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Earl Russell: My Lords, I am most grateful for the noble Baroness giving way. Perhaps I may narrow down the area of difference between us. I agree with most of what the noble Baroness said, but my question is this. Will the disabled person have a share in saying whether something is an actual opportunity or will the Government tell him?
Baroness Hollis of Heigham: My Lords, what we shall offer to disabled people is what they tell us they want; namely, opportunities to move into work. Secondly, at the moment, those opportunities are blocked, sometimes by their health but at least as often by employers' perceptions. In that regard the Disability Discrimination Act will be an important tool. The third aspect is the benefits system. We want to go with the grain of their wish, which is to help them to overcome the hurdles that stand in their way. I repeat that compulsion is not the issue.
The noble Lord said: My Lords, I begin by declaring an interest, albeit perhaps a somewhat indirect one, through my non-executive involvement in a power generation company in some of whose stations gas is the prime energy source. I am most grateful that time has been found for a debate this evening so soon after the publication of the report of the European Communities Select Committee which stemmed from Sub-committee B's deliberations on the subject of the EU Gas Directive. I apologise to noble Lords that this has not given many much notice of the debate, but it was felt important to allow the House to consider the report and convey its view to the Government before the Government attend the next Energy Council meeting on Monday 8th December.
The history of this directive has been a long and painful process. Most of the single market was completed by the end of 1992, but energy was one of the few sectors left out. The Electricity Directive was given priority, and only once it was finally agreed, after months of apparent stalemate, in July last year, did attention return to gas.
Sub-committee B took evidence from 22 witnesses over a period of five weeks. Of those 22, 11 were oral witnesses. They included representatives from France, Germany, Spain, Norway and DGXVII. We were particularly grateful to those foreign witnesses who took the trouble to come and give evidence. Throughout our inquiry there was a problem keeping pace with a moving target. Since we started to look at the draft directive in June this year there has been a whole series of revised texts, under first the Dutch and then the Luxembourg presidencies. These are detailed in our report.
In the midst of these changes, we took evidence on 24th July from the Energy Minister, John Battle, MP. I take this opportunity to thank him again for the time he gave us and for the very high quality of his evidence.
on the 8th. That is next Monday. Perhaps the Minister can say whether he still expects that to happen. If so, what has changed since October to make it possible? If not, will this be a high priority for the UK presidency starting on 1st January?
The background to our inquiry is that natural gas accounts for one fifth of the EU countries' total energy consumption, and use is growing, particularly for electricity generation. But gas-fired power stations account for only one eighth of all EU gas consumption. Nearly half is commercial and industrial use, and most of the rest is used for domestic heating and cooking.
Gas is a clean and efficient fuel. It is virtually sulphur-free and lower in other pollutants, including carbon dioxide, and so less harmful relative to global warming. But its energy density is only one thousandth that of oil, making it expensive to store and transport.
In 1995, the EU countries produced 60 per cent. of their gas from indigenous sources, principally the UK and the Netherlands. But the EU's import dependency is growing, and is expected to reach 45 per cent. in 2000 and 70 per cent. by 2020. Of the EU's imported gas, two-thirds comes from Russia and most of the rest from Algeria (much of it by tanker in liquefied form), with Norway a long way behind in third place.
It is obviously a cause for concern that Europe is becoming increasingly reliant on potentially unstable countries for a vital energy resource. We were fully aware that no directive can do much to alter this fact, but by creating a more flexible trading market it should improve security of supply--which has more to do with how many sources of supply are available and how easily one can be substituted for another than with whether those sources are indigenous or external.
From the UK's viewpoint a key factor will be the completion of the UK-Belgium Interconnector pipeline, scheduled for next year, which will connect the UK to the continental pipeline network. At least in the short term, the interconnector is likely to be used to export UK gas and we recognise in the report that this may-- I emphasise "may"--cause domestic gas prices to rise. That is something upon which the Minister might wish to comment in his reply.
Britain can afford to take a fairly detached view. The Gas Act 1986 introduced competition in the supply of gas to industrial and commercial users; provided access rights to pipelines; and set up an independent regulator--Ofgas. With liberalisation now being extended to domestic consumers, Britain has already put in place a more competitive regime than anything envisaged by the draft directive. But British companies stand to gain from rights of access to continental customers, both as gas exporters and as pioneers of a competitive market. Liberalisation should also improve the EU's overall competitiveness. That is why we offer a general welcome to the directive in our report.
We identify three significant issues in the report, and I shall deal with all of them. The first big question addressed by the directive is how much of the market should be opened to competition, and how quickly. It is already clear that the initial percentage will be around 30 per cent.--28 per cent. in the latest text, rising to 40 per cent. after five years and 45 per cent. after a decade.
Because the pattern of gas consumption differs widely between the member states, the draft directive also sets a minimum threshold beyond which a gas consumer would have the right to choose its gas supplier. Gas-fired power stations will all have that right, regardless of how much gas they consume. In the latest text, that threshold is set at 25 million cubic metres in the first stage--which would include only a few very large industrial users--falling to 15 million cubic metres after five years and to 5 million cubic metres after 10 years.
In our report we call for lower thresholds at stages 2 and 3--namely, 10 million cubic metres and 1 million cubic metres respectively--and for a shorter timescale--three years between stages rather than five years. Again, perhaps the Minister would be kind enough to comment upon our conclusions relative to those in the latest directive, and how the Government intend to deal with that question at the energy conference on 8th December.
