First Hydro Analysts ConferenceJuly 2005

IntroductionPaul Jenkinson

First Hydro Company• Key locations:

~ Commercial Office - Bala House~ Dinorwig pumped storage power station~ Ffestiniog pumped storage power station~ Visitor centre

• The only Pumped Storage Power Stations in England and Wales (representing 75% of Great Britain Pump Storage capacity)

• Station built initially to support the management of the System~ now well placed to participate in the competitive market place

• Full time employees 188~ reorganisation programme completed - 20% staff reduction

delivered• Experienced management and operational teams

~ integrated teams across all locations~ incentives aligned to financial performance

Mike Maudsley Director ProductionMike Hickey Director Asset Management

Asset overview

The pumped storage principle

Dinorwig

DinorwigThe largest pumped storage plant in Western Europe• Commissioned in 1983

• Total plant capacity 1,728 MW

• 6 reversible pump/turbines:~ each generating up to 288 MW and pumping at 275 MW~ capable of achieving full load from stand still in < 2 minutes~ capable of achieving full load from Spinning in < 20 seconds

•Cycle Efficiency 74-75%

• Total water storage capacity ~9 GWh

• Connection to the National Grid via six 18/400kV 340 MVA transformers

• Two 3.3kV 2 MW diesel generators provide ‘black start’ capability

DinorwigPlant design profile

Dinorwig – inside the mountain

DinorwigShaft base and High Pressure water tunnel

DinorwigWater manifold

DinorwigSection of plant

DinorwigGenerator/motor

DinorwigPump/turbine

Ffestiniog

• Commissioned in 1963• Total plant capacity 360 MW• 4 units (with separate pump and turbines on the same shaft):

~each generating up to 90 MW and pumping at 75 MW~capable of achieving full load from stand still in < 5 minutes~capable of achieving full load from Spinning in < 60 seconds

• Cycle efficiency 72-73%• Remotely operated from Dinorwig• Total water storage capacity ~1.4 GWh• Connection to the National Grid via two 16/275kV 190 MVA

transformers

Ffestiniog First major pumped storage station in the UK

Ffestiniog Plant design profile

Ffestiniog Section of plant

FfestiniogStwlan Dam

Plant performance

12 s

90 s 360 s

30 sShutdown

All times are typical

Generate

SpinGenerate

Pump

SpinPump

Dinorwig mode times change (seconds)

Competitive advantage

Typical start up times (minutes)

1.5 2.5

DinorwigFfestiniog CCGT(hot)

Coal(hot)

Typical loading rates (MW/minute)

3000

300 10 10

DinorwigFfestiniog CCGT(hot)

Coal(hot)

60

90

First Hydro Company

Reliability and availability

• Mode changes per annum c.35,000

• Overall mode changes reliability c.99%

• Overall technical availability c. 95%

Plant focus• Safety first (no compromise)

• Operate and maintain plant to achieve competitive flexibility and reliability~working expertise in Electrical, C&I, Mechanical, Civil and IT~experienced, broad based and flexible teams~balance of quality in-house maintenance and specialist

contract work

• Close working relationship between Plant and Commercial Teams~Shift Trading and plant control room~daily and weekly operational strategy~ long term operational and maintenance programme

Commercial overviewDavid Alcock, TradingKevin Dibble, Marketing

Commercial efficiency

• Buy electricity overnight - pump water to top reservoir• Release water to generate at times of peak price

MarchlynMarchlyn

PerisPerisImport 1 MWh

Pumping Generation

Export ~.75 MWh

•Overall cycle efficiency approximately 75%•Additional costs include transmission losses and Balancing System charges•Overall cycle efficiency approximately 75%•Additional costs include transmission losses and Balancing System charges

Markets• First Hydro operates in three markets• Has competitive advantage• Proportion of revenues from each market changes year on

year

Ability to deliver almost any contract shape and despatch plant right up to gate closure

Premium dynamics

Frequency response and fast reserve capabilities

Competitive Advantage

Trading

Balancing Mechanism Plant Reliability

Ancillary Services

Market

Maximising asset valuePeople• Solid understanding of physical market drivers (real-time and

long term)• Strong commercial and plant integration

Systems• Robust trading and despatch systems• Customised real time information and decision support systems

Processes• Strong focus on understanding and managing business

opportunities • Traders discretion on price/product

~ strict risk management limits~ daily (half-hourly) benchmarking of trading performance

