Select Committee on Trade and Industry Appendices to the Minutes of Evidence


APPENDIX 30

Memorandum by Totalfinaelf

  1.  TotalFinaElf welcomes the opportunity to present its views on a number of the issues you have raised as part of your enquiry into Energy Policy—the Security of Supply.

  2.  We have restricted our comments to the use of gas as a primary source of UK energy for the foreseeable future and to the security of the supply concerns that this increasing dependence on gas raises:

SUMMARY

  3.  In what follows there are three key propositions:

    —  Security of gas supply is now of utmost importance and should be a primary focus for regulation. It is essential that this regulation provides the UK with a flexible transportation infrastructure capable of providing alternative routes for gas entry allowing the continuation of producer on producer competition and thus ensuring the continuation of the important traded National Balancing Point (NBP) market.

    —  The Gas National Transmission System (NTS) capacity should be made available on a long-term basis to support the requirement for gas field development of certainty of access to markets. The discussion on the methodology for the determination of long-term capacity and its allocation needs to be resolved urgently and in a way that results in producers and shippers paying no more than cost-reflective charges for the use of the NTS.

    —  The interaction between UK government policy and Regulatory policy must be well defined. The Government's role must be to set clear and unambiguous policies. The Regulator's role must be to demonstrate how the actions it takes support these policies.

SUBMISSION

  4.  The increased use of natural gas over the last decade has already made a significant contribution to the UK in terms of both maintaining competitiveness for UK industry through low fuel costs, reducing the costs of energy for domestic customers and reducing the amount of environmental pollution by generating an increasingly higher proportion of our electricity needs.

  5.  There is general agreement that the percentage of the UK's primary energy demand needs sourced by gas will continue to grow, with estimates of 50 per cent by 2020.

  6.  The UK already imports gas to meet winter peak demand, and most commentaries, including DTI forecasts, suggests that the UK will become a net importer of gas within the next five to ten years. This gas could be provided from several sources, and in most expectations would require additional links to Norwegian fields (to utilise the ullage that is and will be available in the UK offshore infrastructure) or additional interconnectors to Continental Europe. In addition, although the Norwegian producers have recently commissioned the Vesterled pipeline facilities to deliver gas into St Fergus, the continued provision of this service, especially at high volume rates, should not be taken for granted.

  7.  In order to encourage security of supply the UK needs to have a flexible transportation infrastructure capable of providing alternative routes for gas entry and thus allowing the continuation of producer on producer competition. If this flexibility is destroyed, the UK will be left at the end of the European gas supply chain rather than an integral part, with consequent increases in risks to security of supply and price. It is essential that the price control framework for the monopoly transporter supports this flexibility.

  8.  To date in gas, the regulatory price control focus continues to be on providing the minimum base level infrastructure with an expectation that market forces via capacity auctions, will provide the appropriate investment signals to Transco. The Regulatory direction appears to be to minimise investment in a continuing drive for economic efficiency and minimum transportation costs whilst the Government wants to encourage the maximisation of production from the North Sea resources. It is our view that because of the price control risk, the differing asset lifetimes between offshore and onshore investment and the increasing uncertainty about the sourcing of the future supplies of imported gas, this reliance on price based auctions to determine investment signals will not work and will result in an inflexible infrastructure which will increase the price of gas to end consumers, by restricting optimum competition.

  9.  The UK therefore has a clear strategic choice as to where it is positioned in relation to the future European gas grid.

    —  It could become a transit route to Continental Europe for substantial volumes of Norwegian gas landed directly to a number of East Coast terminals, with UK demands being met in the process (the "loop" scenario-Appendix 1);

    —  Or the UK could find itself at the end of the Continental Grid having the least choice of suppliers, the highest prices reflecting the cost of cross-European and Interconnector transportation, and a concentration of imports on a single terminal, Bacton.

  10.  By achieving the former it is likely that wholesale prices in the UK will be less, or at worst equal to those in Continental Europe, thus providing commercial advantages to UK business interests. In addition diversity of energy supply will be increased thus improving the security of supply of UK energy demands. This can be achieved with little expansion of the current UKCS infrastructure due to the extent of pipelines and terminals that will have available ullage in the future. In addition enhanced opportunities will exist to satisfy the supply requirements of the UK petrochemical industries in the supply of base products.

NEW ELECTRICITY TRADING ARRANGEMENTS

  11.  The introduction of NETA has been heralded by the Regulator as a significant success but it is clear that renewable generators and CHP owners do not believe this to be the case. Coal fired plant has recently seen its share of generation increase reflecting its supposed reliability, whilst turbines on wind farms lie idle not because of a lack of wind but so that the farm is not penalised by punitive imbalance charges. All this despite the fact that for a number of years the government has set strong targets for the introduction of renewables and CHP in the UK.

  12.  Whilst it is possible currently to envisage modifications to NETA that will accommodate the present levels of renewables, changes are required that anticipate both the 2010 target of 10 per cent that is government policy and at the same time, many coal and nuclear plants coming to the end of their life. To manage the problems that follow from these events, NGC should be required to purchase the required level of flexibility from the market in advance. This approach has a number of benefits:

    —  The cost of renewables will be obvious.

    —  NETA will be less volatile, this is essential to generation and marketing, the extreme volatility associated with a small gap between supply capacity and demand will reduce competition as companies decline the risks and increases the probability of an electricity supply crisis.

    —  A very clear signal will be given of the need for investment in more generation capacity which is important since otherwise the investment would be based on unpredictable price spikes.

    —  The threat from greater modulation required from the gas system could be anticipated.

GOVERNMENT AND REGULATORY POLICY

  13.  In connection with Government policy, our main concern is the interaction between UK government policy and Regulatory policy. It is our belief that it is the role of Government to set clear and unambiguous policies and for the Regulator to demonstrate how the actions it takes support these policies.

  14.  In general we believe that regulatory policy must be subject to the same guidelines as that of any other government policy. As such we are particularly disappointed that Ofgem continue to dismiss the need for cost benefit analysis despite continued requests from the industry and from other learned bodies. Without this discipline there is a concern that many regulatory inspired initiatives do not have adequate justification and eventually result in increased costs much of which is likely to eventually be passed on to the consumer or producer (thus reducing the viability of new marginal gas production).

  15.  We also believe there is adequate provision under the licensing conditions and general competition law to ensure that anti-competitive practices are prevented. We support the principle which we believe is shared with Ofgem, that as markets make the transition from monopoly to competitive, so the regulation of those markets should also make the transition to the regulation applicable to normal competitive markets in the UK. There is much evidence of increasing competition but there has been little evidence of real consideration of the regulatory transition. As an example, the industry receives regular advice from Ofgem as to how it should bid in competitive markets. As Ofgem has achieved very wide ranging and ill-defined powers under the licenses, and as Ofgem has the power to levy heavy penalties, with (almost) no right of appeal, this is a significant increase in the detail and burden of regulation. The adoption of the approach of the OFT in these competitive markets would allow them to develop in a way which to date has brought major benefits to the UK in terms of cost efficiency of the energy industry and has considerably improved the level of service to customers, at the same time as delivering a real reduction in their energy prices.

  16.  Our final point relates to the development of wider competitive markets both within as well as outside the EU. A consequence of the UK becoming a significant importer is that it will also be necessary to bring gas significant distances across numerous national transportation networks. For this reason, it is important for Government to continue its support for the development of open energy markets on the continent which are based on true free market principles as opposed to regulatory over control.

  17.  We trust you will find the above comments of use in your review. If you would like us to submit oral evidence to the committee, we would be more than willing to participate.

Charles Henderson

31 October 2001

Annex 1





 
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