The second significant issue relates to take-or-pay contracts. We recognised from an early stage that the issue of market opening cannot be detached from the difficult issue of so-called "take-or-pay" contracts. These are contracts between the major gas suppliers, mostly outside the EU, and gas companies in member states--mostly state-owned monopolies--which then distribute the gas to final customers. Under those contracts, gas companies agree to pay for agreed minimum quantities of gas every few months for the duration of the contract--which may be 20 years or more--and they must pay for the gas even if they do not actually take delivery of it (hence "take or pay").
In a monopoly situation, that suits both parties: the gas producers have the guaranteed income they need to invest in developing new fields and building pipelines; the member state gas companies have assured supplies to sell on to their customers. But liberalisation, as envisaged albeit modestly in the directive, threatens to turn this convenient arrangement into a millstone for the gas companies. With rival companies competing for their customers, the market price is likely to fall, and the former monopoly companies may find themselves unable to sell at a profit all the gas they are committed to paying for.
Contrica, one arm of what used to be British Gas, had just that problem, but it was made worse in its case by the inflexibility of the contracts to which it was committed. Most continental contracts have provisions allowing the price paid for gas to be re-negotiated in certain circumstances, and we argue in our report that greater use of such provisions could help to allay the fears of gas companies about the directive.
The draft directive deals with the take-or-pay problem by offering derogations from the market opening provisions for companies which encounter serious difficulties as a result of their take-or-pay commitments. In the report, we accept that as reasonable so long as it applies only to take-or-pay contracts signed before it was clear that the gas market was going to be liberalised.
We were therefore dismayed that the text of the draft directive published by the Luxembourg presidency in July removed the distinction between those existing contracts and contracts signed more recently. That threatens to allow derogations to continue more-or-less indefinitely, making it difficult to see how a genuinely competitive market can ever be achieved.
When we took evidence from Mr. Battle in July, I put it to him that derogations for future take-or-pay contracts would, "drive a coach and horses" through the principle of the directive. Mr. Battle agreed and said that, unless future contracts were "very tightly controlled", the Government would be, "very sceptical about supporting them". He doubted, however, whether he could persuade other member states. Will the Minister indicate whether the Government have succeeded?
The third issue was that of transparency. The Minister also said in July that he wanted to see better transparency provisions in the directive, including a requirement for separate management of transportation and supply activities, unbundled accounts and so-called "Chinese wall" provisions to prevent large gas companies using information provided by other suppliers to benefit their own supply operations. Since then, the Luxembourg presidency has included in the directive clauses prohibiting transmission or distribution companies from
It is my pleasant duty to conclude by offering considerable thanks to our special advisor, Michael Brothwood of the Denton Hall Energy Group and to Dr. Andrew Mylne, clerk to Sub-Committee B. This was his last inquiry before moving on to pastures new. I also thank his secretary, Jane Sanders. Too infrequently are secretaries thanked on occasions such as this. They do a sterling job in difficult circumstances. Finally, I thank all members of Sub-Committee B for the diligence which they displayed throughout our inquiry. I thank in particular the three members of the sub-committee who are speaking tonight. I beg to move.
Lord Berkeley: My Lords, I apologise to the House for not being in my place when the debate started. As a member of Sub-Committee B, I welcomed the opportunity to study gas prices and deregulation across Europe. It confirmed that the attitude of different member states to deregulation, be it of gas, electricity or the railways, is similar. Some member states like it and some do not. The UK has already deregulated, which coloured much of our consideration in the committee.
I wish to cover two matters of considerable concern. They have already been mentioned by the noble Lord, Lord Geddes, and I shall be interested to hear my noble friend's comment in winding up. The first is the security of supply and the second is the price of gas to major consumers.
We heard evidence from Mr. Jonathan Stern, who for the past 10 years has been working on this subject for the Royal Institute of International Affairs at Chatham House. I and many of my colleagues on the sub-committee were impressed with his evidence. He stated that in the year 2020 70 per cent. of European gas supplies will be coming from outside Europe, mostly from Algeria and Russia, which are perhaps politically unstable. He went on to say:
The extent to which other supplies may be available depends partly on price and partly on the availability of a national grid. As we stated in our report, the availability of a free market would be advantageous, too. But the fact remains that, if 70 or 80 per cent. of energy supply can be turned off abruptly, most member states would wish to see some kind of contingency plan.
We in the UK are in a slightly different position because for the moment we are net producers of gas. However, one must question the situation in 20 years' time. I have a slight query about the wholesale rush away from coal which was started by the previous government. Furthermore, I am not sure about what will happen after thousands more jobs have been lost in the mines. I am sure that the Minister will have a response. I believe that we should have a contingency plan because we are acting with the rest of Europe with a European grid. If Russia, Algeria or any other country cuts out, we could be in trouble.
I turn to the major gas users, from whom we had interesting evidence. I wish to quote from Appendix 3, page 30, which shows that the UK's price to industry is the lowest within the EU. It is just about double that of Canada, with the USA falling somewhere in between.
The International Federation of Industrial Energy Consumers, the big companies which are energy-intensive users, told us that, out of their total production cost, 50 per cent. related to energy. Therefore, they go where the energy is cheap. Others told us that the big world multinationals do not like having too many plants in the same continent and they like to consolidate in some way. Therefore, we must find a way of encouraging these industries to stay in Europe, whether here or on the Continent. They will need cheaper gas if we are to achieve that, otherwise, they will go to the United States, Canada or somewhere else. I am convinced that, if the directive is implemented as outlined by the noble Lord, Lord Geddes, they will be assisted in staying.
I have a third concern. It was not clear from the evidence what the final result will be. When the directive is clarified, will it be enforced? We have many European regulations, and not only in this field, which are not enforced. It would be invidious to quote any in particular. My great fear is that whatever compromise is reached in the final text of the directive some will choose to ignore it completely. We may believe that it does not matter much in the UK. However, in terms of our industrial base we are very much part of the European scene. If there were a problem with such primary industries on the Continent we would feel the cold too. I should be grateful if the Minister would comment on EC policy on taking action against member states who do not enforce Community legislation.
