Welcome to First Hydro Company 4 June 2009

Welcome to First Hydro Company 4 June 2009

First Hydro Company overview § Approximately 200 employees across four sites § Dinorwig – the largest pumped storage plant in Western Europe – commissioned in 1983 – total plant capacity 1, 728 MW, 6 reversible pump/turbines – reservoir capacity ~10 GWh § Ffestiniog – – – the UK’s first major pumped storage station commissioned in 1963 total plant capacity 360 MW, 4 separate turbines & pumps reservoir capacity ~1. 3 GWh remotely operated from Dinorwig § Electric Mountain visitor centre § Bala House trading office § Owned by International Power (75%)/ Mitsui & Co, Ltd (25%) since December 2004 Slide 2 First Hydro

The pumped storage principle § Buy electricity overnight - pump water to top reservoir § Release water to generate at times of peak price Marchlyn Pump Generate Peris Import 1 MWh Export 0. 75 MWh § Overall cycle efficiency ~75% § Additional costs include transmission losses and Balancing System charges Slide 3 First Hydro

Asset features § Speed of response – Dinorwig full output in ~16 seconds – Ffestiniog full output ~60 seconds § ~40, 000 mode changes per year § Extremely high reliability and availability § Uniquely flexible assets § Originally designed and built to support grid system management § Asset capabilities provide for a diverse range of trading and marketing opportunities under NETA/BETTA § Business is geared around maximising short term opportunity – highly flexible outage management – proprietary systems to support trading and despatch Slide 4 First Hydro

Dinorwig Slide 5 First Hydro

Ffestiniog Slide 6 First Hydro

Plant dynamics Dinorwig mode change times <30 s <12 s Spin Gen 6 m 3 m Generate 6 m <90 s Shut Down 6 m 8 m 6 m 7 m Spin Pump Fast Start Pump <30 s Typical start-up times (minutes) 90 85 80 3, 000 2, 500 70 60 60 2, 000 50 1, 500 40 30 1, 000 20 500 10 0 Typical load rates (MW/minute) 3, 000 1. 5 Dinorwig Slide 7 300 2. 5 Ffestiniog CCGT (hot) Coal (hot) 0 Dinorwig Ffestiniog 10 10 CCGT (hot) Coal (hot) First Hydro

Plant investment strategy § Preserve competitive advantage – – maintain current levels of performance focus on quality of core maintenance replace or refurbish aging/obsolescent equipment retain expertise within business § Enhance competitive advantage – improve reliability/availability – increase quality or range of products § Case study: Dinorwig Additional Stored Energy – increased storage by 700 MWh (~8%) – commenced January 2007 and completed October 2007 – major civil engineering project within Snowdonia National Park Slide 8 First Hydro

Dinorwig additional stored energy Slide 9 First Hydro

Commercial Focus

The role of pumped storage in the GB market 1. Energy arbitrage - peak/off-peak – valuable peaking capacity – enables efficient running of steam plant overnight 2. Reserve provision – range of timescales (focus on fast) – but, limited storage 3. Frequency control – fast response to plant trips, TV pickups etc. § Roles underpinned by plant reliability and dynamic capabilities § Buying fuel and selling product via the same market Slide 11 First Hydro

Market challenges for pumped storage § Products sold through the three BETTA markets: – Trading, Balancing Mechanism, Ancillary Services § Energy-only market, no Renewable Obligation Certificates, no capacity payments § Reliance on volatile, short term markets – poor forward liquidity in shaped products § Complex business 2, 088 MW Energy limited – maximising option value of assets – managing water constraint Ancillary Services Balancing Mechanism Trading Slide 12 First Hydro

Balancing mechanism § System operator then matches generation to actual demand by adjusting generation via offers or bids, minute-by-minute. § First Hydro offers premium dynamics – managing TV pickups – cover for generator trips – meeting demand fluctuations Slide 13 60 5 55 4 50 3 45 2 40 1 35 0 30 -1 Bids Bid and Offer volume (GW) § ‘Gate closure’ 1 hour ahead of each half-hour period Balancing Mechanism – Example Day GB Demand Scheduled Energy (GW) § Generators sell energy, and then schedule generation to meet half -hourly contract position Offers 25 -2 Demand Scheduled energy 20 -3 1 6 11 16 21 26 31 36 41 46 Half - hourly Settlement Period First Hydro

Ancillary services § Physical services to facilitate system security and power quality – procured by National Grid – enable system balancing in real time – mostly undertaken via competitive tender or real time call-off Reserve: Frequency Response: Other: § Short Term Operating reserve (20 minutes) § Dynamic Response § Black Start § Static Response § Reactive Power § Fast Reserve (2 minutes) § Intertrips § Longer notice contingency reserve (BM Startup) Slide 14 First Hydro

Trading in the wholesale market Trading considerations § Value of capacity/energy in traded markets (net of pumping) § Capacity ‘sterilised’ for ancillary services § Probability of being used in balancing mechanism § Water balancing requirements Key skills § Physical ability to deliver any half-hourly shape § Experienced traders in APX/short term markets § Proprietary live market information and decision support tools § Systems able to notify contracts right up to gate closure Slide 15 First Hydro

Wholesale price trends Day ahead traded prices (£/MWh) £ 160 Baseload £ 140 Overnight Peak £ 120 £ 100 £ 80 £ 60 £ 40 £ 20 £ 0 2004 2005 2006 2007 2008 2009 § Highlights volatility in prices and spreads § Impact of Phase 2 of EU ETS can be seen from Jan 08 § Tight system conditions in Winter 05/06 and through 2008 Slide 16 First Hydro

Market outlook § GB plant mix to change radically in next 10 years – driven by tightening environmental regulation and the EU’s 2020 targets § System to face more challenging system security and balancing issues – wind intermittency, opted out coal plant, nuclear inflexibility § First Hydro is well positioned and planning for the future – – investing in its assets to ensure engineering integrity and extend plant life addressing recruitment needs, expanding apprentice schemes developing its understanding of the impact of change in its target markets seeking to enhance its assets to meet the demands of the market Slide 17 First Hydro