Examination of Witnesses (Questions 107-119)
MR CHRIS
MURRAY AND
MR SIMON
COCKS
20 JUNE 2006
Q107 Chairman: Gentlemen, welcome to
this third session on UK dependence on gas imports as part of
the select committee's investigation into the Energy Review being
held by the Government. As always, thank you for coming and thank
you for your written submissions. Could you introduce yourselves?
Mr Murray: My name is Chris Murray
and I am the Network Operations Director for the National Grid.
My teams look after the real time operation of both the gas and
electricity transmission networks for GB.
Mr Cocks: I am Simon Cocks. I
am the Commercial Director for National Grid, which means I deal
in principle with the live risk management of the live regulatory
regime and the connection of generators and our customers to the
transmission network, European policy and forecasting.
Q108 Chairman: We all know that just
because you build something, that does not mean it is used, whatever
it is in life. Certainly that has been true of gas import capacity.
You say we have plenty but that does not necessarily mean it is
actually going to be used. In your submission to us, your response
to the Government which you copied that to us, there is a graph
about the levels of uncertainty around gas supplies. There are
some pretty wide variations in the graph. Do you have any view
as to which of those scenarios about gas supplies are most likely?
What are you using for your own planning purposes at National
Grid?
Mr Murray: The reality is that
there is a great deal of uncertainty. We saw from last winter
that just because new capacity is made available, that does not
necessarily equal commodity. We are looking at some new infrastructure
going forward, such as the BBL connection, which is backed by
contracts, but that is not generally the case. Therefore, we have
to recognise that we are connected not just to European markets
but to global markets as well. If we are looking at interconnection
with Europe, we have to be cognisant of the liquidity in the market.
If we are thinking about LNG, we have to be cognisant of the fluidity
of the global energy market. We saw last winter, with the impacts
of tail impact of Hurricanes Katrina and Rita, that a number of
energy shipments that might have been destined for the UK went
west to the US. As far as our own assumptions are concerned, then
we are consulting as part of the winter consultation process this
year, and indeed consulting through the TBE (Transporting British
Energy) process with industry. Ultimately, supply will always
equal demand because it has to. We expect that more infrastructure
will be built over the next few years than we actually need. The
issue for us is whether the stuff that we need in a timely fashion
for this winter will arrive on time, and then, looking to the
future, what uncertainties there may be around planning consents
and the like in terms of the rest of the infrastructure turning
up.
Q109 Chairman: Supply equals demand
but only on price of course.
Mr Murray: Absolutely, Chairman.
When we saw the impacts of last winter, where as a system operator
we actually only had one difficult day in balancing the system,
which was 13 March, the gas balancing alert day, that does not
mean to say that there were not significant difficulties for consumers.
In fact, the additional tool that we had last winter, which had
never been proven before, was demand-side response, but we have
to recognise there are two forms of demand-side response: voluntary
demand-side response where people choose to sell their gas back
to the market, and that is fine if they have put those arrangements
in place; there is also involuntary demand-side response where
people simply cannot afford the energy price and therefore have
to curtail their approach.
Q110 Chairman: Returning to my question
at the start, what import capacity utilisation figure would you
work on for planning purposes?
Mr Murray: It is a very difficult
question. Forgive me; I am not seeking to prevaricate. All we
can do is look at what the forecast demand is and then say: looking
at the projected schemes which are coming forward, how much of
that capacity will need to be utilised in order to meet that demand?
I think we would be looking, over the next few years, between
30 and 40% of that capacity in order to meet the demand we have
here within GB.
Q111 Chairman: By 2015, about 50%,
according to that?
Mr Murray: Yes, Chairman.
Q112 Mr Wright: Our predecessor committee
in 2002 put together a report on The Security of Energy Supply.
At that time, they were asking the Government if it was confident
that it was planning far enough ahead to give the market the right
signals to make timely investment. In your response to the DTI
consultation, you suggest that the Joint Energy Security of Supply
working group should be asked to look further ahead up to 15 years
instead of the current seven years. Would you believe that such
an extension really makes a difference to companies' abilities
to plan long-term investment in the gas infrastructure? Further,
do you think that the Government would be willing to make this
change?
Mr Murray: Certainly in respect
of the capability of companies to look forward over those longer
timeframes, then, yes, we do believe that it is important for
strategic planning to have that longer term view. For example,
the current JESS timeframe does not line up even with the Large
Combustion Plan Directive. There are clearly mismatches between
policies, directives out there and the current planning timeframes.
As far as whether the Government would be prepared to look that
far out, then I think that would be a matter for Government.
Q113 Mr Wright: Do you think that
the current seven years was always far too short a timescale then?
Do you think it should just move with the market itself?