Finally, I congratulate the noble Lord, Lord Geddes, on his excellent chairing of the sub-committee. It was intense, it was hard-working but it was occasionally fun. I hope that the report will find favour with the House and will be of interest to the community at large.
Lord Haslam: My Lords, as a new member of Sub-Committee B, it was a pleasure to work under the chairmanship of my noble friend Lord Geddes on this complex problem. Many of the witnesses expressed doubts about the virtue of the proposed directive and no one believed that it would produce even a semblance of a level playing field across the Community. However, most witnesses accepted that on balance it is better to have a directive rather than to have none at all. Both the noble Lords, Lord Geddes and Lord Berkeley, referred to the question of security of supply, and I apologise for repeating some of those statistics but I believe that they are very important.
Some of the evident imperfections of the directive derive from the fact that there are only two major gas producers within the Community; namely, the United Kingdom and the Netherlands. Given that the dependency of the Community as a whole on supplies from Norway, Russia and Algeria is expected to rise to about 55 per cent. By 2010 and to 70 per cent. in 2020, it is clear that the import dependency of those member
For example, British natural gas will soon be sold into Germany through the new interconnector pipeline, in which both British Gas and BP have major shareholdings. BP has also recently concluded a 15-year gas sales contract with Ruhrgas, the largest gas transmission company in Germany, in which BP has a 25 per cent. shareholding. Ruhrgas is obviously pleased to have this new source of a reliable gas supply and in no way views this as cross-border competition. Any normal competitive retaliation from Ruhrgas by supplying UK customers is, therefore, most unlikely. Also the existence of long-term take-or-pay contracts and the access problems to pipelines will further inhibit cross-border competition.
For these reasons I believe that the amount of meaningful cross-border competition likely to develop in the foreseeable future within the Community is absolutely minimal. On the positive side, however, the directive should help to stimulate domestic competition by creating a climate, which is favourable to the growth of liberalisation and which may well help some member states to overcome their domestic opposition to liberalisation. The UK gas industry can be proud of how it has set a shining example to the other member states by the way it has liberalised its domestic gas market.
Although it was not part of the sub-committee's remit, I must express some concern that for short-term benefits, we are willing to sell substantial quantities of UK gas to the continental markets. As the usage of gas in the UK has surged, our gas reserves have shrunk from 23 years in 1991 to 13 years by 1996, or 18 years if possible reserves are included. It is interesting that the German Government are still subsidising their coal industry and maintaining access to their coal reserves with a massive state aid of £4 billion per annum. This reflects one of their major concerns of becoming almost entirely dependent on imported gas from supplier countries, which are not only outside the community but which are also not in the "gile-edged category". Exporting our gas will bring the day nearer when we, too, are dependent on such sources. In extremis we may yet again be subjected to a new OPEC-type regime!
Finally, returning to the gas directive, if one reflects on its objectives, it is clear that the outcome will fall well short of expectations, and in particular the ambitions of increased cross-border competition will prove largely cosmetic. On a school report basis the directive would probably in my view rate about three out of 10.
Having said that, it has been a great pleasure to serve on the sub-committee. I have enjoyed the rapport and differences which there have been between the members of the sub-committee and again, I thank the noble Lord, Lord Geddes, for his excellent chairmanship.
Lord Bridges: My Lords, I was not a member of the sub-committee which prepared this report although I have served on it in the not-too-distant past. But in my position of current independence I am glad to welcome its appearance and the helpful analysis it makes of the European gas market, a subject of real importance. I thank, too, the noble Lord, Lord Geddes, for his clear and authoritative introduction to our debate this evening.
It should be noted that the report is concerned only with the way in which gas is distributed and marketed as part of the internal market regime in the European Union. It does not attempt to lay down the regime for a Community resource as it would if one were discussing agricultural goods or fish. Those are treated quite differently as resources belonging to the Community as a whole.
It is worth recalling that some attempts were made in the 1970s to classify energy as a Community resource but that idea was given up in the light of our implacable opposition. Indeed, I found myself at one unforgettable moment in the spearhead of our efforts to resist that attempt to make gas a Community resource when accompanying the then Prime Minister to a meeting of the European Council which was meeting in Maastricht, in, I suppose, 1980 or 1981. I was sent off at midnight to take part in a debate which lasted for several hours. I had to report to the Prime Minister on my success, or lack of it, at breakfast the following morning. My efforts had been successful but I was not complimented on my conduct because I had not been sufficiently firm.
It is useful to relate this subject to a wider and longer perspective of energy supplies in this country. A lot has happened in the past few decades. A generation ago, Britain was in the unique position as an energy producer and consumer. We drew the bulk of our energy supplies from a single resource--coal--which we had in abundance under our own control. However, because the industry was managed under a state monopoly--the Coal Board--and because of the great power wielded by a single trade union--the National Union of Miners--coal became an expensive source of energy at a time when oil was cheap and readily available. That had the effect of building high energy costs into our industrial structure.
The effect was particularly severe on energy-intensive industries; notably, electricity generation, cement, steel, fertilisers and ceramics. I suggest that that factor had a lot to do with our loss of competitive power in world markets in the 1950s and 1960s. The decision of the last government to break the coal monopoly has transformed that situation at a high social cost and, as others have pointed out, with a degree of loss of security. But we now enjoy a low-cost energy structure which is of wide benefit to consumers and many industries.
However, in continental Europe, little has changed. Energy supplies are either under the direct control of the state, perhaps most notably in France, or are conducted at strictly regulated prices. The report recommends that we should seek to end that regime by introducing energy contracts negotiated at arm's length and by separating gas production from companies transporting and selling gas to consumers.
