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


Supplementary Memorandum by the Lattice Group plc


  Lattice Group gave oral evidence to the Trade and Industry Select Committee on 4 December.

  It appears that one of the questions that raised particular interest was how markets can operate within a public policy framework with clearly defined security standards. Our thinking on this issue is set out below.


  Market mechanisms alone cannot be relied upon to both set the level of and deliver security of supply, for the following reasons:

    —  Liberalised markets and the significant competitive pressures they entail cannot be relied upon exclusively to ensure adequate supply provision for all customers. This particularly applies to domestic and small industrial/commercial customers who are not well placed to provide back-up energy supplies, and where the safety implications of supply interruption are material.

    —  Energy networks are a public good and highly interdependent. Hence they cannot generally deliver different security levels to different customer groups or different locations. Accordingly, a small number of market players could potentially put at risk the safety of the network and the reliability of major parts of the gas supply chain.

    —  Liberalisation can easily lead to efficiency becoming the only criterion for network design, thereby allowing for an insufficient degree of network flexibility and resilience. A certain amount of spare capacity in networks is necessary not only to mitigate the effects of potential supply interruptions from one source but also to allow for flexible gas flows and trading.

  Markets should therefore be set within a framework of public policy with clearly defined security standards. It should be left to markets to meet these standards flexibly and efficiently.


  Security of supply requires (a) adequate provision of gas supplies to cover customers' needs under both average and extreme conditions, and (b) the ability to deliver that gas, ie adequate provision of infrastructure.

  To hedge against the risk of under-provision of both gas supplies and transportation infrastructure we propose the following measures:

(a)   The establishment of mandatory storage obligations on suppliers

  These could take the form of a requirement on suppliers to hold a certain level of inventory in storage, proportionate to the size and nature of their customer base. Such requirements could vary between different customer groups, with customers which traditionally are uninterruptible, weather sensitive and cannot easily switch to other fuels requiring particular protection (typically domestic and small industrial/commercial). Big industrial customers, which can easily resort to alternative backup fuels or interruption in case of a supply shock, can be left to choosing their own level of security without putting the system or other customers at risk.

(b)   The consistent application, across the EU, of minimum output standards for network resilience.

  The UK's future security of gas supplies will directly depend on the resilience of the pan-European gas network as a whole.

  This applies in both average and extreme circumstances. Under average conditions, it is vital that there is adequate capacity in the European transmission system to allow for efficient trading and for supplies to be transported to the UK. This could well be provided on the basis of commercial incentives.

  However, under severe circumstances, eg a severe winter or a supply shock, the European gas network will in addition need to have a sufficient degree of resilience to accommodate additional sourcing of gas from any point of input into the European system. For example, if there was a prolonged interruption of supplies from Russia, UK customers will directly depend on the ability of the European transmission network to accommodate a prolonged sourcing of gas from an alternative source, eg Norway or Continental storage. Avoiding a position where gas is available, but cannot be delivered in peak conditions, may require regulatory standards to underpin the necessary infrastructure investment.

  In our view, this therefore warrants the establishment of pan-European security standards for network resilience and flexibility.

  One example of such output standards would be the ability of the network to withstand a supply interruption from any source of input into the system for a given period of time, in addition to more traditional security criteria such as the one in 20 peak day and one in 50 severe winter requirement.


  The above listed regulatory obligations should be designed in a way that allows markets to deliver them in the most flexible and efficient way.

  For example, storage obligations should be designed in a way which enables market participants to consider a range of substitutes to physical storage, including demand management such as the provision of "virtual" storage in the form of coal stocks at reserve power stations standing ready to displace gas fired power stations if needed.

  Security standards should therefore be output-driven, ie define levels of security to be achieved rather than prescribing how they are to be achieved. Market disciplines offer the prospect of more efficient and innovative delivery of such standards, and should provide investment signals to competing storage operators and other providers of flexibility.

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