Examination of Witnesses (Questions 85-99)|
MR I LATIF,
MR S LADLE
TUESDAY 13 NOVEMBER 2001
85. Good morning, Mr Latif. Could you introduce
yourself and your colleagues?
(Mr Latif) My name is Itret Latif; I
am presently the Gas Forum chairman. My colleague on my left is
Steve Ladle who is the previous chairman of the Gas Forum and
is a member of the executive committee. On my right is David Thorne,
who is a member of the Gas Forum executive committee.
86. Perhaps you could tell us a little bit about
the Forum. We have a procession of trade associations coming before
us, but how representative are you of the gas industry?
(Mr Latif) We were established in 1994 initially to
help to negotiate a contract between the shippers and the monopoly
supplier, Transco. We currently have around 21 members who are
both suppliers and shippers. The Gas Forum comprises virtually
every active, licensed gas shipper or supplier. Nearly all our
members are in both the electricity and gas markets. The Gas Forum
has established a number of work groups which have helped to further
competition and development of the gas market. Recently, we are
undertaking a governance of the gas industry project under the
guide of the Gas Forum as being the vehicle where Ofgem and Transco
participate in governance process development in the retail area,
which probably will be similar to the electricity governance process.
87. In fairness, I think we all ought to recognise
that competition has brought down prices and the United Kingdom
energy market has generally delivered to the consumer and improved
costs and efficiency within the industry. What evidence do you
have to suggest that market forces will necessarily be sufficient
by themselves to ensure security of supply in the future?
(Mr Latif) The government has to play a role in this.
If you allow competition to happen properly and make it transparent
and have third party access which is transparent across Europe,
that will secure gas as a form of fuel for a reasonable term.
In terms of competition itself, it has encouraged the diversity
of fuels. I do not know what the mix of the generation was in
the earlier stages but gas accounts for about 33 per cent of the
generation; coal accounts for about 36 per cent. The competition
has increased diversity and I believe diversity of sources of
gas increases security.
88. You do not believe that market forces alone
will ensure security of supply?
(Mr Latif) It needs government environment to work
in. If you allow competition, it may go one way but the government
needs to set the environment in which we operate. You have to
give us the signals and messages so that we can best develop the
needs of the security of supply of the United Kingdom.
(Mr Ladle) The United Kingdom since deregulation has
seen gas usage grow by nearly 90 per cent and that has made sure
supply was maintained with less interruption through the decades.
We have to recognise that that was very much supported by the
United Kingdom offshore gas industry and an over-abundance of
gas coming into the United Kingdom. That will change. There is
no doubt about that. There are discussions as to when but over
time we will see the United Kingdom offshore continental shelf
production reduce and we will rely on a greater degree of imported
gas into the United Kingdom. Our view is that the market will
sort that out as long as the market is there to operate. This
is where we are talking about government assistance because we
believe that there are flaws in the European market that will
not allow a fully competitive market to operate throughout Europe
and could therefore present some problems for bringing gas in.
I think that is where we are looking for government assistance
to continue the good work and to continue the pressure that the
Commission is exerting to allow a fully competitive, open European
market to evolve.
89. Market forces are there but they will need
the help and protection of government to ensure that security
of supply in the long term?
(Mr Ladle) Yes.
90. You said the United Kingdom is a predominant
importer of gas. In the future, where do you think the gas supplies
will come from?
(Mr Latif) I would rather have UKOOA answer that.
They have more experience. We believe that currently there are
sufficient resources within the Norwegian and Russian gas reserves
that we could tap on. The problem is that we are the end of the
pipe and unfortunately we are stuck with that. An environment
has to be made so that we are a node within this structure so
that we do not get disadvantaged.
(Mr Thorne) We are in the hub of a ring of gas. We
have Norway, Russia, the Netherlands, the United Kingdom continental
shelf and North Africa. We have reserves in Europe, in the world,
to provide here. The key to it is getting it into the United Kingdom
in a cost effective way. The key to that is European liberalisation.
91. That is in the continent of Europe?
(Mr Thorne) Yes. It is the problem of using the pipework
and the transmission system to get the gas into the United Kingdom
without having to pay charges throughout the different countries,
pancaking against each other, making it not cost effective to
get the gas into the country.
92. What you are saying is that the level of
imports is not to be taken as indicative of the security problem
if there is one at all. On that basis, it is a question of market
structures, lack of diversity in the market and that kind of thing,
the inflexibility of delivery systems. Can government do anything
to improve that?
(Mr Latif) You are already playing a part in trying
to get the EU to liberalise. I do not know how fast they will
liberalise. Access is the problem that is causing the security
of supply situation rather than a lack of gas.
(Mr Ladle) There are some smaller areas within the
United Kingdom that still need to be taken forward. The transmission
system has been used extensively and very thoroughly and is an
extremely efficient system. However, we have seen the amount of
gas transported by that system increase dramatically over the
last decade and the investment in that system has not increased
at the same rate. There is a concern that the transmission system
is a little stretched in some areas and the industry is going
through a long process of trying to identify how we can properly
generate investment signals on the transmission network. That
process is a little bit flawed at the moment and the industry
generally has a different view to the regulator. Some government
support can take that forward at a faster rate than it is going
at the moment.