If policies on those lines were adopted, a commercial gas market would be created to the general benefit of all consumers. But for this country there is a delicate balance to be struck. The present condition of the European energy market gives British industry a competitive advantage in Europe wherever gas is a significant source of energy in industrial production. Adoption of the policies recommended in the report and under consideration by our partners would gradually remove that advantage, although it would have the positive effect of improving the competitive position of the continental European industry in the world market.
As the European market is our own largest export market, in this country we should benefit indirectly from that situation but I do not find it at all easy to weigh that balance. It would be extremely difficult to quantify. Nevertheless, although I do not expect our opinion to be adopted by our partners, I believe that we are right to point to the existence of an alternative policy and to the wider negative consequences of the current European modus operandi.
We should also note with care the likely consequences of the European gas connector referred to in paragraph 101, as has already been mentioned by other noble Lords. That too is a serious matter. With the gas connector, supplies in this country are likely to become somewhat constrained in the medium term. But I am in favour of a link with the continental gas grid since access to Siberian gas supplies, although not perhaps the most permanent source, would in normal times be very useful to us in offering an alternative source of supply when our own resource begins to taper off. Here I find the evidence of Clare Spottiswoode, Director General of Gas Supply, most impressive. I noted with particular interest her remark at question 189 (on page 45 of the report) that she saw the interconnector as a price dampening mechanism. I believe that to be a rather helpful way of looking at it.
It is rare, at present, for a European country to be able to draw on a choice of gas supplies, although I know that Italy does so as it deliberately chose to invest in pipelines connecting her national grid with both North Africa and Europe. There is, of course, the alternative source of liquified natural gas supplied by sea tankers, which was briefly mentioned by the noble Lord, Lord Geddes in his introduction. We were one of the pioneers of that business and we should perhaps take it into consideration today. I read that large contracts have lately been signed for the import of LNG by Japan from South East Asia.
It would be useful for us to have this technology and capability in reserve, given the large supplies of LNG available to European consumers in some African countries. I did not detect any reference to that aspect in the committee's report; perhaps I missed it. However, I suggest that it is something we might take rather more seriously than we have done in the recent past. The availability of LNG could well meet the contingency described by some noble Lords if supplies were interrupted from, say, Algeria or the Soviet Union. I should like to join other speakers in commending this extremely useful and informative report to the House.
Lord Moynihan: My Lords, I intend to be brief, which will no doubt come as a great relief to your Lordships, not least because I have the privilege of summing up the subsequent debate and do not wish to keep either my colleagues or myself here at too late an hour this evening.
I should like, first, to declare an interest, in that I am a director of Ranger Oil, and am on the Phillips' Advisory Board as well as being chairman of CMA, the advisory group. Against that background and from my experience during my time as a Minister with responsibility for oil and gas in a previous government, I should like to congratulate noble Lords who sat on the committee on producing a really excellent report. I listened with interest to what the noble Lord, Lord Geddes had to say when introducing today's welcome debate. My only disagreement with the noble Lord would be on the impact on gas prices of the interconnector. I understood completely when he said that they may rise, but it is not my view that gas prices will rise.
If we look at two factors--first, the trading opportunities that the interconnector will generate, and, secondly, the overall supply-demand position in the UKCS gas market--I believe that we should be optimistic about pricing in the United Kingdom, not least because, so far as concerns gas, there is significant associated gas to come on stream in the coming years. There is, in particular, associated gas from the central North Sea fields and there are new fields in their own right coming on stream, such as Britannia. Then there are the carboniferous plays in the southern basin. I am one of those optimists who do not believe that the interconnector will only be an export route for UKCS gas in the short run. I happen to believe that it will be a long-term export route for UKCS gas. If one looks at the overall supply position, I am confident that that will be seen to be the case.
I listened most carefully to what the noble Lord, Lord Berkeley said in his speech. My reflections on that would be that, despite the tremendous political instability in the two countries that he mentioned--namely, Algeria and Russia--it has been notable that gas deliveries from both those markets have been remarkably constant. The question might be asked as to why that is so, especially when one sees the appalling effect of the civil war in Algeria. It is probably appropriate to reflect that both parties in a civil war, particularly the Algerian civil war, recognise the vital importance of the significant revenue flows that are generated from the export of gas. Therefore, I argue that any dislocation in the future would be very short lived; but it is a factor that we would be wise to build into a European gas policy.
I urge the Government to continue their policy of liberalisation of the gas market in all their dealings with Europe and, indeed, in their domestic dealings. I add to that the importance of completing the renegotiation of the FRIGG Treaty, an issue upon which I know they are in constant dialogue with our friends in Norway. I very much hope that the Government will be able to encourage the Norwegians to come to an early
Without a shadow of a doubt, there are two most pressing issues which I hope the Government will take on board from the report and from the comments made this evening--namely, the need to be attached to market opening in their deliberations with their European colleagues, and, indeed, not just to market opening but also to ensure good progress thereafter. By the latter I mean that I hope the Government will foster larger steps than the presidency has proposed, seeking at least three years rather than the five years as proposed.
I believe that the take or pay proposals are in danger of blocking legislative moves towards liberalisation. Therefore, I very much hope that, so far as concerns market opening, the Government will have a strong resolve to push for a higher percentage than that which is currently negotiated. Like Centrica, I believe that an initial market opening well north of 25 per cent. is certainly worth while. As the Minister knows, if one compares the electricity directive with the gas directive, we are not on a level playing field. We should certainly be aiming to achieve a much higher percentage than that accepted in the electricity directive.
