Domestic electricity market_liberalization_and_its_impact_on_pricing

VPRI-071024-AlLeon-P0

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Milan Energy Forum, 24 October 2007

Enrico LanzavecchiaAlessandro LeonaValue Partners

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• UK experience

• The liberalization in Italy

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• The gas and electricity domestic market liberalization in UK has started in 1998

• From 2002 the UK Authority has removed retail market prices controls, having considered the market sufficiently competitive

• Today, half of the customer base (26 Mio. EE; 22 Mio Gas) has been reallocated, with an average switching monthly rate of 1,4%- 70% of the consumer base who are still with the incumbent are satisfied for prices

and services; 15% do not see any reason for change and only 3% consider the “switch” difficult or ignore the possibility

• Competition, initially focused on price, is now moving to service level

• Payment method (prepay, standard credit, direct debit) has effects on price

• Thanks to the competition, customers can save, yearly, up to 18% on bill amount

• More and more customers sign fixed price contracts (6Mio customers), green energy or online offers (2,5Mio/year); moreover, 40% of the potential customer base have a dual fuel offer

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* EDF acquires SeeboardSource: Ofgem, corporate web site, Value Partners analysis

Electricity players’ market share (on # clients) Electricity and gas market share in mar. 2007

100%=

British Gas

Powergen

SSE

Npower

EDF Energy

Scottish power

GasElectricity

21%

19%

18%

16%

14%

12%

26.695.229*

46%

13%

13%

12%

7%

9%

21.403.959*

British Gas(Centrica)

Powergen(eOn)

SSE(ScottishhydroSouthern Elec.)

Npower(RWE)

EDF Energy

Scottish power(Iberdrola)

Other

Seeboard

British Gas

Powergen

SSE

Npower

EDF Energy

Scottish power

Generation capacity 2006

4,3 GW(of which 0,9 tolling)

11 GW(E.on UK)

10 GW

2 GW

6,2 GW

5 GW

Mar ‘06

22%

20%

16%

15%

13%

14%

24%

14%

15%

14%EDF Energy*

11%

Dic ‘03

21%

Dic ‘01

21%

8%

14%

17%

10%

14%

10%

5%

Progressive market concentration Vertical integration with generation process

Players combined presence in electricity and gas

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- Segmentation essentially centered on purchasing behaviors, for example:. Consumption profiles (independent house

vs. apartment house). Payment method (Direct debit, Standard

credit, Prepayment)

- Predominant offer “price-driven”, with extension to additional services, for example:. “Home Care” services (i.e. assistance and fittings maintenance)

. Other services (i.e. insurances, property mgmt)

- Growing emphasis on environmentally compatible offers

- Strong appeal of traditional channels (i.e. franchising), online channel still limited (5% of switching in 2006) growing (i.e. ad hoc offers development), but the use of comparison sites is growing (i.e. Tesco Energy, Energylinx, Energywatch)

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DomesticGas consumptions:~910 m³/year with British Gas at a standard rate

Electricity consumptions:. ~3.200 kWh/year with London Energy at a standard ratePayment through direct bank creditAnnual expenditure in energy: 650£

Benchmark UK: example of electricity and gas offers in London

- Dual fuel offers. 32 of which 7 “green”. Savings up to 18% . 7 players

Standard customer’s profile

- Only electricity offers. 33 of which 5 “green”. Savings up to 21%. 7 players

- Only gas offers. 15. Savings up to 17%. 6 players

Offer development criteria

Source: Ofgem, corporate web sites, Energywatch, Value Partners analysis

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Apr-0

7

Clients changing supplier

Cumulatedrate of switch

• Steady increase in clients changing supplier

• Half of the customer base has been reallocated

Source: Ofgem

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Source: OFGEM

Price differential trend between Prepay and Standard credit and between Prepay and Direct debit

Annual savings (£) calculated on the Best Offer available

Prepay(PPM)

Standardcredit(SC)

Directdebit(DD)

14%

41%

45%

26 Mio

PPM-DD

PPM-SC

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"�� #$%

356

357

368

375

384

435

SSE

EDF

Scottish Power

British Gas

Powergen

npower

560

579

582

584

615

617

SSE

EDF

Scottish Power

British Gas

Powergen

npower

Prepaid Electric energy

Prepaid gas

875

907

909

913

913

961

SSE

EDF

npower

British Gas

Powergen

Scottish Power

825

828

836

837

857

865

npower

SSE

Scottish Power

British Gas

Powergen

EDF Energy

Standard credit dual fuel

Direct debit dual fuel

Best offer

-18% -9%

-9% -5%

Annual energy bill (£) London area depending on payment conditions

Source: OFGEM, Energywatch on consumer profile 3300kWh EE, 20500 kWh gas

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• UK experience

• The liberalization in Italy

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• Market liberalized from July 1st 2007

