Examination of Witnesses (Questions 350-359)
NATIONAL GRID
TRANSCO
26 JANUARY 2005
Q350 Chairman: Would you please introduce
yourselves?
Ms Thompson: I am group corporate
affairs director of National Grid Transco, and this morning I
am accompanied by Chris Murray, our commercial director, and Tim
Tutton, our director of regulation.
Q351 Chairman: Thank you. We realise
that you have to balance supply and demand on the transmission
system. Have you experienced problems over the last 18 months,
or has supply been consistent? What I am trying to get at is has
the perturberance in the market created problems for you, or have
you created the perturberance in the market, as some might say?
What is the position?
Mr Murray: I think it is fair
to say that over the last 18 months or so we have not really experienced
difficulties in terms of managing supply and demand. However,
that is largely due to the fact that both last winter and, indeed,
this winter to date we have experienced what historically would
be seen as very mild winters—indeed, last winter is what
we would call a one-in-seven warm, and technically that means
only 17% of previous winters on record have been warmer, so what
I am really saying is that we were not really tested in terms
of the supply and demand position. Even though we got a bit of
a surprise in terms of the turndown in supply from UKCS, which
is going into decline somewhat more quickly than we had previously
forecast, the equivalent turndown in demand meant that with supplementary
flows coming through the Interconnector and the use of storage
we did not have any real difficulties in terms of balancing the
system, and indeed this winter to date we have not had any real
difficulties in balancing the system, notwithstanding the fact
that we do occasionally get offshore outages, but in terms of
planning processes and our estimates of what our winters would
look like we do try and take into account sudden losses of supply
by putting forecasts of what we expect to come to the beach and
then applying a 95% factor in terms of looking at what would come
from the beach, what would come from the Interconnector or what
would come from storage.
Q352 Chairman: Does that mean that having
had two winters in a row which have not been very cold, we can
anticipate a series of media-driven scare stories around about
August to the effect that it is going to be arctic in 2005-06?
Do you think we might be able to shoot this fox once and for all,
because obviously these things happen but there is no statistical
basis upon which this has to happen this year, and you can have
long periods before something happens.
Mr Murray: It would be very nice
to think that would be the case in terms of being able to shoot
that particular fox, as you say. Even notwithstanding the fact
that the Met Office were forecasting a mild winter this year,
which to date seems to be right, both for this winter and, indeed,
for last winter there were some tales of doom and gloom in terms
of there being harsh winters and reference to Siberia-like conditions,
as I recall. The reality is that both this winter and potentially
next winter are tight-ish if we have cold weather. It is not looking
as if we are going to get a cold winter this winter now but in
terms of the forecast that we put into the market clearly one
of our roles is informing the market as to what we see the supply
and demand position being, looking forward for both gas and electricity,
and then the market chooses how to react to that information.
We have always said that this winter was potentially tight if
we got cold weather, and we have not had cold weather. Next winter
will be somewhat less tight for reasons which I will happily expand
on, if you wish. Thereafter with new importation projects, new
sources of gas and diversified supplies of gas coming to the United
Kingdom, we expect the situation to ease.
Q353 Chairman: Maybe you could for the
record give us your perceptions of the extent of the decline in
UKCS and indicate reasons why this is happening—if it is—as
it were, at a faster rate than had been anticipated?
Mr Murray: We have seen a steady
but slow decline of the UKCS since about 2001-02. It is difficult
to be precise about the reasons for that. Certainly we have not
had the sort of cold winters that would really test the UKCS capability,
and therefore it may be that there is more capacity out there
but people have chosen to use either gas coming through the Interconnector,
or, indeed, gas coming out of storage. As far as our forecasts
are concerned we have revised them downwards over the last couple
of years. A couple of years back we were looking at, say, 400
million cubic metres per day coming off the UKCS; we have revised
that down to 377 million cubic metres in 2003-04. More recently
we have said that for this winter we expect around 364. That would
be at peak, and in terms of planning we then apply the 95% factor
that I mentioned earlier. Looking to next winter, we see a further
decline to around 350 million cubic metres. Against that decline
from this year's forecast to next year's of around 14 million
cubic metres, we are then aware of new sources of gas coming on-stream.
If I mention three that we expect to come through and be available
for next winter, the first is the Isle of Grain LNG facility;
the second is interconnector phase one expansion; and the third
would be Humbly Grove storage. Now if all those projects come
on-stream in the timescales and with the capacities that we currently
expect, they would bring around another 44 million cubic metres
of gas per day to the market against that drop-off in the UKCS
of about 14, so we would see, if you like, a relaxing of the tension
somewhat for this coming winter but, again, if we got into cold
winter situations we would certainly expect to see demand side
response being necessary to balance the system. Beyond next winter
when we see some of the more major projects such as, for example,
Milford Haven, which is a very substantial project, and new interconnectors
such as the Langled pipeline coming in, we might see a situation
where we see perhaps an excess of gas being available to us for
a short time. One of the things we are postulating about within
NGT is might we get a short term gas bubble that with normal supply
and demand forces in place led to some reductions in prices as
opposed to the sort of increases in prices we have seen more recently.
Q354 Chairman: On the question of the
Interconnector, we were under the impression it was a two-way
street but it seems that there is a motorway on one side and a
dirt track on the other, if I can use that analogy. Could you
explain to us more technically than I have sought to do exactly
what the situation is regarding where we are with the Interconnector,
because there is a feeling that people have been using the Interconnector
to sell on gas at prices which they probably could have been selling
in the United Kingdom. You probably as a company are in a unique
position to interpret the flows of the Interconnector.