In conclusion, I hope that we can persuade member states as a matter of urgency to go further than the proposals which are currently before the House. I trust that the Minister will regard these words as a strengthening of what I understand to be the Government's resolve in what will be tough and critically important negotiations.
Lord Skelmersdale: My Lords, it gives me great pleasure to follow my noble friend Lord Moynihan. With my chairman's permission, perhaps I may welcome him to our energy debates. My noble friend clearly has an enormous amount to offer. While he was speaking, I recalled the fact that I spent a few days in August in Uzbekistan which, of course, is a gas producer like Kazakstan, Turkmenistan and, indeed, that general central-Asian basin. Although gas currently tends to go east into Pakistan, India and China, there is no earthly reason why, when the time is right, it should not start to go west.
However, that is not what I want to talk about this evening. Given the lateness of the hour, I shall curtail my intended remarks, especially as regards my introduction. I am particularly grateful to my colleagues on the committee for allowing me to play a full part in this inquiry, possibly nudging against the Griffiths rules. If there is any complaint it is entirely my fault. Neither my chairman nor any other member of the committee shares any fault in that respect.
With the exception of the noble Baroness, Lady Dean, we were all new to the subject--the noble Lord, Lord Bridges will remember this--as the committee reported in 1995 on the Commission's Green Paper on a European energy policy. Since then, we in the United Kingdom have almost achieved a complete free market in gas--something that our continental partners do not have, beset as they are by the monopolies of individual companies just as we had here between the 1960s and the 1980s. Perhaps I may say how delighted I am that Sir Denis Rooke, who masterminded the national grid for gas, was recently awarded a very high honour by Her Majesty the Queen.
Monopolies are by definition great protectors of their own interests, and state monopolies are the worst of the lot. It is hardly surprising then that the committee found that the most entrenched ones were those in the most developed countries, and those with no, or at best--like France--little gas of their own. The United Kingdom, Holland and Norway--a quasi-EC country, but one which obeys the rules through its arrangements with the Council of Ministers--are the only large scale producers. As my noble friend Lord Geddes said, most EC gas comes from Russia and Algeria, both of whom have ample supplies to sell, but unfortunately at a price which is considerably higher than it is here. Nonetheless there is more than enough to go round and I suggest that the supply is fairly secure although security is potentially unstable in the former case because of long and vulnerable pipelines and in the latter because of the political situation. That said, I have heard what my noble friend has just said on that matter. It is hardly surprising then that Europe as a whole wants access to United Kingdom, Norwegian and Dutch gas.
It is hardly surprising, too, that the big users of gas--the chemical companies and the electricity generators, in particular--wish to reduce their manufacturing costs, and that the Commission sees price barriers to trade for that reason. Its utopia of similar costs of production, whether in energy, wages, or raw materials, will lump all member states in the same boat and will make it inevitable that political integration will come if--and it is a big if--they ever achieve it. However, I must not be xenophobic. Indeed, I would not be a member of the committee if I was xenophobic about the Commission.
The industrial competitiveness of the Community as a whole, as against America, South East Asia, China or wherever, is a goal to be aimed at; hence this directive which intends to achieve common rules for the internal market in natural gas. Against this laudable objective, the Commission, as one expert said, faced "a carefully orchestrated campaign" of concerted opposition from the gas industry which,
Looking back at recent history in this country, there are many who, in my children's words, would say, "Been there, Gran, done that, got the T-shirt". One must remember, however, that on the Continent the gas industry is hardly ever in the private sector. It is rigidly controlled by governments for all the reasons that we in this country believed in nationalised industries before
My noble friend Lord Haslam clearly believed some of our witnesses when they said that even though this was a minimalist directive, to have it was better than to have no directive at all, and that slowly pressure will build up from industry generally to change the situation. The noble Lord, Lord Berkeley, made the same point. The proof was the interconnector between Britain and Belgium. I know of contracts already signed for the supply of gas by Centrica, both in Belgium and in Germany, in anticipation of its coming on stream next year. Some sort of directive will be necessary to increase the penetration of that gas further into Europe.
What the Commission therefore needs to do is to make certain that derogations from the common use of pipelines are kept to the absolute minimum. This remains a major sticking point. I hope that goodwill prevails at the Energy Council next week. It should, I feel, be achievable if the Commission retains the lightest of possible touches on the tiller. If it gives the slightest clue that it will be heavy handed, I believe that the Energy Council on Monday will fail.
I refer to market opening. Over the past two years the basic premise has been agreed. However, the levels and speed are still a most contentious issue. We have had a fast reduction in this country--probably too fast--and to levels undreamt of still in the Community. In fact they will be undreamt of even at the end of the 10-year period described in the draft directive. There is no suggestion anywhere that a householder could purchase his gas from anywhere other than the national monopoly, unlike here where, within two years on the present plans, we shall see a competitive market across the whole spectrum. The draft directive goes to the other extreme and is so slow as to be meaningless. I believe that the report, suggesting as it does thresholds of 25, 10 and 1 million cubic metres of supply to a single customer per year, is so reasonable that it is in itself somewhat minimalist. Nonetheless, I believe that it is achievable and, most important, it is not too damaging to the supplier firms.
However, transparency of pricing is vitally important. I am not a believer in Chinese walls; there is too great a temptation to pass information between the transport arm and the selling arm in a single company. I am sure that Voltaire would agree, were he still alive, that in the United Kingdom we have the best of all possible worlds. Two separate companies, one for supply and one for transport, must be the ideal even if, as on the Continent, both will be state owned. That is certainly the case in the current state of play. There is also, in my view, little logic in a producing country having transport and production in the same firm. However, that is probably another matter and not really germane to the report.