• The previous tariff regime was based on two main tariffs with crossed subsidy but not necessarily linked to social aims

• The temporary tariff regime implies a liberalized energy price component which impacts for 63% of an average D2 customer and for 36% of an average D3 customer

• The main players (Enel, Eni, Asmea, Aem, … ) have already launched several offers (green energy, fixed tariff, fixed discount, fidelity card) and relative promotional campaign, but there isn’t a direct comparison mechanism yet; the compulsary summary sheet is only available upon offer request

• There are still no regulatory indications on the timeframe for complete transition to the free liberalized market nor on the future of the “Acquirente Unico”

• The current fixed tariff offers, considering the recent energy cost trends, seem to offer advantages in the medium term, paying an extra initial cost

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D2

D3

D1

D2

D3

Yearlyconsumption(kWh)

Yearly expense (Euro)

100

0

200

300

400

500

600

700

800

900

1.000

500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 5.000

“Subsidy” from D3s and high consuming D2 customers to

low consuming D2s

D2 “Special term”

- Domestic clients, residence house and installed power <=3 kW

- Protection indistinctly offered to all the customers

- Not differentiated by time slot

- Domestic clients, residence house and installed power > 3kW

- Non residential houses (eg. 2nd house)- Subsidy to D2 customers with lowconsumption levels

- Not differentiated by time slot

Source: AEEG reference document

D1 - Theoretical tariff not applied in practice

Standard tariffs previously in place

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Domestic electric market Customers consumption profile

D3

Source: Value Partners analysis on AEEG data and public sources

D2

Additional tariffs

Clients(Mio)

37,5%

62,5%

28

Consumption(TWh)

5%

16%

79%

62

Low consumer< 1,8 MWh/year

Medium cons.1,8 < x < 3,54

MWh/year

High cons.>3,54 MWh/year

17,5Mio 6,7Mio

38%8,3Mio

47%2,6Mio

15%

10,5 Mio

47%

53%

5 Mio

5,5 Mio

1st House(> 3kW)

~ High cons.

2nd House

~ Low cons.

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Costs subject to liberalizationEuro/year, percent

VP analysis on the residential domestic customer, 3kW installed power, consumption 2400 kWh

PE 53%PD 7%

PPE 2%

Most players offer discounts on the PE factor only

Yearlybill

360(100%)

VAT (10%)

37(9%)

Taxes

14(4%)

Energy purchase and Dispatch

223(62%)

Othervariable

costs

67(18%)

Fixedamount for

sale

2(1%)

Fixedamount

21(6%)

Variable costs Fixed costs

Includes system costs such as:. Nuclear charges. Subsidies for renewable power sources. Special tariff regimes subsidies. R&D expenses. Stranded costs*. …

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Costs subject to liberalizationEuro/year, percent

VP analysis on the residential domestic customer, 4,5kW used power, consumption 2400 kWh

Energy purchase and Dispatch

Variable costs Fixed costs

Yearlybill

615(100%)

VAT (10%)

56(9%)

Taxes

60(10%)

223(36%)

Othervariable

costs

166(27%)

Fixedamount for

sale

2(0%)

Fixedamount

107(18%)

The D3t customer pays extra charges to subsidize the D2t

customer segment

PE 30%PD 4%

PPE 2%

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“Mercato a maggior tutela” (controlledmarket)

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Offers

Tariffs(energycomponent)

Other plus

“Monoraria” (all day):. D2t (residence <=3kW). D3t (residence >3kW no

residence)

- “Monoraria”:. 7,94 €c/kWh

- “Bioraria”* (dependingon peak/ off peak):. 6,11 €c/kWh off peak . 11,57 €c/kWh peak

Two electrical offers:. “green” only. 1h x 365days

Two electrical offers :. Bioraria. EnergiaPuraCasa

(certified renewable)

“Bioraria” offer

4,17% saving on the energy factor (1h per day) for the offer 1h x 365days

Fixed tariffs for 2 yearsBioraria: . 6,97 €c/kWh off peak

(+14%). 11,17 €c/kWh peak

(-3,4%)Energia pura casa

(certified renewable). 8,3 €c/kWh(+4,5%)

Bioraria tariff:. 5,95€c/kWh off peak

(-25%). 10,88€c/kWh peak

(-6%)Bioraria tariff fixed 1 year:. 6,86€c/kWh off peak

(+12%). 11,08€c/kWh peak

(-4,2%)

