Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 328-339)

DR KEITH MILLER, MR DAVID PORTER AND DR MALCOLM TAYLOR

TUESDAY 20 NOVEMBER 2001

Chairman

  328. Good morning, Mr Porter. Perhaps you could introduce your team and then we will get started. I am sorry it is a little bit late.
  (Mr Porter) Thank you, Chairman. On my left is the Chairman of the Association's Board of Directors, who is Dr Keith Miller. He is a Director of Teesside Power. He has some 30 years' experience in the electricity industry formerly with the Central Electricity Generating Board. During that time he spent a few years working in France, later went to National Power at privatisation and now has his present directorship at Teesside. On my right is our Electricity Markets Adviser from my office, Dr Malcolm Taylor. He also has some 30 years' experience in the electricity industry first with the CEGB, then with National Power and then with International Power where he worked even further afield than Dr Miller did. We welcome very much the opportunity to have this discussion with you this morning.

  329. Thank you. We are concerned here about security of supply, the working of the market. In your paper to us you make the point that the market has provided both falling prices and a diversity of supply. Are you confident that this will continue? We do not really see a major slowing down of the dash for gas, although it is not as fast as it once was, but it is continuing and this obviously raises questions about importing of supply and the like. Do you have concerns about the interplay of market forces and the apparent inability of our country to be able to sustain the increasing levels of gas consumption from our own resources?
  (Mr Porter) Broadly speaking, the Association believes that the market will deliver the electricity that the UK's customers want and, indeed, the companies that the Association represents stand or fall on that basis. They go out of business if they fail to provide the product. In the process, however, the market may well deliver occasionally outcomes which are uncomfortable. They can be things like shortages of capacity and occasional hikes in prices. If politicians cannot live with that, and they feel that they want to intervene in the market—and we know that is a distinct possibility—from the Association's point of view we would ask that they do so with the utmost care. The reason for that being that it would be very easy to damage a market which, in broad terms, is working very well. We would say that acting with the utmost care means going with the grain of the market and intervening, should that be necessary, in a way which is market-based. You mentioned prices, Mr Chairman, and asked whether we expected them to fall. I do not think any of us can expect electricity prices to keep on going down as they have. Indeed, at the moment prices are remarkably low and are below the level that most companies would want to see in order to make an investment in a new power plant. Before very long more new power plants will be needed, we have an ageing stock and investment will be a very key issue. I hope that during the discussion this morning we may be able to talk a little more about that.

Mrs Lawrence

  330. It is difficult to tell from your submission whether you are concerned about the dependence on the input of gas or not. You note the anxiety of some commentators but then you go on to point out that the United Kingdom has been dependent on imported oil for a long time, including wartime, do you think the anxieties about gas importage are exaggerated?
  (Mr Porter) I think it is possible that they may be. I could not give you a clear yes or no answer on that. I can say that we do not have members saying within the Association that they have particular difficulty at the moment in sourcing gas under contract. They are concerned about prices, but they are not coming to us at the moment saying, we do not see a future running our gas fired power stations, indeed they have made investments on the basis that gas will be available and they have entered into contracts with gas supply businesses to that effect. It is, however, possible that the use of gas may grow so much that it is indeed largely imported. I think it is fair to say that broadly speaking our members are neutral to the source of the fuel.

  331. We are all a little bit sensitive after 11 September, do you think that there is enough flexibility in the transportation system of gas to provide gas at a reasonable price, even in the event of a major incident?
  (Mr Porter) I think on the question of terrorism, that it takes discussions about security of supply on to an entirely different level. It is not one where I think we would want to get deeply involved. You cannot have absolute security of supply and the incidents of 11 September have demonstrated that to us. The technicalities of whether the gas system works well and whether the import arrangements work well is an issue that we can address. I think our greatest concern as far as that goes is that the markets across the channel are liberalised in the manner that was discussed earlier this morning. May I ask Dr Taylor to add something to that if he thinks it is appropriate.
  (Dr Taylor) Merely to reinforce and support exactly what the Minister was saying this morning and I think the Chairman was saying, that we wholeheartedly applaud everybody's attempt in government to rapidly move towards a better and more liberalised market on the continent, as we see that as being to everybody's benefit in terms of ensuring the commercial security of supply.