As has been said, there is a short period between the production of this report and the Minister attending the Energy Council. If he does nothing else in his preparation I urge him to read and consider most carefully paragraph 114 on page 27. It is on these procedural points that this directive will founder, not on
Lord Ezra: My Lords, it is with a certain nostalgic feeling that I take part in this debate having been involved in the affairs of Sub-committee B many years ago, and for quite a long period. I am delighted to see that the noble Lord, Lord Geddes, is now leading that committee with such effectiveness, and that once again it has produced an excellent report.
I shall not repeat what other noble Lords have said in this well-informed debate in which brevity has been one of the keynotes. I shall try to follow that. Emphasis has rightly been placed on the importance of gas in the energy mix of the European Union. Emphasis has also been placed on the import dependence and the difficulty that that creates.
As to usage, the real growth is likely to be in the power station. I have always retained grave doubts about that. It is not so long ago that the Community prevented the use of gas in power stations and the reason was quite clear: gas is one of the best forms of primary energy available. If consumed directly, it can be used to the extent of 90 per cent. efficiency. Therefore one might well ask, why put it into a power station where the ultimate efficiency is 50 per cent.? It strikes me as a slightly odd quirk that we deprive ourselves of the full benefit of this valuable form of energy.
That leads me to another, related, matter which some noble Lords who are present may feel strongly about, and that is the progressive diminution of the coal industry in providing a necessary element of security. If I may diverge for a moment on that issue, it is a little odd that we in Britain, having the most efficient coal industry in the European Union, are reducing it at the fastest rate, while others are preserving their access to coal at higher cost. That may not directly relate to the subject under debate, but it is part of the issue of energy policy which I believe should be taken into account.
The specific issues which arise in connection with the directive have been well aired. There is the problem of the level of market opening. While there can be unending arguments about this, I believe that the 15 member countries are near achieving a resolution. I should be very surprised if they agree on anything less than has already been agreed in the electricity directive. Equally, there is the problem of take-or-pay contracts. We must recognise that those who produce gas in whatever country invest a great deal in that production;
Access to the network, whether on a regulated or negotiated basis, has been carefully considered. In general, I imagine that it will be on a negotiated basis, as the regulatory system is relatively undeveloped at present on the Continent.
There is the interesting question of public service obligations. In Britain we no longer have this obligation. In the old days we had state owned coal, electricity and gas industries. They all had their public obligations to supply--to make sure that the energy was there when wanted. I am concerned that, under the new regime which our Conservative friends introduced progressively over recent years, that obligation has disappeared. It is felt that the market will provide the security. We have been going through an energy market which has been particularly beneficent in that sense. Any amount of energy has been available. But if things were to change who, ultimately, would be responsible? In law, no one in particular. On the Continent people think differently. We should have some sympathy with the view that a public obligation should be retained under the new arrangements.
I believe that the negotiating countries are very near agreement. I should be a little surprised if the agreement is not reached on 8th December. I very much hope that it will be. The nature of that agreement clearly will disappoint many in this country because we have moved so much faster. I believe that it does not matter too much how things are at the start because a momentum could develop which could push things forward.
I remind noble Lords of the electricity directive. The opening market figure was 22 per cent. When it comes into effect in 1999, it is likely to be 25 per cent. That suggests that there is an acceleration in these matters. The important thing is to start.
However, I very much regret one aspect. There is no mention in the directive, and therefore none in the report, of energy efficiency--the efficiency with which this prime form of energy should be used. In the legislation introduced for the privatisation of gas and electricity in this country, proper regard was paid to the need for efficiency. It has not been carried out as effectively as I should have liked, but at least regard was paid to that issue. I should like to see us pressing hard for something similar in the directive.
I was reading the evidence involving the noble Lord, Lord Howie of Troon. He asked the representatives of the Commission how they thought that they would be serving the interests of energy efficiency by pushing for ever lower prices. He received a rather confused reply, as indeed anyone must. There is little incentive for people to save on energy if the sole objective is to reduce prices. There should be an objective to improve efficiency in use, to improve value in the hands of the customer. That element is missing.
I believe that the directive is a move in the right direction. I hope that it will come into effect quickly. However, I also hope that the issue of energy efficiency will be introduced in some way into the final version of the directive.
Lord Mackay of Ardbrecknish: My Lords, I share the nostalgia of the noble Lord, Lord Ezra, for Sub-committee B. I was a member of it under his illustrious chairmanship. If my recollection is right, we investigated similar arrangements in the electricity industry and spent some time working out electricity interconnectors between various European Union countries. Therefore I share his nostalgic feelings for the committee.
I cannot say that I share his nostalgic feelings for the old days of the nationalised gas and electricity industries, coal companies, and so on. Perhaps I may recommend to the noble Lord page 47 of the report. The gas regulator, Ms. Clare Spottiswoode was giving evidence. At question 203, she answered by saying that she is a fundamental believer in market processes working better than government. She pointed out that,
I think I am right in saying that there may well be public obligations to supply in the gas and electricity Acts, but I am not a great expert in these matters. I suggest that the noble Lord, Lord Ezra, might consider that point.
The report relates to an industry where we and our continental partners are in different playing fields. We are major producers, with the Netherlands--a point made by many noble Lords who have taken part in the debate. My noble friend Lord Haslam illustrated the point by contrasting our position with that of many of our friends on the Continent who are dependent on Norway, Russia and Algeria. The noble Lord, Lord Bridges, commented on these differences and the important impact they have on the way we and our continental friends view these matters.