Mr Murray: I think the market
is operating within the current timeframes, and it is clearly
bringing forward new generation, and certainly through the consultations
that we do and the statements we provide, both the seven-year
statement for electricity and the 10-year statement for gas, we
can see new schemes coming forward so that supplies can come in
to meet demand. However, we do believe that longer timeframes
would be more helpful because then investors could look at the
longer term environment into which they are investing, rather
than thinking about perhaps going out and seeking to do long-term
contracts, many of which are simply not there.
Q114 Mr Wright: Do you genuinely
believe, as you put in your report, `up to 15 years'? Is that
just to add a little bit of insurance on your basis, or do you
think it will genuinely take up to 15 years?
Mr Murray: We genuinely believe
it would be helpful. Some of the schemes that we are talking about,
of course, from inception to delivery, do take an awful long time.
Quite often either ourselves, if we are building, or developers,
if they are building, can go through very extended planning timescales
before they can actually go ahead and build something. If you
only plan on a seven-year horizon, for example, it may be that
the vast majority of that, if not all, could be taken up in planning.
Mr Cocks: There are two other
points to make. Clearly, this is a capital-intensive business.
We are looking at a 40 to 50 years asset life. That would tend
to suggest a longer strategic planning timescale. Given that such
areas of work, which we will come on to talk about later, like
the RCEP 2050, work to make a commitment to our 60% carbon reduction,
again making a commitment that far out, we would need sensible
steps in terms of policy direction and policy coherence in order
to reach those objectives.
Q115 Mr Hoyle: Can we take you on
to gas storage facilities or the lack of gas storage facilities?
Whose job is it to actually create and ensure that there is enough
gas storage in the UK?
Mr Murray: Storage, of course,
is a matter for private developers. We have very limited storage,
as you know, here in the UK for historic reasons, because of our
dependence on North Sea gas. We only have something like 4% of
annual requirements in storage. There are something like 10 new
gas storage projects under development at the moment. Even if
all those go ahead, that will still leave us with perhaps twice
what we have at the moment, but a very low percentage compared
to our total annual need. Whilst the market is delivering these
short-to medium-term projects, which are strategically important
and the engineering characteristics of the new ones tend to be
such that they can fill very rapidly whereas some of the old ones
tended to fill quite slowly and therefore they can be recycled
through the winter, the reality is that we do not have an environment
that is creating a signal for anybody to invest in long-term storage:
for example, another Rough. There is no long-term strategic storage
being built. If we look at the experience that we had last winter,
where in February we lost the Rough storage facility, then clearly
that was a significant loss in terms of capability, of about 10%
of peak day loss to us, in one go. Nothing is coming forward at
the moment in terms of replacing that.
Q116 Mr Hoyle: The truth of the matter
is that the consumer is the loser because there are no storage
facilities. We know that the spot market price is what it is because
we do not have the capacity to store and hold the gas. That is
causing problems to the market. It ensures that overall the consumer
has to pay more for power. The question was: whose responsibility
is that? You said it is that of private companies. Does Transco
have a responsibility as they have the monopoly for moving gas
around? Do you think it is your responsibility to have storage
facilities for people to use?
Mr Murray: No, we do not believe
it is our responsibility.
Q117 Mr Hoyle: Whose responsibility
do you believe it is?
Mr Murray: At the moment, it is
the responsibility of the market.
Q118 Mr Hoyle: You are saying that
we should regulate to make sure that companies deliver for consumers
where you are failing at the moment?
Mr Murray: If the market is deemed
to be failing at the moment in terms of providing long-term storage,
it may be that there are other options that could be looked at.
It may be that additional obligations could be put on suppliers
in terms of securing storage to make sure that they can provide
for winter peaks. I entirely agree with you that in the absence
of substantial storage, to allow us to flatten price so that people
are not having to buy on spot, then that smoothing or dampening
mechanism on price does not currently exist.
Mr Cocks: Clearly the market could
respond in several ways. It will either provide gas storage or,
as we are seeing in terms of development of the infrastructure,
it will provide supply-side diversity, both of which contribute
to security of supply.
Q119 Mr Hoyle: When we look at our
European counterparts, they have much more storage facility than
we have, so we are really letting down the consumer. I wonder
what you think we can do to ensure there is more adequate storage?
Mr Murray: I think we could sharpen
the existing obligations to incentivise suppliers. We could explicitly
incorporate security of supply standards into supply licences
with penalties if need be. We could require suppliers to demonstrate
to Office of Gas and Electricity Markets at the start of every
winter that they broadly have the capability to meet the needs
of their consumers. We could extend the obligations to cover firm
non-residential customers. We could review the 1:20 and 1:50 standards.
There are numerous things that could be done.
| 
