Examination of Witnesses (Questions 200-219)
MR MARK
CLARE AND
MR JAKE
ULRICH
20 JUNE 2006
Q200 Mr Hoyle: That moves us nicely
on to gas storage. Obviously, one of the big issues last winter
was that there is actually no real capacity in the UK for long
term storage of gas; in fact, in your memorandum you have argued
against strategic gas storage and one must question why, what
makes you so confident that the market will be more effective
in the future as you almost failed and the gas valves were about
to be turned off from major users last winter? There is a real
concern there, why are you opposed when everybody knows that the
reality is that if we had had more gas storage there would have
been no worries about supply; also, gas prices, the poor old consumer
would not have been beaten over the head with your huge price
increases. I just wonder, is it because you have upstream and
downstream and it is in your best interest to ensure high prices
because of your upstream market, you make even bigger profits.
Mr Clare: I will pass over the
main question to my colleague, but let me make it very, very clear
that Centrica and British Gas suffer seriously the higher wholesale
prices move. Obviously, the reason for that is that we are more
exposed than any other energy company in the UK to high wholesale
prices. Yes, we have put prices up, but we have absorbed an enormous
amount of those increases which has depressed profits and sent
us into loss in British Gas last year, and of course the impact
of losing customers undermines the long term value of our company.
We have been doing everything we can to drive prices down; it
is worth making that point. We would much prefer lower prices
which is why we are pushing the European Commission, which is
why we are putting so much more investment into UKCS which is
why we have secured the long term contracts with Norway, Holland
and with Petronas to bring new supplies to the UK. We continually,
therefore, bring pressure to drive prices down. Jake.
Mr Ulrich: We would agree that
storage is necessary and the question is what is the best method
to deliver that storage, and what we are not in favour of is government
expenditure of four, five, six, seven billion pounds to build
a strategic storage capacity that may never be used, and we are
unclear when and how that would be used. There are currently three
new storage projects under construction, three in the planning
process, three being appraised and we know of at least three other
studies that would more than double the current storage capacity
in the UK, so we are all for incremental storage and we are looking
at a few of those projects ourselves, but I think if the announcement
or decision was made to go forward with strategic storage the
commercial operators would not move forward with their projects.
Why would we build incremental storage not knowing what the policy
is around strategic storage? We are very much for storage but
not for a central strategic storage facility that is out of the
market.
Mr Clare: It is also worth making
the point that of course the UK is in an unusual position and
a lot of comparisons are made between the number of days storage
we have in the UK and France and Germany, but we still deliver
90% of our gas requirements from our own UKCS gas fields, so if
you like we have the largest storage of any Member State. Clearly
there is a need for more storage and I think we have to accept
that if the planning processes—I know the intent now is
to try and address those—had not presented the obstacles,
there would have been more storage anyway last winter. There are
a number of projects that have been held up for some time and
I think the estimates are that over the next five years as long
as the planning issues are dealt with the amount of storage will
double and that will put us in a reasonably strong position.
Q201 Mr Hoyle: In fairness, everybody
has been too reliant on Rough, have they not, and when that facility
was not available that brought a lot of pressure on the market.
Therefore it is only right that people will say why should the
Government not ensure that there is strategic gas storage because,
unfortunately, the market let its customers down. You go on to
say quite rightly about planning issues; people say we ought to
be more liberal in the case of planning, but we should also take
into account Buncefield and the problems there when it comes to
planning. I think everybody would have been sympathetic until
the major explosion last year, which does show that you could
be very vulnerable if you do not get planning right. You have
therefore to be very, very careful on planning and we would entirely
agree with that, but the reality is that unfortunately, whichever
way we look at it, companies have let customers down because there
are no real facilities. In fact, in your own memorandum you are
suggesting you are spending £0.6 billion and yet we know
that the Government was trying to commit £9 billion in order
to create a huge gas storage facility. Do you think it is because
it is real investment that is needed that the market really does
shy away from ensuring that we have capacity when there is major
demand in winter? The truth of the matter is that we came so close
last winter, you cannot give us any guarantees next winter and,
as the Chairman points out, we really do not know what the future
holds unless we have huge gas supply storage facilities in the
UK.
Mr Ulrich: We would clearly disagree.
If you have a proper, functioning Europe and you have access to
European storage and European capacity, a properly functioning
market will alleviate some of those issues also. I run into quite
a few people who want to invest money in storage, there is private
equity—
Q202 Mr Hoyle: Then why are you losing
customers?
Mr Ulrich: Sorry?
Q203 Mr Hoyle: If it is so good and
you have got it so right, why are you losing customers hand over
fist, why have your prices gone up significantly and why was it
that you almost turned the valves off on the major energy users,
if it is so good?
Mr Ulrich: I do not understand
what you mean, so good. I did not say it was good.
