Examination of Witnesses (Questions 328-339)|
TUESDAY 20 NOVEMBER 2001
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 marketand we know that
is a distinct possibilityfrom 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.
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,
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.
(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
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.