Mr Murray: We are absolutely in
a position to confirm that the Interconnector is capable of flowing
both ways, and with a capacity of around 25 million cubic metres
per day that is a substantial amount of gas flowing either way.
We, as some others have, occasionally have scratched our heads
concerning what was happening in terms of the markets and we can
only conclude, I think, that where one might have expected, under
supply demand conditions, gas to be coming into the United Kingdom
through the Interconnector and instead seeing it going out of
the United Kingdom through the Interconnector, leading perhaps
to additional tightness within the United Kingdom and therefore
rising prices, we can only, because we are not close to the contracts,
assume that that would have been due to people's contractual positions
in terms of where they were due to flow gas.
Q355 Chairman: That does not really answer
the question as to when the contracts were struck. If they were
almost of a spot character, it would be a suggestion that they
were selling out to make more money.
Mr Murray: I am afraid we do not
have any information, Chairman, on the contracts that are actually
in place. We only receive the nominations in terms of flowing
gas on to the NGT networks, so I am afraid I cannot give the Committee
any information in terms of the timing of those deals.
Q356 Sir Robert Smith: The concern from
a lot of our witnesses is that the spot prices between the two
markets seem to flow together in terms of a convergence, but there
are dramatic spikes in the futures market as a result of not enough
gas being offered for sale. Is that something that you have any
observations on from your own experiences?
Mr Murray: The only thing I would
say to that is that we were equally surprised that, given the
information that was in the market, prices rose to the point that
they did. What people were concerned about was the uncertainty
of what might happen out into the future because suppliers are
required to balance their positions. We do the physical balancing
on a daily basis. Frankly, the market was disturbed by the potential
for harsh winters and what the imbalance position and therefore
the exposure might be for any of the individual players. With
the benefit of hindsight and seeing how the winter has played
out, one cannot really see why the prices ever got to where they
got to.
Mr Tutton: It is worth drawing
a distinction between looking backwards and saying, as you said
in the earlier questioning, that supply and demand after the event
were not tight, so why did the prices move? That is not what drives
prices. Prices are driven by people's expectations when they enter
into contracts. Just as Chris was saying that we were to some
extent surprised by the decline in the UKCS recently, we assume
that some other people were probably surprised as well. If you
combine that surprise with what was already going to be a relatively
tight position and you then say that people have to plan against
possible supply demands through the winter, it is not so surprising
that there was a spike. Whether that explains the spike is, of
course, another issue.
Q357 Sir Robert Smith: Presumably though
they would be relying less on the headlines in the newspapers
and more on the Met Office and other things to assess the risk
of the winter? The market would not be completely driven by that?
Mr Tutton: The market is driven
by expectations. You have got a competitive market out there so
you have got people competing with each other for supply. It is
just like any other market, for instance, the housing market.
At certain points markets gain momentum when people get worried.
People in the housing market get worried that if they do not buy
now they are going to be priced out of the market, so at any point
in time markets gain momentum, people make decisions about what
they think other people will do in the event and, given the way
the weather turned out, it may be that they did not need to enter
into some of those contracts.
Q358 Sir Robert Smith: One of the things
that maybe would make the market more relaxed is if it had more
information. Do you feel that more information being provided
in the market about the state of what is happening offshore and
what is likely to be happening offshore would help bring less
panic to the tight situation?
Mr Murray: I think it would and
there has been some very good moves in that direction in terms
of the DTI offshore initiative which was referred to earlier.
We certainly are in a much better position now in terms of fulfilling
our role of providing information to the market through what we
term the TBE process, the transporting Britain's energy process,
because of the information which is now available to us as a result
of the DTI initiative, some of which, of course, is provided to
us on a voluntary basis within confidentiality agreements. We
support in principle the idea that getting more information to
the market would be helpful in terms of improving transparency
and therefore people would be acting more on information and have
less of an incentive to worry. However, we believe there are some
issues that will need to be dealt with by the industry, such as
data ownership, quality of metering, liabilities, confidentiality
arrangements, etc, and we do not see any reason why those issues
cannot be dealt with looking forward, such that the more information
we get into the marketplace the better. For example, we have very
much better information now in terms of planned maintenance offshore
and data flow nominations than we would have had in the past,
but we do not have full visibility of some of the variances. By
that what I mean is that an offshore operator might say they are
going to flow at a certain rate for a period of time and then
drop back down to another rate, then go back up to another rate.
That is all we need in terms of having information to manage and
balance the system. It may be that if some of the market players
knew why some of those variations were coming about they could
take more informed decisions as to their actions going forward.
There has been a move in the right direction. The DTI initiative
has been very helpful and we certainly support the principle,
provided it is always going to be of benefit, as opposed to the
costs associated with it, of getting more transparency.
Q359 Sir Robert Smith: There is more
data yet to become available and the witnesses yesterday were
suggesting that there was a technical/computer problem—not
a problem but something that you were having to come to terms
with to make this data available.
Mr Murray: It is not a problem.
It is just a question of undertaking the work. We anticipate that
this additional information, which will be aggregated north and
south flows, will be available in the third quarter of this year,
and that is just about putting all the processes and systems in
place to make that information available, but that is on track.
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