- 1.000 points You&Agip(15€ equivalent of fuel)

- Solar power recharger set for internet subscribers

- Installment payment possible

- 2.000 points Enelpremia- 1.000 additional points

for internet subscribers

Source: Official web sites, request for quotation, Value Partners Analysis

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* Peak is from 8.00 to 19.00 from Mon to Fri (except holidays)

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Offers

Tariffs

Other plus

Monoraria - ècasa attiva: dual fuel- ècasa rinnova:

renewable sources- ècasa sostiene: support

to the Red Cross*

3,3% saving (12days in a year) on the energycomponent

Fixed tariff (for 12 months)

- ècasa attiva: 8,0015 €c/kWh(+0,7%)

- ècasa rinnova: 8,002 €c/kWh(+0,78%)

- ècasa sostiene: 8,003 €c/kWh(+0,8%)

25 € coupons to be used in supermarkets

Saving formula

4% saving on the energycomponent

Tariff blocked for 12 months

Source: Official web sites, request for quotation, Value Partners Analysis

EnergiaVerde 2 years (EV)PrezzoFisso 1 year (PF1)PrezzoFisso 2 years (PF2)

EVmono: 8,3€c/kWhEVbio: 11,89 / 5,79€c/kWh<65%>

PF1 mono: 8,23€c/kWhPF2 mono: 8,35€c/kWhPF1 bio: 11,64 / 5,64 €c/kWhPF2 bio: 11,69 / 5,69 €c/kWh<57%>

Fixed tariff for 12 or 24 mthsAEM payes unbalancecosts (0,54€/kWh discount, equal to -6,8%)

* Match charity: 1� MWh from clients + the same amount from En�a

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Brent and net average domestic tariff trends

Brent price € and net tariff, index numbers, 1°two-month period 2000=100

6

Source: AEEG analysis on Platt’s data

Brent price (in Euro) Net average domestic tariff

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• The domestic electricity market is an interesting market especially for Groups with production capacity, with the purpose to balance the amount produced on a customer segment less volatile than industry (customers average lifetime in UK is 4 years)

• The price advantage for customers is still limited compared to the Acquirente Unicoand there are no indications on the customers migration process from the regulated market to the liberalized market

• The offer transparency should be granted today by the offer comparison form for the different consumer ranges. However the saving reported in the promotions do not give an idea of the related savings, since they only refer to a 30-66% part of the total yearly cost

• The renewable offers could have room for a further growth, considering the customers care on environmental themes (source IRES): 38% of the interviewed target are willing to pay a monthly extra rate (19% between 1€ and 10€, 17% between 11€ and 50€ and 2% more than 50€/month)

• The fixed tariff offers, considering the recent energy cost trends, could bring significant savings in the medium term (as happened in UK)

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EXAMPLE:

• 4,5 kW available power• 3,65 MWh yearly consumption• 75% of which off peak• Yearly bill ~800€• “Biorari” tariff until 1 july, then the

Authority abolished it…

Total unit tariff(€c/kWh)

217 206 197 199221

200

lug-06 ott-06 gen-07 apr-07 lug-07 ott-07

24,2 22,9 21,9 22,2 24,5 22,2

It’s only 20€…Yes, but multiply it by 5 million usersWhat is the overall effect ?

Start of “bioraria” billing*

Quarterly bill for an average high consumer (€)

* Discount for off peak consumption, extra price for peak (break even at 30% peak consumption)

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Enrico Lanzavecchia, DirectorIn twenty years of management consulting he conducted projects in Italy and abroad for corporations in the energy & utilities, telecom and consumer goods industries. He is leader of the Energy practice.

Previous experience: Engagement Manager at McKinsey & Company, Management Accountant at Henkel Italy. Degree in Economics and Statistics from the Bocconi University, Milan, MBA at INSEAD, Fontainebleau.

Alessandro Leona, Senior Engagement ManagerHe developed significant professional expertise in strategy, organisation and cost efficiency projects in different sectors, mainly energy & gas, industry, and services.

Previous experience: McKinsey & Company, ST Microelectronics, National Institute for Nuclear Physics and Lawrence Berkeley Lab (CA)Degree in Electronics Engineering from the University of Pavia and PhD in Electronics and Information Systems at the University of Pavia in collaboration with Lawrence Berkeley Laboratory – Berkeley (CA). MBA at MIP, Milan Polytechnic

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Domestic electricity market_liberalization_and_its_impact_on_pricing