Examination of Witnesses (Questions 73-79)
ASSOCIATION OF
ELECTRICITY PRODUCERS
25 JANUARY 2005
Q73 Chairman: Good morning. To begin
with, Mr Porter, perhaps you would be kind enough to introduce
your colleagues.
Mr Porter: On my right is Mrs
Julie Cox, who is the Head of Gas Markets at the Association;
and on my left is Dr Malcolm Taylor who is Head of Electricity
Markets.
Q74 Chairman: In your view, do you think
the recent gas price rises are really just a temporary blip or
are they the start of a long-term trend? By how much do you estimate
gas prices are going to rise and over what sort of time period?
Have the members of your organisation taken a view?
Mr Porter: As an Association we
do not make forecasts about fuel prices; in fact if we were to
do that it could get us into some difficulties. Clearly, electricity
and gas are commodities traded in markets, and in markets prices
go up and down. For many years we have enjoyed such downward pressure
on prices in the UK that I think people have become almost accustomed
to at least falling electricity prices. A bit like some people
thought house prices would only ever go upwards, I think some
people also thought that energy prices would, at least in our
market, only go downwards. We watch what other forecasters say
and we have noticed that at least one forecaster has suggested
that in a year or two, perhaps 2006-07, we may enjoy a glut of
gas in the UK; and I would expect prices to respond to that. I
am not sure whether "blip" is the word for what happened
in 2004 or not. When you look at other factors then, as I think
you yourself have said, Chairman, I think the era of lower electricity
prices may well be coming to an end. There are other factors which
come to play on our industry all of which, added together, suggest
that people are going to have to pay more for their energy in
future than they have been accustomed to over the last 15 years
or so. I read something that the DTI produced recently which reminded
us that, although we did suffer that blip in 2004, when you take
real prices into account probably retail electricity and gas prices
last year were no greater than they were in 1990.
Q75 Chairman: I am sure we will take
great consolation from that.
Mr Porter: It does suggest that
over time markets work but, unfortunately, at times they deliver
circumstances which people find uncomfortable or unacceptable.
Q76 Chairman: Your members just put their
hands up and say, "It ain't us, guv. It's nothing to do with
us, it's gas prices. Electricity, you just have to feed it through".
To what extent do your members have other options? They do not
have to use gas, so why do electricity prices have to rise by
the figures which they have done?
Mr Porter: As far as the members
are concerned it depends on what they are and what portfolio of
power stations they have or, indeed, whether they have a portfolio.
We have members which range from very small renewable energy businesses
that perhaps run hydropower or wind or landfill gas—some
of them are family-owned—all the way through to large international
companies. The biggest electricity companies in the land are members.
There are huge differences between those companies in terms of
how they can react to fuel price changes. Some of the largest
ones have coal, gas and renewable plant but they may, to some
extent, give a bit more emphasis to plant which currently has
cheaper fuel, but their options are not huge in that area. In
any case, if we are considering gas, you will know that they suffered
coal price increases as well in 2003-04. They have to supply into
a competitive marketplace, and that is another strong consideration
for them. Customers are able to shop around and a large number
of them do it, and that is a restraint in itself on how much they
can pass costs through.
Q77 Chairman: Given that the main sources
for mass generation, outside of nuclear, are coal or gas what
is the extent to which coal prices have risen in the last couple
of years? Has it been almost similar?
Mr Taylor: In brief, our understanding
is that in round numbers coal prices have effectively doubled
since April 2002. Those members who are in the business of buying
coal tell me that the primary driver for that (as probably most
people in this room know) is the emergence and strong growth of
the Chinese economy which has affected both the requirement for
coal and its price, but also has affected freight prices as well.
Q78 Chairman: With the overall increases
therefore in gas and coal would it be right to say your members,
the ones who have dual fuel, have just averaged it out and the
market has, as it were, operated in a similar way for both fuels?
Is coal-fired electricity more expensive than gas-fired, or is
it about the same? What is the position at the moment?
Mr Porter: That varies over time.
Dr Taylor or Mrs Cox may wish to add to that.
Mr Taylor: The point right now
is that the market itself is serviced by high-30s percentage gas,
mid-20s percentage coal: 30 or something like that. Clearly the
prices those generators are able to charge in the market are determined
by the fact it is a very competitive market. I would guess for
the future the additional points we may come on to think about
are that there will be further environmental constraints placed
upon the coal-fired in particular, but the carbon-based generation
in general. As the European Union Emissions Trading Scheme comes
more strongly into play (as I guess we all anticipate it will
over the course of this year) the effect of that on the price
and the costs of energy production is something that will increasingly
be factored in throughout the market.
Ms Cox: Just talking in the relativities—that
the gas and coal will influence the proportion of each running
at any particular time. Also, I think there is probably more seasonality
in gas prices than there are in coal prices.
Q79 Chairman: As an organisation, do
you get involved in negotiation of gas purchase contracts?
Mr Taylor: Never.
Mr Porter: No.
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