  332. With a dash for gas do you think that a rise in gas prices will actually alter the dependency on gas in the near future?
  (Mr Porter) Yes, I think that is a possibility. In fact you should not assume that people will forever choose gas as the fuel for power stations. There is a small example which has come up recently where one of the larger generating companies has announced that next year it will close one of its gas fired generating sets in the North of England and will replace it with a coal fired set. Maybe we should not draw too many conclusions from that, but it is a signal that companies do not immediately think only in terms of gas.
  (Dr Miller) I think you have covered the point perfectly, David.

Dr Kumar

  333. Mr Porter, in your submission in paragraph 14 you said that there are signs that the demand for electricity is likely to rise. You may also know that some commentators have been arguing there has been a decoupling of economic growth from energy use. If we get an economic slow down there may be stagnation or even a fall in demand. What leads you to believe the optimism and growth in demand at this moment in time?
  (Mr Porter) I have to say it is not the result of an intensive study or anything, there is a figure bandied about in the industry that growth stands at about one per cent per annum and I think growth in demand in the European Union is approximately two per cent per annum. You see new demands coming along, very large intensive, not very large in the sense of our major industries, uses for electricity in computers, and so on. I also believe that people generally have become so accustomed to electricity that they expect it to do more and more for them. Is there a possibility that we shall see much more widespread use of air conditioning for example? I am giving you those comments off-the-cuff, they are not the result of any study that the Association has done.

  334. Let me press you a little further, would your optimism still be so strong, bearing in mind that we could have higher prices in the future which reflect the increasing costs, but also the environmental charges on energy use as well, is that going to put the price of electricity higher, would you still be optimistic in the increase in growth?
  (Mr Porter) I am not attaching a lot of importance to that level of growth that we mentioned in the paper.

  335. You would want to revise that figure of one per cent?
  (Mr Porter) We might.

  336. Sorry?
  (Mr Porter) We might.

  337. What would you like the figure to be?
  (Mr Porter) I would not want to give a figure off-the-cuff this morning.

Linda Perham

  338. Going back to your opening remarks, I would like to just look at the balance between market forces, regulation and public policy, which you cover in paragraph 17. You actually say markets do not deliver neat and tidy outcomes and you certainly do not like Ofgem's proposed market licence conditions, which you describe as unnecessary and say that it could add to regulatory risk, increased costs or even deter investment. Do you think competition law could prevent market abuse, even if the government does not take any action to maintain fuel diversity?
  (Mr Porter) Ofgem has every possible power at its disposal to ensure that we do not have market abuse. We have a very competitive market. We have a Competition Act with powers which are extremely stringent and they involve very high penalties on companies that fall foul of the Act. We have a trading mechanism which is capable of being changed at quite short notice to deal with incidents of behaviour that do not go with the grain of the market. Generally we are deeply disappointed that Ofgem persists, even after having had the proposal rejected by the Competition Commission, with trying to control a part of the market which should really be left alone.

  Linda Perham: Thank you.

Sir Robert Smith

  339. We have been talking about the liberalisation of the European market, which includes not only easy access to transmissions but also easier access to each others markets. Assuming there continues to be some resistance from some Member States to complete liberalisation can the freeing-up of the transmission system proceed without the other elements, the liberalisation?
  (Mr Porter) No. The markets have to be freed up as well. I am not, in fact, quite as pessimistic as some of the people involved in the earlier discussions this morning about the European liberalisation. It is quite clear that some of it is going much too slowly. We have in the past seen instances of where the take-up of liberalisation has suddenly gone ahead in a spurt. Usually when customers have realised there is something in it for them political pressure gets applied and we move forward rather more quickly than in the past. I am not denying that there is an awful long way to go.
  (Dr Miller) I guess the only comment I would make is that I think one of the areas that is crucial is not necessarily the internal market arrangements in each country but more the arrangements for cross-border trading. I know that is a subject which is currently being discussed within the European Community. It is very important we get those things right and that we do not lock up those inter-connector accesses which prevent the flow across from one country to another country.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 3 May 2002