APPENDIX 10
Memorandum by EDF Energy
ABOUT EDF ENERGY
EDF Energy is one of the UK's largest energy
companies. We are a vertically integrated company with a balanced
portfolio of business throughout the energy chain—from generation
to supply. Most pertinent to this inquiry:
— We are the fifth biggest electricity
generator in the UK. We own and operate an 800MW CCGT power station
at Sutton Bridge and 4GW of coal-fired generation assets that
are currently being fitted with Flue Gas Desulphurisation (FGD)
equipment as well as small CHP and renewable assets.
— EDF Energy is a major supplier
of gas and electricity with five million electricity and gas customer
accounts throughout the UK supplied through our retail brands,
London Energy, Seeboard Energy and SWEB Energy. EDF Energy's total
demand in gas and electricity is c.32TWh and c.45TWh per annum
respectively.
EDF Energy also:
— Owns and operates the electricity
distribution networks serving London, the East and South East
of England which means that around one quarter of the UK population
relies on our distribution networks for their electricity. This
makes EDF Energy the largest distribution network operator (DNO)
in the UK.
— Is also the number one owner
and provider of private electricity infrastructures in the UK
including for the major London airports, the London Underground,
the channel tunnel rail link, the DLR and Canary Wharf. We are
also a partner in the Metronet consortium.
As a company EDF Energy is committed to finding
the right balance between providing sustainable financial returns
while continually investing in serving our customers better.
EDF Energy is pleased to have the opportunity
to contribute to the Trade and Industry Committee's inquiry into
fuel prices. Below we outline the factors we believe have contributed
to the rise in gas prices and the ways in which we are seeking
to address the implications of this for our vulnerable customers.
EDF ENERGY'S
ROLE IN
THE WHOLESALE
GAS MARKET
We procure the majority of our gas requirement
on the UK NBP balancing market ahead of the day. In addition,
EDF Energy also has a combination of LTI and long-term indexed
contracts deals, together with physical and virtual storage products
used to hedge against energy balancing exposures. EDF Energy does
not have any gas "upstream" field or pipeline interests,
does not trade gas in Europe and has no interests in gas interconnector
capacity. We are therefore reliant on a stable and transparent
gas market in which gas prices should reflect market fundamentals.
Below we comment on some of the factors which we believe have
contributed to recent gas price rises in addition to rising oil
prices, declining UK continental shelf supplies and concerns over
competition in the European gas market that have already been
identified by Ofgem. We also comment on prices in the electricity
market for which wholesale gas prices are a key driver.
LOW LEVELS
OF TRANSPARENCY
IN THE
GAS MARKET
The wholesale gas market is less transparent
than the electricity market and not all gas market participants
receive the same level of information.
For example, the wider gas shipper community
finds out only after the day what the exact flows were at all
entry terminal points for the day before, whereas some producer-affiliated
shippers are privy to terminal flow data if they have offshore
interests on those pipelines. In contrast all Balancing and Settlement
Code (BSC) parties in the electricity market can calculate what
production margins will be like ahead of time, as generators have
to publish their maintenance plans in advance through their Operating
Code chapter 2 (0C2) data release obligation. Close to real-time
production data is also available throughout the day to all electricity
market participants. This means that, unlike in the gas market,
electricity parties can reliably procure on the forward markets
based on a clear and universal view of the fundamentals.
Without parity in information provision across
the industry some companies will derive a competitive advantage
which distorts the effective operation of an efficient market
and can impact prices. This is particularly important when considering
the fact that the UK will be entering a period of tight supply
margins due to the decrease of indigenous gas production from
the UK Continental Shelf before additional import infrastructure
comes on-line.
REDUCTION IN
GAS MARKET
LIQUIDITY
The demise of major energy trading companies
such as Enron and Dynegy and the consolidation of retail companies
have led to a notable decrease in market liquidity as NBP churn
volumes have fallen dramatically in the last few years. This has
increased the volatility of energy prices as there are fewer "market-makers"
who trade both sides of the market and who could close positions
and stop prices from spiralling. At the same time producers, who
normally sell gas into the market years before delivery, have
held back from selling significant volumes of gas far ahead of
delivery. This is due to the uncertainty regarding their actual
production and the extra risks of trading out their positions
in an illiquid and volatile market. This, in conjunction with
suppliers' buying patterns, has created a gap between the buying
period, two years ahead, and the selling period close to the day
of delivery. This creates a bullish market in the interim which
is manifested in out-turn prices on the day being generally lower
than forward market prices.
OFGEM GAS
PRICE PROBE
Ofgem undertook to investigate the increase
in gas prices since they began to rise last October 2003 and has
published three reports since it began its first investigation
last December 2003. In its recent final conclusions report Ofgem
dismissed earlier concerns regarding manipulation of offshore
supplies and interconnector flows, and instead reported that high
oil prices and diminishing UK supplies were to blame for rising
prices.
However, Ofgem also identified two areas which
needed further investigation: the lack of European competition
and the nature of certain offshore contracts which limit maximum
production on peak-demand days but which only account for 6% of
UK offshore contracts. EDF Energy does not believe that significant
revelations will come from these avenues of investigation. Instead
we believe there would be more merit in analysing the pattern
of offshore flows on the days in question against demand and flow
nominations, whilst probing the validity of field outages which
caused the first price spike last autumn.
THE ELECTRICITY
MARKET
EDF Energy has a much larger electricity demand
than can be supplied by our own generation and therefore has an
interest in the market being not only transparent and liquid but
also reasonably priced.