I believe that the situation will continue for a long time. Early in the development of North Sea oil people talked about the supply beginning to run out. It is not showing too many signs of running out. As my noble friend Lord Moynihan said, the potential sources of supply in the North Sea are there. We know about many, and we still find many. I share his view that there is not
There is another major difference. We have a more competitive regime in this country. My noble friend Lord Skelmersdale drew the attention of the House to paragraph 26 on page 11 of the report. Mr. Jonathan Stern, an independent gas analyst, said that the Commission had faced,
I hope that the Minister will not only be able to confirm that that is the Government's view of current position but that he will be equally able to confirm the Government's determination not to allow anything in the directive which will inhibit the liberalisation and the competition we have introduced in our markets.
In his introduction my noble friend Lord Geddes specifically referred to several aspects and I agree with him entirely about the need to re-think the thresholds and the timescale and go for lower thresholds and a shorter timescale. That is important. On "take-or-pay", I must say that I have to turn to Ms. Spottiswoode again, because I think that the point she made in Question 194 was an interesting one, especially from someone coming from Scotland who has watched the gas and oil industry develop. Speaking about this whole issue she says that,
The committee goes on to say that they believe that "take-or-pay" contracts are contrary to the spirit of competition, so I hope the Government will endeavour to ensure that any derogations are given only for contracts already in existence and not for contracts to come.
The other interesting point--raised, I believe, by the noble Lord, Lord Berkeley--is about who is to police the gas regime. Is it to be the Commission? I have to say that my confidence in the Commission's policing of competition policy is not great. I remember during my short period in the Department of Transport constantly having to consider how the Commission could possibly agree to the large tranches of money that nation states like France were pouring into their aviation industry. The Spanish, and others, were also doing it. It did not seem to me that the Commission were being very vigorous about fair competition and opening up markets. That is also a worry in the financial services industry and so I am not entirely confident that the Commission would be a good policeman.
I believe that would be the case of the Commission, too, so the question of who is to police these matters could be very difficult. What we have to ensure is that inside each country an effort is made to police any competitive policy arising.
This is a fascinating and interesting report. In many ways I think that my noble friend Lord Geddes and his colleagues have produced a report with a great deal more substance to it than the directive on which they were reporting. It is to be regretted that the directive does not have more substance, but I believe we ought to recognise the difficulties experienced by some of our European friends. These have been illustrated by your Lordships tonight. I hope that they will recognise the huge advantages of liberalisation and competition which have been brought to this country and to our industrial consumers, who need energy as a prime source to produce competitively in the world and also to our domestic consumers who, thanks to liberalisation and competition and--dare I say it?--thanks also to privatisation, have enjoyed the fruits of declining gas energy costs. Unlike the noble Lord, Lord Ezra, on behalf of consumers, both industrial and commercial, I welcome that.
Lord Haskel: My Lords, I am most grateful for the opportunity to reply for the Government to this Motion tonight. The gas directive is an important and late single market measure. I congratulate the committee on a most full and helpful contribution to the Government's
As several noble Lords have mentioned, it has not been an easy task for the committee. As one speaker remarked, it has been like trying to hit a moving target. Successive presidency drafts have been tabled, involving new proposals on key issues, and the picture still continues to change. Indeed, there were developments or discussion as recently as Friday and I will try to take account of these.
The committee has taken evidence from a wide range of those who are active in the gas market and those interested in the way it works, including my honourable friend the Minister of State for Science, Energy and Industry. Evidence has been received from companies based inside and outside the United Kingdom, from Members of the European Parliament, from the Commission and from the Norwegian Government. I congratulate and thank the committee upon the thoroughness with which it has pursued its inquiries. The result is a well-informed and valuable analysis of the issues confronting European legislators in considering the first step in opening the European Union to gas market competition.
Several noble Lords have suggested that the gas directive is not in the United Kingdom's best interests and that we should be better off keeping the benefits of competition and of our gas to ourselves. This is not the Government's view. Like other noble Lords, the Government attach priority to the completion of the single market, and the gas directive is an important single market measure. We believe it is desirable for the European Union as a whole to benefit from gas competition. This can bring important benefits to the competitiveness of European Union companies and the wider welfare of the European Union. What is good for the European Union is also good for the United Kingdom. As the committee notes, competition in the European gas market will improve export opportunities for United Kingdom gas producers. This competition should also help the United Kingdom companies which are interested in investing in the European Union in energy-intensive power generating projects. In addition, it will afford considerable opportunities for British companies to provide expertise in the workings of the competitive gas market. The computer applications alone for a competitive gas market across Europe are estimated to be worth billions of pounds by the turn of the century.
A more competitive European Union is good for United Kingdom trade and United Kingdom employment. That is why the Government are committed to pursuing the best outcome possible in terms of effective market opening under the gas directive. I can promise the noble Lord, Lord Mackay,
We do not maintain that the United Kingdom model for gas competition should be the only one available. That is because at present there is no homogeneous European Union gas market. The position varies greatly within the 15 member states. While the UK is a large, mature and liberalised market, there are countries such as Greece and Portugal where natural gas has been available to customers for months only rather than years. There are many variations within the Union and it is those differences between market structure and maturity which mean that member states have different views about how they see competition developing. Accordingly, there is a general wish to permit a large measure of subsidiarity in implementing the directive's core provisions.
Here I respond to the point made by the noble Lord, Lord Ezra, about energy efficiency. It is a matter for subsidiarity. The directive does not seek to impose energy efficiency measures on member states. The decision as to how best to achieve energy efficiency without distorting the single market is up to each individual member state.
Many noble Lords raised the point about member states which are substantially or wholly dependent on imported gas, much of which originates from outside the European Union. The noble Lord, Lord Geddes, gave us the figures. Of course, that has created political concerns about the nature and pace of market openings which have not perhaps been uppermost in our minds in the UK. But we agree that the European Union will be heavily dependent on imported gas in the future. However, liberalisation should not make the position any worse. Indeed, it should help, to the extent that a more open and flexible European market is created which may encourage the development of other possible sources of supply. The political support for some changes that we and the committee consider desirable--for example, the function of separation of gas transportation and supply--has not been present in the considerations of other member states for that reason.
