APPENDIX 3
Supplementary memorandum by the DTI Winter
2006-07 Energy Supply
SUMMARY
Supplies of gas and electricity have comfortably
met demand this winter. UK North Sea gas production has continued
to meet a significant proportion of demand, and there have also
been substantial and consistent flows through new import infrastructure.
Gas prices have been considerably lower this winter than last,
reflecting gas being relatively plentiful, increased confidence
in availability of supplies, and modest demand due to mild weather
both here and on the Continent. There has also been significant
price convergence with Continental Europe. Following the fall
in wholesale gas prices, four of the six major retail suppliers
have now announced price reductions for domestic customers. Gas
and coal have both been important for electricity generation,
each accounting for around 40% of generation capacity for most
of the winter. For coal, this is down on the 50% it supplied last
winter.
GAS SUPPLY
Supplies of gas have comfortably met demand
this winter. The market has delivered significant new gas import
infrastructure, which was in place for this winter. This included
the Langeled pipeline from Norway, commissioned in October, and
the BBL (Balgzand Bacton pipeline) from the Netherlands, commissioned
on 1 December. The enhancement to import capacity of UK-Belgium
interconnector was commissioned two months early, on 1 October.
Production from the UK Continental Shelf and
from Norway through Vesterled has been consistent, delivering
around 230 million cubic metres per day (mcm/d) against a total
average demand of 340 mcm/d. ie meeting around 70% of demand.
The Langeled and BBL pipelines have delivered consistently, at
around 45 and 25 mcm/d respectively. The LNG (Liquefied Natural
Gas) import facility at Isle of Grain has performed well, consistently
delivering around 13 mcm/d against a 17mcm/d maximum capability.
Flows through the expanded Belgian Interconnector have generally
been more limited, reflecting the small price differentials with
Continental Europe. For a significant part of the winter, the
Interconnector has been in export mode. At times of peak demand,
however, the Belgian Interconnector delivered close to 40 mcm/d.
The build up of gas supply is shown in Figure 1. Flows through
the Belgian Interconnnector and price differentials with the Continent
are shown in Figure 2.
During the winter, two other importation projects
were commissioned. Excelerate Energy's LNG project at Teesside
became available for commercial operation on 19 February. Additional
compression for the BBL pipeline, allowing it to increase its
maximum gas delivery capability from 30mcm/d to 42 mcm/d, became
physically available on 1 January, two months ahead of schedule.
ELECTRICITY SUPPLY
Electricity supplies have comfortably met demand
this winter. There was a sufficient margin of installed capacity
(22%) to accommodate long-term outages at a number of British
Energy nuclear stations (primarily Hunterston B and Hinkley Point
B), issues around boiler safety at the Radcliffe coal-fired power
station in the early part of winter, and reduced capacity at Longannet
coal-fired station during January and February while repairs were
carried out on a coal conveyor belt. Gas and coal were the most
important contributors to the generation mix, each accounting
for around 40% of electricity generation. In the later stages
of winter, there was an increase in the proportion of gas-fired
generation, above forecast levels, reflecting lower gas prices.
The build up of electricity generation is shown in Figure 3.
Weather and Demand
Demand for gas is significantly influenced by
the weather, which affects how much gas is needed for space heating
for domestic homes. Provisional figures show that winter 2006-07,
with a mean temperature of 5.47ºC, is the second warmest
on the UK national record dating back to 1914. All three winter
months (December-February) have recorded above average temperatures,
with January 2007 also the second warmest on record at 6.0ºC.
Across Europe, temperatures have been even warmer, with anomalies
of 3 to 5ºC over large areas of Eastern Europe. These mild
conditions have therefore led to reduced demand in the UK and
across Europe. Figure 4 shows the UK weather over the winter,
using the Composite Weather Variable, which takes into account
temperature and wind speeds. It should be noted that within the
power sector, demand rose significantly from last year, typically
by 25mcm/d, as a consequence of lower prices favouring greater
use of gas.
Role of Government and Industry
The Government established the Business Energy
Forum in July 2006 to ensure that sound preparations were made
for winter energy supply. This is a high level strategic group,
jointly chaired by DTI and CBI and involving Ofgem, National Grid,
energy suppliers and users and other key energy industry players.
The group ensured there was effective communication and co-ordination
of effort. As part of this, DTI created a dedicated website resource
to provide information and signposting on winter energy supply
issues.
Prices
Wholesale Gas prices have been considerably
lower this winter than last, reflecting gas being relatively plentiful,
increased confidence in the availability of supplies, and modest
demand due to mild weather. The average spot price for January
was 27 pence per therm (p/th). For February, the spot price averaged
20 p/th. By comparison, the average price of gas in February 2006
was 65p/therm, over 3 times higher, and in February 2005 was 40
p/th. There has also been significant price convergence with Continental
Europe, with price differentials typically less than a few pence
per therm. Figure 5 shows UK, Continental and US average monthly
spot prices. This increased confidence in supplies has also been
reflected by forward prices, where, as shown in Figure 6, UK and
Continental forward prices have been on a falling trend with significant
convergence. It should be noted that the increase in Henry Hub
(US) prices has been driven by cold conditions on the East Coast.
Wholesale prices in the UK have been less volatile
this winter than last winter, although they have still been volatile
by long-term historic standards. Prices having typically varied
between 20 and 40 pence per therm during the winter, with one
significant excursion to minus 5p/therm when Langeled unexpectedly
flowed significant volumes during testing.
Industrial prices and impacts
With reductions in the wholesale price, the
situation for industrial customers buying gas at current prices
should have eased compared with last winter. However, gas prices
remain uncomfortably high for users who negotiated contracts when
the forward price was high, eg last summer. Although there is
evidence of convergence of wholesale prices with those on the
Continent, the Government is continuing to press for greater transparency
and liberalisation in Continental European markets. The Government
supports the ambitious proposals to develop the internal energy
market which appear in the Commission's Strategic Energy Review
and were endorsed by Member States at the Energy Council in February.
Domestic Gas and Electricity prices
Estimates for October 2006 show that prices
in the UK including taxes were below the EU average (median) for
both domestic electricity and gas prices and have remained so
even after increases at the start of 2007. The UK's domestic gas
prices for medium sized consumers (including taxes) have been
lower than the EU 15 median since the late 1990s, including the
last two years, despite UK wholesale prices being higher. The
main reason for this is the lower transportation and distribution
costs in the UK's more competitive market.
As described above, wholesale prices have fallen
over the last few months. Retail prices would also be expected
to fall, although Ofgem has indicated there can be a six to nine
month lag before these price reduction are passed on, just as
there was a lag between wholesale prices increasing and domestic
retail prices being increased. Four of the six major suppliers
have announced price reductions, and the others are expected to
follow shortly.
DTI
March 2007
Figure 1
Source: National Grid
Figure 2
Source: Heren & IUK
Figure 3
Source: National Grid
Figure 4
Source: National Grid
Figure 5
Source: Heren & Energy
Window
Figure 6
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