Security of Gas Supply Summary of the Conclusions and Recommendations of the Select Committee – December 05

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A summary of the UK Select Committee’s findings on the Security of Gas Supply and the business impacts. The Committee is less than complimentary regarding the Government’s performance and it’s mixed messages for industry who could now experience shortages as a result.

Gas supplies this winter are likely to be tighter than were anticipated last February, mainly as a result of the continued faster than expected decline in production from UKCS.

Although new import and storage facilities are coming into operation roughly on schedule, the predictability of supply has been somewhat hampered by the effects of the US Hurricanes in the Gulf of Mexico which has caused a diversion of significant LNG supplies to the US.

Furthermore, gas suppliers in Europe appear to be giving priority to customers in Continental Europe casting doubt over the Interconnector’s ability to run at capacity when required.

The Met Office’s suggestion that there is a 66% chance of this winter being a 1 in 10 would suggest a high possibility of interruptions in supply for large I&C customers.

Ministers who have previously encouraged I&C customers to change their habits of securing annual contracts around October in favour of short term spot market purchases are now claiming that the customers have freely chosen to gamble with the price and supply conditions and must face the consequences.

The Committee’s belief is that the Government should take some responsibility and step up its pressure on Europe to pursue a single market. Secondly, it ought to consider relaxing the climate change legislation to allow I&C customers to temporarily breach emissions limits if it is the only alternative to suspending operations altogether. This would have limited effects on climate change providing it was made clear that the breach could only occur during this period of temporary supply shortages.

It is noted, however, that the Minister is not prepared at this point to consider such actions.

Financial institutions who might be expected to take part in or finance trading in the forward market for Gas are not interested in doing so. They don’t consider the UK market to be big enough on its own and would only consider getting involved if the market were Europe wide.

The conclusion is therefore that the existing UK market is too illiquid to be considered functioning and is currently heavily dependent on the un-liberalised market of Continental Europe.

And things wont get better overnight as it is noted that some contracts that have been agreed in Europe have another decade to run which means a strong possibility of a malfunctioning market for the next decade.

Electricity4business’s View

The UK government denies that the European market is distorted and continues to practise a policy which allows ownership of the UK energy assets to pass into the hands of foreigners. Anything else, they claim, would be anti-competitive and would break European Law.

We believe, however, that given the lengths of contracts in Europe – which may last another decade – it is impossible to have the rest of Europe working under a previous monopolist structure whilst Britain is stuck with a free market structure. Any attempt to operate both market structures in tandem can only lead to disaster and there can be only one loser.

Impact on business electricity

Electricity is already cheaper in mainland Europe than in the UK. If we continue with a situation where we are more dependent on Europe for Gas supplies and we open the UK market to European ownership then electricity prices will rise both at wholesale and retail levels. Furthermore, the UK will have lost complete control over its energy supplies.

Editors Notes

electricity4business is Britain's independent electricity retail company specialising in the supply of electricity to small and medium sized businesses. E4B’s aim is to cut the cost for British business by offering lower prices.

Business Electricity Retail Supply Market

96% of UK business is supplied by 6 players:

E.ON UK – Powergen, E.ON, Germany

RWE – Npower, RWE Group, Germany

EDF Energy – Electricite de France,France

British Gas Business, Centrica Plc

Scottish Power Plc

Scottish and Southern Energy Plc

Signs of further impending market consolidation are E.ON’s recent bid for Scottish Power with a second bid expected soon and more than a passing interest in Centrica by the Russian giant, Gazprom. This may leave UK business energy supply in the hands of foreign businesses with the potential to operate as a cosy oligopoly - this is not the free market that UK businesses should have access to.


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