Like the committee, the Government would prefer to see a more ambitious measure than that proposed by the Luxembourg presidency. The Government have sought and will continue to seek at the Council on 8th December improvements to the proposed extent of market opening and the quality of the third party access regime designed to implement that. Depending on how far we can get, there will, of course, be room to speculate about how much difference the directive will make in practice. But whatever the precise outcome, the Government share the view of some noble Lords that on balance it is better to have as good a directive as we can achieve than to have no directive at all.
Through consistent presentation of the UK case, persuading others of its relevance, it has been possible to make some progress on the concerns raised by the committee. For example, the presidency's proposals contain a form of the Chinese walls which so disturbed the noble Lord, Lord Skelmersdale. The provisions will require transmission and distribution companies not to abuse commercially sensitive information obtained from third parties in undertaking their own gas sales.
A noble Lord raised an important question about the scope for cross-border trade and the impact of the UK-Continent gas interconnector pipeline. The importance of both the directive and the interconnector lies to a large degree in the fact that they will help to make new forms of activity possible. Although the number of major sources of supply into the UK market is comparatively limited, there will be additional competition between those sources of supply for market share, once competition in supply is established.
In addition, by providing an assurance of third party access rights for large industrial customers, the directive will open the door to new forms of market activity. The potential of the directive to facilitate such developments will be reinforced by the interconnector. The interconnector will link developments in the liberalised UK market to Europe. I agree with the noble Lord, Lord Moynihan, that trading and arbitrage are likely to develop around the interconnector, which will help promote similar developments in the European industrial supply market. We are therefore likely to see the emergence of traders and aggregators in the European market, as well as the more traditional forms of gas trade.
Some noble Lords raised the issue of the impact of the interconnector on UK gas prices. On that, the Government anticipate that on price and otherwise the interconnector will in the long term benefit UK customers. The noble Lord, Lord Bridges, reminded us of Clare Spottiswoode's comment about the interconnector having a price-dampening effect.
UK gas will only be sold abroad if it cannot find a competitive outlet in the UK and it is economic to sell elsewhere. However, by connecting the UK and the European markets, the interconnector is likely to lead to more stable UK prices than in the past and to enhance Britain's security and diversity of supply. Liberalisation in the United Kingdom will then continue to ensure that our consumers benefit from competitive prices.
I now turn to two other major issues: market opening and the take-or-pay contracts. On market opening, the Government agree with the committee's wish to see competition introduced into the European market as widely and rapidly as possible. We agree that it is desirable to achieve lower thresholds for eligible customers in second and third stages. There is also a case for shorter periods between stages of market opening. But it has been agreed that all gas-fired power generators should be able to benefit from competitive supply in order to avoid distortion in the electricity market.
Turning to take-or-pay, discussions on the possibility of derogating from the directive in respect of problems arising from long-term take-or-pay contracts have been one of the most difficult areas of negotiation. The Government share the concerns of many noble Lords about the potential for such derogations to delay the establishment of a competitive market. There has, however, been a strong political wish on the part of other member states to include such provisions for both existing and future contracts. The Government's view is that this should be seen as a transitional issue. It should be recognised that there is some potential for problems to arise as competition is introduced and in that sense a case for derogation is undoubtedly much stronger for existing take-or-pay contracts than for future ones.
We argued that case. However, the force of the political debate has been in favour of including the possibility of derogations for future contracts. We therefore sought other means of limiting the potential anti-competitive activity and the most significant safeguard in that respect is that any derogation can only be granted if important competitive criteria are met. For example, there is a requirement to show that no other alternative to a derogation is reasonably available. Most important, we have worked to ensure that those criteria are harder to satisfy for future than for existing contracts.
The Government believe that assurance can be taken from the fact that it is the European Commission, not the member states, which has the final say on whether a derogation may be granted. In our view it is essential that the Commission should have that role to ensure that we have a real single market in gas. We are concerned, however, at developments at discussions on Friday. Those showed a wide range of support for French proposals to allow member states considerable freedom to protect their companies in respect of existing take-or-pay contracts in ways which may blunt the impetus to competition under the directive. That remains a difficult issue and noble Lords are right to draw our attention to it.
My noble friend Lord Berkeley and other noble Lords raised the question of coal. I do not want to enter into a debate on the coal industry tonight. However, in Europe it is possible that the directive will, over time, encourage greater competitive pressures on the coal industry. It may assist with the removal of coal subsidies mentioned by the noble Lord, Lord Haslam.
I have tried to cover the Government's views on the main issues raised by the committee. I have also tried to answer any questions, and where I have not been able to do so I shall certainly write to noble Lords. I close by repeating the Government's welcome for the report.
Lord Geddes: My Lords, before making my brief closing remarks, perhaps the Minister could help the House. Doubtless because my attention was distracted, I am not now clear as to whether on Monday the Government will or will not seek improvements regarding market opening. My attention must have been elsewhere. Perhaps the Minister could say.
Also, before the Minister answers, did I hear him correctly say that last Friday, under strong pressure from the French, the take-or-pay derogations may well be continued for future contracts as well as for existing and past contracts? If that is so--I am sure all members of my committee would support me--will he ask his honourable friend to do everything possible to change that decision? As I said in my opening remarks, the Minister himself said that any derogations on take-or-pay for future contracts would, to use my words, drive a coach and horses through the whole point of it. Perhaps the Minister would be kind enough to reply.
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