Memorandum submitted by energywatch |
energywatch was set up under the Utilities Act
2000 and came into being in November 2000. It represents all gas
and electricity consumers but has particular regard for the needs
of low income, elderly, disabled, chronically sick and rural consumers.
Our mission is to be an independent consumer
champion, dynamic in developing safe, confident and assertive
consumers. We are committed to improving the services provided
to all gas and electricity consumers.
energywatch has produced a composite response
in response to key issues from the various scoping papers provided
by the Performance and Innovation Unit as part of its review of
We believe that there are several high level
points that are applicable across all of the issues. Firstly,
nothing can be off the agenda because it is too difficult or unpopular
to think about. Second, we can no longer hide behind the view
that markets provide the right investment signals and we need
to accept that risks and costs need to be shared. We need clear
impact assessments based on the key deliverables set out in the
paragraph below so that we can clearly explain decisions to consumers.
Finally we need effective tools for assessing risk and developing
2. THE ENERGY
energywatch believes that there are three fundamental
deliverables for consumers from the review of energy policy that
is being undertaken by the Performance and Innovation Unit, namely
the delivery of secure, safe and affordable energy.
A secure supply of energy is one that is secure
both in terms of internal systems (ie. that there is appropriate
investment in pipes and wires for example), and in terms of the
external geo-political environment. A safe supply is one that
gives consumers confidence and meets the principle that people
will not be put at risk by the provision of energy. Finally, affordable
energy enables the UK to compete effectively both within Europe
The Energy Policy Review will inevitably develop
a series of options as a consequence of its work. energywatch
believes that it is essential that each option be tested against
the above and that the criteria for each of these tests need to
be clear and transparent. It would also need to be explicit in
addressing the likely impact of proposals on fuel poor consumers.
The intention would not be to change proposals but so that mitigating
action might be taken to ensure that Government remains on target
to deliver the eradication of fuel poverty.
The abundant supply of coal, and its potential
as stored energy, means that it must be taken seriously as a means
of generating electricity. There may be a continuing role for
coal, particularly as new technologies (to increase efficiency
and reduce emissions) are developed, and in any event as a contingency
to offset the risks associated with other fuels.
4.1 Investment in infrastructure
The energy policy debate needs to analyse whether
there is likely to be an infrastructure in place to access and
deliver remaining reserves. It is already evident that strains
are beginning to show in the gas supply network. It is vital we
address this as we become increasingly dependent on gas for generation.
The question is in part being discussed as part
of the debate into planning future investment into Transco's price
control. Transco must balance investment into extending existing
capacity of North Sea production and cope with increased importation
of gas from Europe and elsewhere (increased use of LNG may change
the economics of locating terminals). It may very well require
looking again at the mechanisms and conventions of price controls.
Whilst it is likely that both types of investment
will be needed, it highlights the problems of maintaining capacity
in the network that avoids constraints. This is particularly important
as perceived lack of capacity in the network can have an important,
and detrimental, impact on wholesale gas prices.
4.2 Storage and LNG
It is clear that the increasing dependence upon
gas for electricity generation means that we must review the function
of storage (for example both France and Italy have sufficient
storage capacity for six months) and whether the investment drivers
in place are sufficient to meet any revised role. There is also
likely to be a greater role for LNG (Liquid Natural Gas) storage.
LNG is an easy way to store gas and is not confined
to the geology of a particular area as is salt cavity storage.
It can be placed on the periphery of the gas network to manage
both supply and system constraints. It is also clearly a very
mobile source of a commodity that is conventionally viewed as
needing a fixed "gas chain" from production to burner
Since energy prices are only likely to increase,
given the predicted shortfall in production, it is likely that
LNG will become more economic. Energywatch expects the review
to consider ways in which energy security can be managed at a
truly global level. This would inevitably include the development
of greater international trade in LNG.
Auctions are an effective short-term mechanism
for transmitting price signals to market participants or establishing
"price discovery" of the value of a service or commodity
that was previously unknown. However applied to energy, there
are some significant drawbacks.
Unlike an auction for a painting, all participants
in the gas market are forced to bid for the service from a monopoly
service provider. If they do not get the service, such as network
capacity, gas shippers face expensive financial penalties for
going out of balance.
Auctions can also create volatility in related
markets. Uncertainty over Transco's maintenance programme and
doubts about offshore reliability have caused significant price
spikes sending out peculiar investment signals. In fact, one of
the reasons why the largest players are vertically integrated
is to mitigate risk in these open markets and make some money
along the way from their smaller competitors. Companies that are
not integrated nor have long term contracts have been exposed
to the recent price rises. In this way uncertainty caused by auctions
has a negative impact on long term investment strategies and impacts
on a secure, safe and affordable energy supply.