93. I hear what you say about the challenges
being addressed by a competitive market and I take your point
about the European Union dimension but I am still slightly unclear
from your submission where you see the role of the market and
the role of government interfacing. You do specifically say that
the government has a role in providing clear guidance to the regulators
to ensure changes proposed to the energy market are consistent
with the government's wider goals and objectives. I have two questions.
One is what specific changes would you like to be made to current
guidance to the regulator? Secondly, do you see the possibility
for government intervention in other ways? For example, through
the fiscal system?
(Mr Latif) The regulator created a market called NETA
and it had a knock on effect on the renewable policy that the
government wishes to follow. We were thinking that there should
be some clarity in terms of the way the government's policy is
then adopted by Ofgem in this instance, where the government requires
certain renewable resources to be built but, because of the way
the market has been chosen to operate, it has a detrimental effect
on these particular types of generation resources. If the government
has a policy, then it should go right through the whole arm of
the regulation to make sure there is a consistent view.
94. Do you think the role of Ofgem should be
to determine and ensure certain targets for renewables?
(Mr Latif) The mechanism you choose should not have
a detrimental effect on the policy that the government wishes
to operate. I am not an expert in NETA but I presume there are
other ways the market could have been constructed that could have
had not that much of a detrimental effect on the renewables.
(Mr Thorne) The government needs to have its vision
and that is why we are here today, to understand what are the
outputs at the end of the day; what are we trying to achieve;
what do we want. The regulator is one of the vehicles to take
that policy and ensure their responsibilities are consistent with
that policy, to ensure that gives the outputs to the industry
and let the industry and the market deliver those outputs. The
Gas Forum members certainly recognise that renewables have a part
to play in issues about the reliability of the supply into the
network because of the very nature of renewables. If the government
says ten per cent because that is part of a wider policy, the
market will deliver that and put market mechanisms out like the
£30 for our buy-out price, but do not define how those outputs
are to be achieved. That is for the market.
95. You have indicated in your submission that
the new marketing arrangements for the competitive market have
encouraged diversity and security. We have moved away from coal
as the primary source of power. Is there not a danger if these
market trends continue that gas will become too dominant and diversity
will be reduced?
(Mr Latif) If you try to plan it, it is very difficult
to plan that you have certain mixes. If you set the environment
up, whether a coal or a gas fired power station, the investments
are made in a particular type of generation. At the moment, gas
seems to be the preferred choice of the market to develop these
kinds of power stations. If you leave competition to operate,
if you find that gas is becoming scarce or there is a lack of
clarity how to get that gas from, say, Russia to here, the market
will then start changing its direction, as long as the planning
consents and those types of things are there in a timely manner
so that people can change the way they want to generate.
(Mr Thorne) You say there is a danger that gas becomes
dominant. I am not sure whether I would agree that that is a danger.
Firstly, I do not know that I agree with some of the estimates
for how the percentage of gas for generation is going to be used,
but even if it goes up to 50, 60 or 70 per cent we need to ensure
that we have access to the gas to enable gas generation to work.
I do not necessarily believe it is a risk because you have a certain
percentage divide on what is coal, what is gas, what is renewable
etc. It is the access to the fuel source to be able to feed that
96. Your submission definitely concentrated
on the market side of it. How would you see the government side
of it and regulation or support from government? Do you think
the market is the main driver?
(Mr Thorne) We believe there may be support in a number
of ways. We have talked about overseas resources but continental
shelf resources are still there and they will still be used obviously.
There is more gas out there that we can get. However, it is not
economic to do so at this time. There are perhaps changes to the
tax regime on the more mature fields which could allow for that
gas to be taken out of the ground and brought into the United
Kingdom. Secondly, we have touched on planning elements and whether
there are certain measures that can be made to make the planning
process more swift with regard to new stations that may be required;
the storage requirements that may be pursued by particular companies,
but the third one is providing support to the liberalisation of
the EU with regard to energy resources.
97. What does liberalisation involve?
(Mr Thorne) The liberalisation we are talking about
is the transmission network, the pipes that provide the gas to
the various countries. At the moment, we have integrated companies
throughout the EU who are responsible for the supply and the transmission.
The problem is that there is lack of transparency to get access
to that pipework. It is not clear to us how much it would cost
us to put the gas in here and take it out there. Without that
transparency and without the access to that capacity, we cannot
arrange to get gas from the Russians etc., or North Africa, to
come into the United Kingdom. That lack of third party access
to common carriage to the pipes is making it very difficult for
suppliers and shippers to improve their security of supply which
we all want.
98. What does transparency mean?
(Mr Thorne) How much do we pay to get our gas from
A to B.
(Mr Latif) Transco publishes its prices. You do not
get that kind of information available.
99. You want people to be forced to publish
(Mr Latif) Yes.
(Mr Ladle) One of the biggest successes for the United
Kingdom was moving to common transportation carriage on the network
so that any shipper or supplier talking to potential customers
knew, at the start of those discussions, exactly how much it was
going to cost to deliver gas to that customer. If you try that
under the European network, it is not until you go to the transporter
quite often with a particular customer that you want to deliver
to that you will then be given an idea of how much it might cost
and whether they say there is capacity available to be delivered.
It makes it very difficult to open up that dialogue and get that
access for all the end users to have a diversity of supply.
(Mr Latif) If you did put gas into the pipe at this
point and we want it to come out at that point, we do not want
a government that suddenly finds itself short of gas hiving it
off in their territory. There should be a recognition that there
is a transit point and they do not hive off things that do not
belong to them.