APPENDIX 5
Supplementary memorandum submitted by
Ofgem
THE SUPPLY/DEMAND BALANCE IN WINTER 2005-06
AND WINTER 2006-07
GAS SUPPLY
Winter 2005-06
Wholesale gas prices rose by 215% between March
2003 and March 2006. Prices rose because of a faster than
expected decline in North Sea gas production. This made us more
reliant on importing gas from Europe and the failure to liberalise
the European market made it difficult to buy and transport gas
to the UK. This was made worse last winter by colder weather and
a fire at Britain's largest offshore gas storage facility that
left it unavailable for much of the winter.
See chart on the next page for more detail.
Winter 2006-07
Since last summer, wholesale prices have approximately
halved. This is due mainly to lower demand (because of warmer
than average weather) and significant new sources of gas supply
coming on stream:
— gas import capacity has increased
by around 135%, to 235 million cubic metres (mcm) per day;
— series of major new infrastructure
projects delivered on schedule has increased capacity and diversity
of supplies:
— IUK upgrade (Belgium interconnector):
additional 20 mcm/day;
— new Langeled pipeline from Norway: 74
mcm/day;
— new BBL pipeline from Holland: upgraded
to 42 mcm/day in January 2007 (opened in December 2006 with capacity
of 30 mcm /day); and
— new LNG import terminal at Teesside:[5]
11 mcm/day
See chart on the next page for more detail.
Outlook for gas next winter
Further infrastructure projects are planned
to arrive before the end of winter 2007-08:
— 2 new LNG import terminals in Wales:
45 mcm/day.
Daily gas supply, Winter 05/06
Daily gas supply, Winter 06/07
GAS
DEMAND
— Demand so far this winter has been
quite low, largely due to the relatively mild weather conditions.
A cold spell in early February 2007 resulted in a spike in daily
demand to the highest level for three years. However, the level
of supply available meant that spot prices remained stable.
Daily gas demand, Winter 06/07
Daily gas demand, Winters 05/06 and 06/07
GAS
PRICES
— Winter 2006-07 forward prices remained
very high for much of 2006, which reflected the significant risks
arising from the uncertainty surrounding:
(a) demand—in particular the weather; and
(b) supply—the delivery on schedule of
a number of large and complex infrastructure projects (listed
above) and the return of the Rough storage facility to full working
capability.
— As winter approached, uncertainties
reduced about the completion dates of the various infrastructure
projects. In addition, a mild winter was forecast to depress demand.
Prices fell as the competitive market continued to respond to
the changing supply and demand conditions (see chart below).
Evolution of Q1 2007 gas price
NBP spot price: Winters 05/06 and 06/07
ELECTRICITY
GENERATION AND
DEMAND
Electricity generation capacity and peak demand
| Year | 2005-06
| 2006-07 |
| Generation capacity | 75 Gigawatts
| 76.8 Gigawatts* |
| Peak demand | 59.5 Gigawatts
| 57.7 Gigawatts |
* Capacity was 76.8 GW at beginning of winter; 2 GW of nuclear
capacity was lost early in the winter (due to maintenance) and
remains offline. Additionally, 2 nuclear units came to the end
of their operating lives on 31 December 2006, reducing capacity
by a further 0.8GW.
ELECTRICITY PRICES
— Forward prices were high throughout early 2006
(see chart below) reflecting high gas prices, high carbon prices
(under EU ETS) and uncertainty over demand.
— Since then, electricity prices have fallen (see
charts below and on the following page) as the competitive electricity
market has responded to changes in supply and demand factors.
These changes to market conditions included large falls in the
prices of gas and carbon (see chart on subsequent page), and electricity
demand turning out to be lower than had been expected.
Evolution of Q1 2007 gas electricity price
Electricity day-ahead prices: Winter 05-06
Electricity day-ahead prices: Winter 06-07
5
So far this facility has hardly been used because prices are too
low and the additional gas is not required. Back
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