TRADE AND INDUSTRY COMMITTEE
COMMITTEE OFFICE HOUSE OF COMMONS
7 MILLBANK LONDON SW1P 3JA
Telephone: 020 7219 5777/5779
PN 15 of Session 2005-06
EMBARGOED UNTIL 00.01 am on Tuesday 13 December
PUBLICATION OF REPORT
Inquiry into Security of Gas Supply
The Trade and Industry Committee will publish its First Report of Session 2005-06, Security of Gas Supply (HC 632-I) on Tuesday 13 December 2004 at 00.01am.
When the Committee in the last Parliament produced a Report on the wholesale gas market (Fuel Prices, Twelfth Report of Session 2004-05, HC 279-I), the Government and gas and electricity markets regulator expressed confidence that the market was robust and that, though gas supplies would be tight for a year or two, peaks in gas prices were a temporary phenomenon which would disappear as further gas supplies came on line. Since then, forward gas prices, especially for those trying to fix contracts for a year at a time, have remained unusually high, with reports that some industrial customers are being quoted prices up to 50 percent higher than those quoted last year. Moreover, some commentators have suggested that, because American demand for imported LNG (Liquified Natural Gas) has increased following the hurricanes this year, LNG destined for the UK will be diverted to the USA.
In these circumstances, in September the Committee decided to undertake a brief review of the developments in security of the gas supply since the last Report, focussing on whether the supply situation this winter is likely to be about the same, better or worse than predicted in February this year; and, if worse, what the consequences will be, and what the Government’s responses to the problem should be.
The main conclusions of the Committee are:
Gas supplies this coming winter are likely to be tighter than was anticipated in February, principally because of the continued faster-than-expected decline in production from the UKCS. Although it is extremely unlikely that domestic customers and the majority of businesses will suffer any interruptions to their gas or electricity supply, it is very likely that the largest I&C customers will, if they have the relevant contracts, suffer interruptions, or, if they purchase gas on the spot market, have to pay very high prices for that gas, or both. It is, unfortunately, impossible to do anything to change this situation now, although some mitigating actions can be taken.
Although the effect of peaks in prices on the wholesale gas market is moderated for domestic consumers, rising fuel prices will mean that more people fall into fuel poverty. Greater energy efficiency is the most effective means of reducing the number of those in fuel poverty absolutely and permanently, but it is not an immediate response for those suffering now from higher energy prices. If fuel prices continue to rise it will be essential to provide further assistance to the elderly. However, the Committee is particularly disappointed that little progress has been made in dealing with the plight of some non-elderly vulnerable groups, particularly disabled people, whose difficulties in relation to fuel poverty have been known for a long time.
The Government cannot directly affect the price of gas, but it can ensure that there are no UK regulatory or economic barriers to maximising gas supplies and storage facilities, and improving the functioning of the gas market. It can also encourage energy liberalisation in the European Union, and help I&C customers to share best practice on how to cope with high prices and a volatile market. The Committee is pleased to note that the Government has been pursuing all these.
However, manufacturers are concerned that, if they use alternative fuels to gas, they risk temporarily breaching emissions limits, for which the Government would penalise them. The Minister seemed reluctant to do anything about this. The Committee does not believe that giving temporary derogations would seriously undermine the Government's long term climate change programme. The Committee therefore seeks the Government's assurance that it would be willing to give temporary derogations this winter and in the next two winters if prolonged cold spells make large scale gas interruptions inevitable, at the same time as making it abundantly clear that such derogations in the years thereafter would not be forthcoming except in a case of grave national emergency.
Financial institutions that might have been expected to take part in or finance trading in the forward market for gas are not interested in doing so: the UK market is not big enough, and they are unlikely to become involved unless there is a Europe-wide forward wholesale gas market. This supports the previous Committee's conclusion that the forward market was too illiquid to be considered functioning, and it underlines the fact that the operation of the liberalised UK market is heavily dependent-and becoming ever more so-on the unliberalised Continental European one.
As shown by the two reports on the European gas and electricity markets published by the European Commission on 15 November, the obstacles remaining to electricity and gas companies seeking to trade in, buy from, or use transit or storage capacity in, Continental Europe will not be overcome quickly or easily-many of the legacy contracts that make purchasing or transporting gas through Europe so difficult have a decade or more to run-with the result that the UK risks having a malfunctioning forward gas market for a decade. Although LNG imports will alleviate some of the problems of liquidity, the UK will be competing for those with not only some European countries (such as Spain) but also the Far East and the USA.
The Committee therefore expects the UK Government to give its full backing to the Commission in its attempts to enforce existing legislation, and to introduce any amendments designed to close any loopholes.
The Chairman of the Committee, Mr Peter Luff, said: "It is far from clear that all energy users have derived continuing and sustainable benefits from the early liberalisation of the energy market in the UK. The gas supply problem this winter will affect-whether through high prices of gas and electricity, or through actual supply interruptions-all domestic and I&C customers. The problem is caused not only by matters outside the control of government, but also by a legacy of slow development of infrastructure, and the lack of a true European market for gas. These are matters that do lie, at least partially, under the control of the UK Government. It is therefore right to expect Government to take steps to mitigate the impact of problems this-and probably for the next two-winters."
The report will be published at 00.01 am on Tuesday 13 December and may be purchased from the Stationery Office (inquiries: 0870 600 5522). It will also be available on our website at the address below soon after publication.
For further information please call the Committee Office on 020 7219 5777/5779.
13 December 2005