Memorandum by Totalfinaelf
1. TotalFinaElf welcomes the opportunity
to present its views on a number of the issues you have raised
as part of your enquiry into Energy Policythe Security
2. We have restricted our comments to the
use of gas as a primary source of UK energy for the foreseeable
future and to the security of the supply concerns that this increasing
dependence on gas raises:
3. In what follows there are three key propositions:
Security of gas supply is now of
utmost importance and should be a primary focus for regulation.
It is essential that this regulation provides the UK with a flexible
transportation infrastructure capable of providing alternative
routes for gas entry allowing the continuation of producer on
producer competition and thus ensuring the continuation of the
important traded National Balancing Point (NBP) market.
The Gas National Transmission System
(NTS) capacity should be made available on a long-term basis to
support the requirement for gas field development of certainty
of access to markets. The discussion on the methodology for the
determination of long-term capacity and its allocation needs to
be resolved urgently and in a way that results in producers and
shippers paying no more than cost-reflective charges for the use
of the NTS.
The interaction between UK government
policy and Regulatory policy must be well defined. The Government's
role must be to set clear and unambiguous policies. The Regulator's
role must be to demonstrate how the actions it takes support these
4. The increased use of natural gas over
the last decade has already made a significant contribution to
the UK in terms of both maintaining competitiveness for UK industry
through low fuel costs, reducing the costs of energy for domestic
customers and reducing the amount of environmental pollution by
generating an increasingly higher proportion of our electricity
5. There is general agreement that the percentage
of the UK's primary energy demand needs sourced by gas will continue
to grow, with estimates of 50 per cent by 2020.
6. The UK already imports gas to meet winter
peak demand, and most commentaries, including DTI forecasts, suggests
that the UK will become a net importer of gas within the next
five to ten years. This gas could be provided from several sources,
and in most expectations would require additional links to Norwegian
fields (to utilise the ullage that is and will be available in
the UK offshore infrastructure) or additional interconnectors
to Continental Europe. In addition, although the Norwegian producers
have recently commissioned the Vesterled pipeline facilities to
deliver gas into St Fergus, the continued provision of this service,
especially at high volume rates, should not be taken for granted.
7. In order to encourage security of supply
the UK needs to have a flexible transportation infrastructure
capable of providing alternative routes for gas entry and thus
allowing the continuation of producer on producer competition.
If this flexibility is destroyed, the UK will be left at the end
of the European gas supply chain rather than an integral part,
with consequent increases in risks to security of supply and price.
It is essential that the price control framework for the monopoly
transporter supports this flexibility.
8. To date in gas, the regulatory price
control focus continues to be on providing the minimum base level
infrastructure with an expectation that market forces via capacity
auctions, will provide the appropriate investment signals to Transco.
The Regulatory direction appears to be to minimise investment
in a continuing drive for economic efficiency and minimum transportation
costs whilst the Government wants to encourage the maximisation
of production from the North Sea resources. It is our view that
because of the price control risk, the differing asset lifetimes
between offshore and onshore investment and the increasing uncertainty
about the sourcing of the future supplies of imported gas, this
reliance on price based auctions to determine investment signals
will not work and will result in an inflexible infrastructure
which will increase the price of gas to end consumers, by restricting
9. The UK therefore has a clear strategic
choice as to where it is positioned in relation to the future
European gas grid.
It could become a transit route to
Continental Europe for substantial volumes of Norwegian gas landed
directly to a number of East Coast terminals, with UK demands
being met in the process (the "loop" scenario-Appendix
Or the UK could find itself at the
end of the Continental Grid having the least choice of suppliers,
the highest prices reflecting the cost of cross-European and Interconnector
transportation, and a concentration of imports on a single terminal,
10. By achieving the former it is likely
that wholesale prices in the UK will be less, or at worst equal
to those in Continental Europe, thus providing commercial advantages
to UK business interests. In addition diversity of energy supply
will be increased thus improving the security of supply of UK
energy demands. This can be achieved with little expansion of
the current UKCS infrastructure due to the extent of pipelines
and terminals that will have available ullage in the future. In
addition enhanced opportunities will exist to satisfy the supply
requirements of the UK petrochemical industries in the supply
of base products.
11. The introduction of NETA has been heralded
by the Regulator as a significant success but it is clear that
renewable generators and CHP owners do not believe this to be
the case. Coal fired plant has recently seen its share of generation
increase reflecting its supposed reliability, whilst turbines
on wind farms lie idle not because of a lack of wind but so that
the farm is not penalised by punitive imbalance charges. All this
despite the fact that for a number of years the government has
set strong targets for the introduction of renewables and CHP
in the UK.
12. Whilst it is possible currently to envisage
modifications to NETA that will accommodate the present levels
of renewables, changes are required that anticipate both the 2010
target of 10 per cent that is government policy and at the same
time, many coal and nuclear plants coming to the end of their
life. To manage the problems that follow from these events, NGC
should be required to purchase the required level of flexibility
from the market in advance. This approach has a number of benefits:
The cost of renewables will be obvious.
NETA will be less volatile, this
is essential to generation and marketing, the extreme volatility
associated with a small gap between supply capacity and demand
will reduce competition as companies decline the risks and increases
the probability of an electricity supply crisis.
A very clear signal will be given
of the need for investment in more generation capacity which is
important since otherwise the investment would be based on unpredictable
The threat from greater modulation
required from the gas system could be anticipated.
13. In connection with Government policy,
our main concern is the interaction between UK government policy
and Regulatory policy. It is our belief that it is the role of
Government to set clear and unambiguous policies and for the Regulator
to demonstrate how the actions it takes support these policies.
14. In general we believe that regulatory
policy must be subject to the same guidelines as that of any other
government policy. As such we are particularly disappointed that
Ofgem continue to dismiss the need for cost benefit analysis despite
continued requests from the industry and from other learned bodies.
Without this discipline there is a concern that many regulatory
inspired initiatives do not have adequate justification and eventually
result in increased costs much of which is likely to eventually
be passed on to the consumer or producer (thus reducing the viability
of new marginal gas production).
15. We also believe there is adequate provision
under the licensing conditions and general competition law to
ensure that anti-competitive practices are prevented. We support
the principle which we believe is shared with Ofgem, that as markets
make the transition from monopoly to competitive, so the regulation
of those markets should also make the transition to the regulation
applicable to normal competitive markets in the UK. There is much
evidence of increasing competition but there has been little evidence
of real consideration of the regulatory transition. As an example,
the industry receives regular advice from Ofgem as to how it should
bid in competitive markets. As Ofgem has achieved very wide ranging
and ill-defined powers under the licenses, and as Ofgem has the
power to levy heavy penalties, with (almost) no right of appeal,
this is a significant increase in the detail and burden of regulation.
The adoption of the approach of the OFT in these competitive markets
would allow them to develop in a way which to date has brought
major benefits to the UK in terms of cost efficiency of the energy
industry and has considerably improved the level of service to
customers, at the same time as delivering a real reduction in
their energy prices.
16. Our final point relates to the development
of wider competitive markets both within as well as outside the
EU. A consequence of the UK becoming a significant importer is
that it will also be necessary to bring gas significant distances
across numerous national transportation networks. For this reason,
it is important for Government to continue its support for the
development of open energy markets on the continent which are
based on true free market principles as opposed to regulatory
17. We trust you will find the above comments
of use in your review. If you would like us to submit oral evidence
to the committee, we would be more than willing to participate.
31 October 2001