Capacity allocation

• Capacity/energy allocated according to value

Ancillary ServicesAncillary Services

TradingTrading

Balancing MechanismBalancing

Mechanism

2,088 MW10.5

GWh/day

2,088 MW10.5

GWh/day

Ancillary services overview • Physical services to facilitate system security and power

quality~wholesale markets operate on half-hourly basis~ancillary services enable system balancing on a second-

by-second basis

• Procured by National Grid Company (NGC)~GB System Operator~NGC obliged to operate the system in an ‘efficient,

economic and co-ordinated’ manner~costs managed via a regulated annual incentive scheme

Forward procurement options• Standing Reserve (20 mins. notice)

~ annual or seasonal tender~ hydro, OCGT, demand-side~ approximately 2000 MW

procured annually

• Fast Reserve (2 mins. notice)~ monthly tender, few eligible

providers, small volumes

Short term procurement• Inherent level of reserve delivered

by the market• Residual reserve purchased by

NGC via the Balancing Mechanism• Require ~3500 MW of reserve in

total

Source: NGC

MW

Key ancillary servicesReserve

• NGC manage system frequency in line with statutory obligations (within 1% of 50Hz) and operational requirements

• Dynamic Frequency Response~ units operate at part-load with output varying in response to

frequency deviations - provides “second-by-second energy balancing”

~ basic level of capability is mandatory for all generators - utilised as required, mainly from steam plant

• Static Frequency Response~ automatically triggered by low frequency events

- pumped storage, demand-side providers have capability

• NGC currently forward contracts for enhanced services through negotiation

Key ancillary servicesFrequency response

• Deals with residual energy balancing once traded markets have closed

• Generators have sold half-hourly energy, and scheduled plant to meet contract position

• System operator matches generation to actual demand by adjusting generation (or demand) via offers or bids in the BM

• All parties required to bid into the BM, but due to flexible nature of assets, FHC is well-placed

ScheduledenergyScheduledenergy

Required

Demand

BM offersrequiredBM offersrequired

Example:

Balancing Mechanism (BM)

Fast-acting plant in the BMMorning run-up• Gas/coal unit synchronisation

risk• High rate of change of demand =

greater risk

Plant trip• Unpredictable events that

require fast-acting plant held in reserve

Evening TV pickups• Domestic load swings driven by

TV events• Largely predictable• NGC able to plan using

combination of fast and slow plant BOAs = Bid-Offer Acceptances

System Demand and Fast Response BOAs(25 May 2005)

20 GW

25 GW

30 GW

35 GW

40 GW

45 GW

1 3 5 7 9 11131517192123252729313335373941434547

Half-hourly Settlement Period

-100 MW

0 MW

100 MW

200 MW

300 MW

400 MW

500 MW

600 MW

700 MW

800 MW

Fast Response BOAsDemand

Source: NGC

Demand pick-upsChampions League Final

-2500 MW

-2000 MW

-1500 MW

-1000 MW

-500 MW

0 MW

500 MW

1000 MW

1500 MW

2000 MW

Coal

Gas

Fast

Bids

Offers

BM activityChampions League Final

Wholesale markets (trading)Trading considerations• Capacity and energy dedicated to ancillary services• Margin (net of pumping) available in traded markets• Probability of being used in balancing mechanism• Reservoir management

Key advantages• Asset physical ability to deliver any shape close to real time• Experienced traders in APX/short term markets• Proprietary live market information and decision support

tools• Systems facilitate trading up to gate closure

+ve Sales

-vePurchases

• Developed over time through combination of:

~ structured deals with counterparties

~ standard products traded OTC

• Broadly balanced position

• Handed to shift trading team Friday morning

Example of energy-balanced book4,800 MWh pumping; 3,600 MWh generation

-600

-400

-200

0

200

400

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Hour

MW

Pumping

Generation

Trading process 1Week ahead position

Trading process 2Typical power exchange price shape - winter

Marginal Cost

Half-hourly Settlement Period1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

