Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 85-99)




  85. Good morning, Mr Latif. Could you introduce yourself and your colleagues?

  (Mr Latif) My name is Itret Latif; I am presently the Gas Forum chairman. My colleague on my left is Steve Ladle who is the previous chairman of the Gas Forum and is a member of the executive committee. On my right is David Thorne, who is a member of the Gas Forum executive committee.

  86. Perhaps you could tell us a little bit about the Forum. We have a procession of trade associations coming before us, but how representative are you of the gas industry?
  (Mr Latif) We were established in 1994 initially to help to negotiate a contract between the shippers and the monopoly supplier, Transco. We currently have around 21 members who are both suppliers and shippers. The Gas Forum comprises virtually every active, licensed gas shipper or supplier. Nearly all our members are in both the electricity and gas markets. The Gas Forum has established a number of work groups which have helped to further competition and development of the gas market. Recently, we are undertaking a governance of the gas industry project under the guide of the Gas Forum as being the vehicle where Ofgem and Transco participate in governance process development in the retail area, which probably will be similar to the electricity governance process.

Mr Hoyle

  87. In fairness, I think we all ought to recognise that competition has brought down prices and the United Kingdom energy market has generally delivered to the consumer and improved costs and efficiency within the industry. What evidence do you have to suggest that market forces will necessarily be sufficient by themselves to ensure security of supply in the future?
  (Mr Latif) The government has to play a role in this. If you allow competition to happen properly and make it transparent and have third party access which is transparent across Europe, that will secure gas as a form of fuel for a reasonable term. In terms of competition itself, it has encouraged the diversity of fuels. I do not know what the mix of the generation was in the earlier stages but gas accounts for about 33 per cent of the generation; coal accounts for about 36 per cent. The competition has increased diversity and I believe diversity of sources of gas increases security.

  88. You do not believe that market forces alone will ensure security of supply?
  (Mr Latif) It needs government environment to work in. If you allow competition, it may go one way but the government needs to set the environment in which we operate. You have to give us the signals and messages so that we can best develop the needs of the security of supply of the United Kingdom.
  (Mr Ladle) The United Kingdom since deregulation has seen gas usage grow by nearly 90 per cent and that has made sure supply was maintained with less interruption through the decades. We have to recognise that that was very much supported by the United Kingdom offshore gas industry and an over-abundance of gas coming into the United Kingdom. That will change. There is no doubt about that. There are discussions as to when but over time we will see the United Kingdom offshore continental shelf production reduce and we will rely on a greater degree of imported gas into the United Kingdom. Our view is that the market will sort that out as long as the market is there to operate. This is where we are talking about government assistance because we believe that there are flaws in the European market that will not allow a fully competitive market to operate throughout Europe and could therefore present some problems for bringing gas in. I think that is where we are looking for government assistance to continue the good work and to continue the pressure that the Commission is exerting to allow a fully competitive, open European market to evolve.

  89. Market forces are there but they will need the help and protection of government to ensure that security of supply in the long term?
  (Mr Ladle) Yes.

Dr Kumar

  90. You said the United Kingdom is a predominant importer of gas. In the future, where do you think the gas supplies will come from?
  (Mr Latif) I would rather have UKOOA answer that. They have more experience. We believe that currently there are sufficient resources within the Norwegian and Russian gas reserves that we could tap on. The problem is that we are the end of the pipe and unfortunately we are stuck with that. An environment has to be made so that we are a node within this structure so that we do not get disadvantaged.
  (Mr Thorne) We are in the hub of a ring of gas. We have Norway, Russia, the Netherlands, the United Kingdom continental shelf and North Africa. We have reserves in Europe, in the world, to provide here. The key to it is getting it into the United Kingdom in a cost effective way. The key to that is European liberalisation.


  91. That is in the continent of Europe?
  (Mr Thorne) Yes. It is the problem of using the pipework and the transmission system to get the gas into the United Kingdom without having to pay charges throughout the different countries, pancaking against each other, making it not cost effective to get the gas into the country.

Mr Djanogly

  92. What you are saying is that the level of imports is not to be taken as indicative of the security problem if there is one at all. On that basis, it is a question of market structures, lack of diversity in the market and that kind of thing, the inflexibility of delivery systems. Can government do anything to improve that?
  (Mr Latif) You are already playing a part in trying to get the EU to liberalise. I do not know how fast they will liberalise. Access is the problem that is causing the security of supply situation rather than a lack of gas.
  (Mr Ladle) There are some smaller areas within the United Kingdom that still need to be taken forward. The transmission system has been used extensively and very thoroughly and is an extremely efficient system. However, we have seen the amount of gas transported by that system increase dramatically over the last decade and the investment in that system has not increased at the same rate. There is a concern that the transmission system is a little stretched in some areas and the industry is going through a long process of trying to identify how we can properly generate investment signals on the transmission network. That process is a little bit flawed at the moment and the industry generally has a different view to the regulator. Some government support can take that forward at a faster rate than it is going at the moment.