Ownership of generating stations is sufficiently
diverse that the Herfindahl-Hirschman Index (HHI), a commonly
accepted measure of market concentration is below 1,000, indicating
a competitive industry; at privatisation this measure was over
4,000, indicating highly concentrated ownership. The market is
therefore driven by its fundamentals. These include capacity margins,
fuel mix, and associated raw fuel prices. Recent fuel price rises
have been the main driver of rising electricity prices.
Margins seem healthy, with NGT's winter outlook
statement showing a margin of over 20% at winter "ACS"
peak demand (this represents peak demand in a fairly cold winter).
However, if this winter turns out to be a "one in 50",
ie extremely cold, it may be necessary to interrupt gas supplies
to a range of non-domestic gas demand including 8 GW of CCGTs
on interruptible gas supply contracts for about 40 days—leading
to a tighter situation and significantly higher prices. Expected
future earnings for new plant seem to be tempting at least two
major companies to invest in large new CCGTs. Investment confidence
would be further enhanced by greater certainty over future environmental
regulations affecting fossil-fuelled power stations, as any uncertainty
is unhelpful to the investment community and their financiers.
In terms of fuel prices, there have unfortunately
been simultaneous severe pressures on both gas prices, on which
we have outlined our concerns above, and coal prices. International
coal prices are now at an all time high—in the $70 to $80
per tonne range. EDF Energy purchases approximately 50% of its
coal from UK sources. We are therefore exposed to international
coal prices, as are our competitors, many of whom import a higher
proportion of their needs and this feeds through into higher electricity
prices. Two factors have driven international coal prices to their
current level. The first factor is increasing global demand for
coal driven primarily by Chinese economic growth, in particular
that of its steel industry. The second factor is the increase
in freight rates from $7/tonne to as high as $30/tonne on the
South Africa-ARA route. This is due to both the increase in oil
prices and increased demand for bulk carriers to supply raw materials
to the Chinese economy, once again to its steel industry.
ARA futures prices (including shipping costs
into Europe) for coal are $72/t in 2005, $66/tin 2006 and $59/tin
2007. This clearly indicates that the market believes that the
price of coal is going to go down in future years are a result
of more freight capacity coming on-line and increases in coal
production and transportation infrastructure.
IMPACT ON
CUSTOMERS
At EDF Energy we believe that an integral part
of our role as an energy provider is to ensure that we provide
our customers with energy efficient products and give them advice
on how to reduce their bills. We want to make sure that our customers
make the best use of the energy that they buy and get good value
for money.
More specifically, EDF Energy appreciates that
price rises particularly affect vulnerable customers. We are working
hard to maintain and extend our help and support for these customers.
At this particularly challenging time, we will work closely with
the rest of the industry, government, energywatch and all the
relevant agencies to find ways of enhancing and improving our
help to those who need it most.
Some of the initiatives currently undertaken
by EDF Energy are outlined below:
EDF ENERGY LONDON
WARM ZONE
Since April 2001 we have been in partnership
with the London Borough of Newham, pioneering a sustainable model
for eradicating fuel poverty on a household-by-household basis.
In the past three years we have spent £680,000
in Newham. 57,000 homes in the borough were assessed for energy
efficiency, and among them 8,500 qualified for investment by EDF
Energy, from the government funded Warm Front and from the local
authority. Most of the improvements undertaken have been relatively
simple energy saving methods such as cavity wall insulation or
loft insulation.
The Newham pilot has proved so successful that
we are expanding this groundbreaking programme to a further six
London Boroughs, creating the EDF Energy London Warm Zone. This
is a commitment of £9.5 million in energy efficiency measures
to London, helping up to 800,000 homes save money on their energy
bills.
EDF ENERGY TRUST
In 2003 we launched the EDF Energy Trust to
help customers that struggle to pay their bills by providing grants
and advice. In the first year, we gave around half a million pounds
to vulnerable customers in debt, and in the second year, we have
pledged £2 million. Although EDF Energy provides the financing,
the Trust is completely independent and is run by CHARIS. EDF
Energy's aim is to ensure that customers who have problems paying
for their fuel take control of their finances, reduce the burden
of their debt, and are assisted in meeting their future outgoings.
The Trust initially helps people pay their bills, but also advises
on general financial management. Once the Trust is fully operational
we will widen it to include advice on energy efficiency and where
appropriate facilitate the installation of energy efficiency measures
for those that we support.
ENERGETIC HANDS
AND ENERGYCARE
Energetic Hands is a staff run initiative in
partnership with the South West based charity Care and Repair.
EDF Energy staff have teamed up with Care and Repair volunteers
to visit homes of the elderly and vulnerable to provide energy
efficiency advice, practical help and free products.
In the South East, we have renewed our energycare
network for a fourth year. We have trained 800 care volunteers
that visit customers' homes to promote energy awareness and remedies
for fuel poverty so that the right advice can be given to those
that most need it.
PRIORITY SERVICE
REGISTER
We are committed to improving awareness of the
Priority Service Register (PSR) and to helping vulnerable customers.
This received external recognition in September this year when
our Priority Services team won the Focus on Disability category
at the National Customer Service Awards.
We have re-structured our business to establish
Centres of Excellence in customer services. Specialist Priority
Services Register (PSR) and energy efficiency teams are now located
in Exeter which is also the centre of our revenue management functions.
Our specialised debt teams are very pro-active in taking a holistic
approach to debt and have instant access to relevant information,
products and services.
We are working with money advice agencies to
enhance our staff knowledge and capability to converse with customers
about debt generally, rather than restricting our knowledge to
energy debt.
PREPAYMENT TARIFF
EQUALISATION
In March 2004, we became the first electricity
supplier to equalise our Prepayment tariff with our Standard Credit
tariff—electricity customers using a prepayment meter pay
no more than those on Standard Credit.
November 2004
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