£/MWh

Pump

Generate

Tradingexample

Hour

Trading process 3Generation optimisation

-600

-400

-200

0

200

400

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

MW

Pumping

Generation

300 MWh moved from hour 19-20Net value-added £15,000

Buy @£30/MWh Sell @

£80/MWh

Tradingexample

Hour

Trading process 4Pump/generation optimisation

-600

-400

-200

0

200

400

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

MW

Pumping

Generation

Net value-added £6,000

Buy 450 MWh @ £20/MWh

Sell 600 MWh@ £25/MWh

Tradingexample

Final position

Long term trading

APX

Shift trading

Bilateral

Trading process 5Evolution of final position

• Diversity in revenue streams

• Competitive advantage through assets~includes people and proprietary systems

• Niche expertise in short term markets and system services

• The UK’s most dynamic provider of electricity

Summary

UK portfolio overviewSteve Riley

First Hydro

• Key addition ~excellent fit within portfolio

•Unique asset with competitive advantage

~speed of response and reliability~positioned to benefit from

tightening reserve margin

•Energy trading~deep market knowledge -

benefits entire portfolio

UK asset portfolio

• 5 assets with gross capacity of just over 5 GW~ IPR net share = 7th largest portfolio in the UK

• Largely merchant capacity

• Good fuel diversity~gas, coal and pumped storage

• Robust operational and environmental performance

FuelType

IPRShare(MW)

Rugeley

Deeside

Derwent

First Hydro

Saltend

Total

GrossCapacity

(MW)CountryName

England

Wales

England

Wales

England

1,050

500

214

2,088

1,200

5,052

1,050

500

50

1,462

840

3,902

Coal

Gas

Gas

PS

Gas

Rugeley

Saltend

First Hydro

Deeside

Derwent

UK recovery signals• Tightening reserve margin

~ 2.4 GW nuclear plant (Magnox) expected to retire before 2010

~ limited new-build anticipated before 2010

~ 2.6 GW interconnector links to Netherlands and Norway unlikely to proceed before 2010

~ renewable growth largely from intermittent wind power - requirement for firm power during peaks

~ environmental legislation will restrict 10-12 GW non-FGD output

• Increasing development and acquisition activity

Source – National Grid January 2005 Update. Forecast includes all generation projects under construction and all planned closures of generation.

England & Wales Reserve Marginabove Peak Demand (2004-10)

5%

10%

15%

20%

25%

2004 2005 2006 2007 2008 2009 2010

Notional New-Entrant Point

ForecastReserve Margin

Notional Target Reserve

Spreads - recent history

• Over the past 12 months, gas prices have increased on the back of rising oil price

~ current oil prices remain close to all time high

• Coal prices (delivered ARA) have declined since Jan 05 from ~$80/t to ~$65/t

• EU ETS commenced January 05

• CO2 credit prices have increased since

Jan 05

• Baseload power prices increased end 04/early 05 driven by rising gas price and CO2 cost

UK Historic BaseloadGas & Coal Spreads£/MWh

0

5

10

15

20

M

Gas Spreadpre-CO2

Coal Spread pre CO2

J J A S O N D J F M A M2004 2005

UK market - forward view• Forward spreads indicate recovery

~ gas prices are expected to decline

~ coal prices expected to remain steady

• As environmental constraints tighten Rugeley will shift to a more peaking role

• From Jan 2005, cost of emitting CO2 has been treated as an additional marginal cost:

~ will be offset by NAP allocation~ market liquidity increasing~ early clarity on Phase 2

allocations important

Forward prices sourced from Argus

Forward Baseload Gas Spreads,

0

2

4

6

8

10

12

14

2005 2006 2007 2008

£/MWh

Gas Spreads pre-CO2

Gas Spreads post-CO2, no allocation

Environment - implications for IPR Legislation

• EU Emissions Trading Scheme commenced Jan 05~ CO2 credits trading at €20-€23/t

in June 05 for Phase 1

• Large Combustion Plant Directive (2008)~ reduces emissions of SOx, NOx

and dust from coal/oil plant

• Targets for renewable generation~ EU policy to reduce long term

dependence on fossil fuels~ current HMG target of 10%

generation by 2010 under pressure

IPR strategy

• Actively trade emissions to support plant operations and maximise asset value~ May 05 allocations imply load

factors of 44% for Rugeley, 55% for Deeside, 64% for Saltend

• Rugeley~ final decision, likely December

2005 ~ focus on low sulphur coals to

maximise value under LCPD constraints

• Renewables~ biomass co-firing at Rugeley

Summary• Well balanced asset portfolio

~positioned to benefit from recovering spreads~portfolio enhanced with acquisition of Saltend

• First Hydro - key asset~excellent fit in UK portfolio~particularly in a tightening reserve margin

• Focus on maximising financial returns