Mr Berry

  93. I hear what you say about the challenges being addressed by a competitive market and I take your point about the European Union dimension but I am still slightly unclear from your submission where you see the role of the market and the role of government interfacing. You do specifically say that the government has a role in providing clear guidance to the regulators to ensure changes proposed to the energy market are consistent with the government's wider goals and objectives. I have two questions. One is what specific changes would you like to be made to current guidance to the regulator? Secondly, do you see the possibility for government intervention in other ways? For example, through the fiscal system?
  (Mr Latif) The regulator created a market called NETA and it had a knock on effect on the renewable policy that the government wishes to follow. We were thinking that there should be some clarity in terms of the way the government's policy is then adopted by Ofgem in this instance, where the government requires certain renewable resources to be built but, because of the way the market has been chosen to operate, it has a detrimental effect on these particular types of generation resources. If the government has a policy, then it should go right through the whole arm of the regulation to make sure there is a consistent view.

  94. Do you think the role of Ofgem should be to determine and ensure certain targets for renewables?
  (Mr Latif) The mechanism you choose should not have a detrimental effect on the policy that the government wishes to operate. I am not an expert in NETA but I presume there are other ways the market could have been constructed that could have had not that much of a detrimental effect on the renewables.
  (Mr Thorne) The government needs to have its vision and that is why we are here today, to understand what are the outputs at the end of the day; what are we trying to achieve; what do we want. The regulator is one of the vehicles to take that policy and ensure their responsibilities are consistent with that policy, to ensure that gives the outputs to the industry and let the industry and the market deliver those outputs. The Gas Forum members certainly recognise that renewables have a part to play in issues about the reliability of the supply into the network because of the very nature of renewables. If the government says ten per cent because that is part of a wider policy, the market will deliver that and put market mechanisms out like the £30 for our buy-out price, but do not define how those outputs are to be achieved. That is for the market.

Linda Perham

  95. You have indicated in your submission that the new marketing arrangements for the competitive market have encouraged diversity and security. We have moved away from coal as the primary source of power. Is there not a danger if these market trends continue that gas will become too dominant and diversity will be reduced?
  (Mr Latif) If you try to plan it, it is very difficult to plan that you have certain mixes. If you set the environment up, whether a coal or a gas fired power station, the investments are made in a particular type of generation. At the moment, gas seems to be the preferred choice of the market to develop these kinds of power stations. If you leave competition to operate, if you find that gas is becoming scarce or there is a lack of clarity how to get that gas from, say, Russia to here, the market will then start changing its direction, as long as the planning consents and those types of things are there in a timely manner so that people can change the way they want to generate.
  (Mr Thorne) You say there is a danger that gas becomes dominant. I am not sure whether I would agree that that is a danger. Firstly, I do not know that I agree with some of the estimates for how the percentage of gas for generation is going to be used, but even if it goes up to 50, 60 or 70 per cent we need to ensure that we have access to the gas to enable gas generation to work. I do not necessarily believe it is a risk because you have a certain percentage divide on what is coal, what is gas, what is renewable etc. It is the access to the fuel source to be able to feed that generation.

  96. Your submission definitely concentrated on the market side of it. How would you see the government side of it and regulation or support from government? Do you think the market is the main driver?
  (Mr Thorne) We believe there may be support in a number of ways. We have talked about overseas resources but continental shelf resources are still there and they will still be used obviously. There is more gas out there that we can get. However, it is not economic to do so at this time. There are perhaps changes to the tax regime on the more mature fields which could allow for that gas to be taken out of the ground and brought into the United Kingdom. Secondly, we have touched on planning elements and whether there are certain measures that can be made to make the planning process more swift with regard to new stations that may be required; the storage requirements that may be pursued by particular companies, but the third one is providing support to the liberalisation of the EU with regard to energy resources.

Mr Djanogly

  97. What does liberalisation involve?
  (Mr Thorne) The liberalisation we are talking about is the transmission network, the pipes that provide the gas to the various countries. At the moment, we have integrated companies throughout the EU who are responsible for the supply and the transmission. The problem is that there is lack of transparency to get access to that pipework. It is not clear to us how much it would cost us to put the gas in here and take it out there. Without that transparency and without the access to that capacity, we cannot arrange to get gas from the Russians etc., or North Africa, to come into the United Kingdom. That lack of third party access to common carriage to the pipes is making it very difficult for suppliers and shippers to improve their security of supply which we all want.

  98. What does transparency mean?
  (Mr Thorne) How much do we pay to get our gas from A to B.
  (Mr Latif) Transco publishes its prices. You do not get that kind of information available.

  99. You want people to be forced to publish that?
  (Mr Latif) Yes.
  (Mr Ladle) One of the biggest successes for the United Kingdom was moving to common transportation carriage on the network so that any shipper or supplier talking to potential customers knew, at the start of those discussions, exactly how much it was going to cost to deliver gas to that customer. If you try that under the European network, it is not until you go to the transporter quite often with a particular customer that you want to deliver to that you will then be given an idea of how much it might cost and whether they say there is capacity available to be delivered. It makes it very difficult to open up that dialogue and get that access for all the end users to have a diversity of supply.
  (Mr Latif) If you did put gas into the pipe at this point and we want it to come out at that point, we do not want a government that suddenly finds itself short of gas hiving it off in their territory. There should be a recognition that there is a transit point and they do not hive off things that do not belong to them.

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