Market-based mechanisms such as auctions are
not the right instruments for something as vital as ensuring that
there is sufficient investment in networks. We have relied too
much on the notion of the market and need to accept that sharing
risk is part and parcel of a secure, safe and affordable energy
Safety in energy networks is of prime concern
to energywatch. Traditionally safety has been linked to investment
and safety standards. However the competitive market has created
new types of issues that need to be addressed by the review. For
example, we have concerns that there is a shortage of gas service
engineers that will affect any major work on the gas supply network.
Energywatch believes that investment in people should be recognised
alongside other forms of investment.
5. ENERGY EFFICIENCY
It is difficult to underestimate the importance
of increasing the take up of energy efficiency measures in the
context of the Energy Policy Review.
It is a sure fire win-win for companies, consumers
and the environment. Its major difficulty, however, has been the
ability to get consumers interested in its take-up at a time of
low energy prices. It is also well identified as a key tool for
increasing the affordable warmth for fuel poor consumers.
Consumers' interest in energy efficiency may
change, given a sufficiently high profile campaign, when presented
with the alternative options for sources of energy presented in
the findings of the review.
6. NUCLEAR POWER
If we are serious about CO2 reduction and supply
security, nuclear power must be on the agenda along with all other
options. We recognise the concern people have regarding the safe
disposal of nuclear waste and it is vital that efforts continue
to be made to resolve this issue. We also need to accept that
this is an issue that needs to be dealt with whatever the outcome
of this review.
In particular clear and unequivocal attention
must be given to developing a public relations strategy to ensure
that people are aware of the options that are available to them
and their consequences.
We also need to be able to convince consumers
of the need for real diversity in energy so that we can prevent
having energy that is the most expensive in Europe and with its
inevitable consequences for jobs.
It will be important to present these issues
starkly so that consumers are in no doubt regarding their importance;
for example new nuclear power stations or dependence upon Russian
gas or a comprehensive programme of renewable energy are just
some of the choices of which consumers need to be aware.
There will inevitably be difficult decisions
that will need to be taken as a consequence of the review. Having
a clear set of tests based on key deliverables as mentioned above
provides a clear and consistent means of assessing their impact.
energywatch believes that it is neither practical
nor desirable to have different security standards for domestic
consumers and others who do not have the means available to them
to source alternative supplies.
Given that it would be physically impractical
to implement such a proposal it would only be possible through
tariff structures. This would inevitably lead to first and second
class consumers, with those on lowest incomes (and possibly with
the greatest need for constant supply) suffering the most. Energy
is an essential service key to UK competitiveness and such a proposal
would jeopardise this.
It is inevitable that there will be an increased
dependence on imports of energy. Against this we need to develop
clear risk assessment strategies along with appropriate contingency
We do not believe that network users should
pay different prices for the provision of network services and
there needs to be a fundamental review before any further cost-reflectivity
is imposed. Such an approach has implications for programmes to
extend the gas supply network that have clear social and environmental
benefits and we believe that there is a case for increased cost
smearing to provide equal access to networks.
We discuss above our concern at any suggestion
of different security standards for energy and our belief that
this is not appropriate. We are strongly supportive of Ofgem's
Information and Incentive Project as a start and believe that
it is correctly focussed. However we believe that it needs to
be developed further, over time, to cover system security and
9. A NEW REGIME
energywatch feels that the market cannot be
relied upon to provide supply security in the future. Markets
can only take us so far in the provision of secure energy and
that we need to reconsider their role.
The Energy Policy Review has also highlighted
the real difficulties in trying to reconcile social, environmental
and economic objectives. We believe one body needs to take ownership
of these competing issues and make certain that the proposals
from PIU can be coherently implemented. Such an arrangement would
tend towards the development of a strategic energy authority.
Nothing can be off the agenda because it is
too difficult or unpopular to think about.
We can no longer hide behind the view that markets
provide the right investment signals and we need to accept that
risks and costs need to be shared.
There are three key deliverables from the review
of energy policy, namely the provision of secure, safe and affordable
We need clear impact assessments based on the
key deliverables we have set out so that we can clearly explain
decisions to consumers.
It also needs to be explicit in addressing the
likely impact of proposals on fuel poor consumers so that mitigating
action might be taken to ensure that Government remains on target
to deliver the eradication of fuel poverty.
We need effective tools for assessing risk and
developing contingency plans.
Government must play a leading role in developing
both the investment drivers and regulatory framework to guarantee
delivery of a secure, safe and affordable energy supply.