APPENDIX 32
Supplementary memorandum by the Chemical
Industries Association
We write in order to clarify two issues raised
during CIA's oral evidence to the Committee on energy prices.
1. RECENT EXPERIENCE
OF OUR
MEMBERS RENEWING
GAS AND
ELECTRICITY CONTRACTS
Point 12 of our written submission stated that
on top of rising prices "industrial consumers have also reported
increasingly difficult negotiation conditions" and "very
few quotations are received."
Our evidence was based on responses to a questionnaire
sent out by CIA to its members in October 2004. In total 31 responses
were received. One question asked respondents whether they perceived
the UK gas and electricity markets had become more or less competitive
during the past five years, in particular whether fewer market
quotations were received when tendering for contract renewal.
Of the responses received, one company felt the markets were more
competitive, five were unable to respond and 25 responses (79%
of returning companies) felt that the market had become less competitive.
Of these last 25, several provided additional information as stated
below.
Many reported that during their last contract
renewal round only a few quotations were received, and these were
held open for short periods of time (between one week and a few
hours). In particular, one respondent said that during their electricity
contract renewal only their incumbent supplier and one other were
prepared to provide quotations for the coming year, and these
were available for only two hours, giving no time to obtain other
comparative tenders. This member's response was to renew the contract
for six months in the hope of obtaining better pricing conditions
after the winter period. Another member, Elementis Chromium, also
reported that during their electricity contract negotiation round
they had to go through the tendering process two or three times
before they could conclude a contract as a result of such short
offer periods.
In relation to the gas market, members believed
it was less competitive. With UK forward gas prices higher than
European forward gas prices, some members had linked their contracts
to the spot market. However, one respondent said that as they
were a "smaller user (slightly less than 1m therms/year)"
the contract conditions offered were less favourable than those
available to larger users. Elementis Chromium have managed to
negotiate a contract with their incumbent gas supplier that allows
them to purchase all, or part, of their monthly gas requirements
when prices are favourable. The disadvantage is that they must
devote more resource on a continuing basis than under their previous
competitive fixed price contract. Markets need regular monitoring,
and they have had to negotiate special contract mechanisms allowing
them to exercise their purchasing flexibility.
We should add that many of our smaller companies
simply do not have the in-house experience or expert resource
to enable them to investigate all the market options which might
be available, some of which might not be available to them due
to their (relatively) limited purchasing requirements. They are
at a considerable disadvantage compared to Continental European
competitors who can still obtain fixed price contracts at competitive
prices and concentrate fully on running their businesses.
2. COMPETITIVENESS
OF ENERGY
MARKETS AS
MEASURED BY
THE HIRSCHMANN-HERFINDAHL
(HHI) INDEX
An HHI value of 3,353 for the gas supply market
was quoted. We feel it appropriate to bring to the Committee's
attention that this figure in fact related to the market for supply
of electricity to Industrial and Commercial users. On reflection
we realise that this could have been clearer in our submission,
and apologise for any confusion caused. The HHI value for gas
quoted by Ofgem is 1,758.
Stephen Elliott
Director, Business Environment
24 February 2005
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