Creating the Conditions for New Market Entry

SmartestEnergy’s Experience and Views

3rd March 2011

Colin Prestwich

Agenda

• Introduction to SmartestEnergy

• The NETA environment

• Setting up as a supplier and issues

• Engaging with the demand-side

• Looking forward

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UK’s leading purchaser and supplier of electricity generated by the independent generation sector

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Introduction to SmartestEnergy

*Financial figures 2009/10 audited accounts

• Wholly-owned subsidiary of Marubeni Corporation of Japan• Established in 2001 on the back of deregulation• Licensed Electricity Supplier, and Gas Shipper and Gas Supplier• Annual turnover £841 million*• Profit after tax £8.6 million • Physical and financial trader in UK power, gas, carbon, and renewables in both

forward and spot markets• Retail business launched in Summer 2008

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SmartestEnergy Overview

• Largest purchaser of electricity from embedded independent generators– 1700 MW installed capacity¹– 150+ customers– 500+ generation sites

• Launched Retail business in Summer 2008 with focus to supply renewable power to industrial and commercial

business customers– 6TWh contracted volume²– 300 customers– 1500 sites*

¹Figures quoted as of 31st October 2010²Figures quoted as of 31st January 2011

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• Founded in May 1858 and incorporated in December 1949• One of the leading Sogo Shosha or general trading house• Gross Trading Profit: JPY 491.7 Billion (£3.5 billion ¹) • Net Income: JPY 95.3 Billion (£681 million)• Total Assets: JPY 4,586.6 Billion (£32.8 billion)• Total Capacity (MW) of overseas Independent Power Producer Projects Power

Assets: 25,725• Operations

– 118 Offices in 71 Countries– Over 32,300 Marubeni employees Worldwide ²

• 12 divisions ranging from Energy to Food, from Metals & Minerals Resources to Forest Products

• SmartestEnergy sits within the Power Project and Infrastructure Division

Fairness

Harmony

Innovation

Marubeni’s Company Creed

¹Financial figures from 2009/10 audited accounts ,converted into £ using the exchange rate as of Mar 2010² As of September 2010

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SmartestEnergy Operations

• 77 employees across two offices within the UK• 6 regional Account Managers across the UK• London Office (registered head office)

– Executive Committee & Board– PP Sales and Customer Service Teams– Marketing– Trading and Transaction Team– Credit and Risk Management Teams– Finance

• Ipswich Office – Retail Sales Team and Customer Service Teams– Business Operations and Analysts

NETA

• NETA created:

– Bi-lateral trading– Balancing incentive

• Further extension of free-markets after the Pool

• Freedom (to trade) brings with it responsibility (to pay your way)

Setting Up as an Electricity Supplier

• Licence• Accreditation

• Trading, risk and billing systems• Front, middle, back office staff

• Credit for bi-lateral agreements, Elexon, exchanges

Main Risks

• Wholesale market movement

• Imbalance costs

• Distribution costs

• Transmission costs

• Market rule changes

Other issues facing suppliers/wholesale players

• Liquidity

• Ofgem/Elexon reporting

• Other obligations– RO– Metering and Data Collection– Distributors– etc

Engaging with demand side

• Lack of pricing granularity– Brokers want to compare identical products– Customers want easy to understand bills

• Demand management– Technology cost effectiveness (over and above SmartMeters)– Scale, aggregation of many customers is required

• Trust– Difficult for pricing to be both granular and transparent– Demand control

Looking forward

• SmartGrids or Smart Energy

• SmartMeters will allow stronger price signals• Price should incentivise

• Suppliers may or may not develop technology• Other types of entrant (aggregators, meter operators)

EMR

• FiTs with CfD

– Additional bidding process– Price setting will affect the wholesale market

• The market should operate as a level playing field for all players and where necessary incentives should be built around those arrangements, not as a part of them.

• We prefer to see incentives, not taxes.

Other things that could help

• Level the playing field on the other side of the fence– Locational transmission losses– Costs of reserve– Etc

• No need to question the embedded benefit at this stage

• Less regulatory uncertainty eg FiTs

• Half hourly settlement for all customers

Conclusions

• Consolidation and technology will evolve further, but the basic market structure is right

• Risk and set-up costs

• Customers need to be engaged through technology and price

• NGT have ultimate responsibility for balancing the system