Q204 Mr Hoyle: You are saying that
it is good because we can do this and we can do the other. It
was so bad last winter and we are expecting next winter to be
the same, so surely, quite rightly, customers should look to the
Government to make sure there is provision put there to ensure
it does not happen again.
Mr Clare: If you look at last
winter, what were the failures? We had as a country invested substantially
in new LNG terminals and an interconnector which had doubled in
capacity, neither of which were used. If both of those were used
then we would not have had the price spikes that we saw. Clearly
in March we saw the loss of Rough, which did put the UK in a more
difficult position, but there is no lack of desire to invest in
storage. There are very many projects, as my colleague has said,
that companies want to invest in: with storage prices where they
are, it is not at all surprising. The issue is the time it takes
to get the necessary approvals to deliver those projects. If there
was a desire or an announcement by Government to build a £6
billion storage facility, I guess it would also struggle, one
assumes, to get the necessary planning consent.
Q205 Chairman: I do not think anyone
is suggesting that the Government should pay towards this equipment;
you are saying to the committee you think that the private sector
is bringing forward enough gas storage proposals to meet effectively
the need for any strategic gas reserves.
Mr Clare: That is our belief,
yes.
Q206 Mr Hoyle: That the Government
cause you to spend, that is what I was suggesting.
Mr Clare: We talked about the
potential to put additional obligations into supply licences and
that is an important ingredient, because what it does is clearly
demonstrate the demand for storage more clearly than perhaps it
does today.
Q207 Mr Hoyle: Would there be a benefit—and
you do mention this, you are quite right to highlight the tax
treatment on cushion gas and reserves—or would that be a
way, if there was some cushion within there, some tax breaks,
to drive forward storage facilities if the Treasury were to be
sympathetic? If the Treasury were to look sympathetic, have you
been in touch with them and what have you done to actually say
to the Treasury, "look, we can both work together on this,
if you give us some tax breaks and give us an incentive, we believe
that the market will then put the storage in place"?
Mr Ulrich: We have not specifically
talked to the Treasury about it. Clearly, it would be an incremental
help in moving forward storage projects, I do not think anyone
questions that. In our view right now there is enough moving forward,
if we can get planning consent, that we will be okay, but clearly
if that were available there would be more projects coming forward
so it would incrementally add some more.
Q208 Mr Hoyle: Has the time come
to knock on the Treasury door? No.11, M r Brown, have you made
the appointment, next week, tomorrow?
Mr Clare: I think what we are
saying is that the economics are already very good, but if we
do see a fall in gas prices, for example, and therefore storage
going forward then this would be an important driver to continue
that investment. There is a real issue there.
Q209 Mr Hoyle: My final question,
do you think that customers, the people I represent at number
10 Green Street, are going to see a fall in their prices?
Mr Clare: We believe that if the
infrastructure that is due to come on over this next winter arrives
and the contracts that we have in place deliver the gas, then
we will start to see prices falling. There are indications of
that, but unfortunately, the market still assumes that wholesale
prices will rise this winter, but then they will start to fall
from that point onwards.
Q210 Mr Hoyle: So there is good news
for Mrs Wilson in the long term.
Mr Clare: There is.
Mr Ulrich: Yes, in the long term.
If you go back, there was a point made earlier by National Grid
about how the interconnector did not work this winter, it was
only half-full, and how even if the BBL line comes on and Langeled
comes on, there is no guarantee that that facility will be used,
but there is a very key difference in those facilities. We have
contracts with Gasunie to put gas through that, we have contracts
with Statoil to put gas through, so if those facilities are there
on time that will be incrementally more supply coming into the
UK than we have lost in the last year so there will be more gas.
Q211 Chairman: You are not worried
about the Norwegian rumblings about the fact that some of these
disclosure requirements in the UK prejudice their own?
Mr Ulrich: I do not think it is
going to be a stumbling block.
Q212 Chairman: One last question
before we change the subject and come to Tony Wright, just to
push you a bit on this planning issue. It is a recurring theme
in our inquiry across all sectors that planning is an issue, whether
it is microgeneration or nuclear power plants or grid or gas storage.
Of course, the Secretary of State has announced some changes which
are going to be helpful; do you feel that there is any need to
do more in terms of the planning regime beyond what the Secretary
of State has already announced?
Mr Clare: I do not think we know
yet what the review for onshore is going to deliver and we understand
that offshore there will be a Marine Bill, but again we do not
know what the content is. I guess we do recognise that the local
authorities do have a role to play in this as well and there are
issues that they need to deal with. The fact that the Secretary
of State has made it clear that this is an issue that needs to
be dealt with is a major step forward because we have been in
this situation for some considerable time. Until we know what
the outcome of the Review and the outline of that Bill is going
to be, it is very difficult for us to say, but our nervousness
is that it will still not provide the clear path that is needed
to ensure that the strategic projects, which are important for
the UK, are actually delivered on time.
Chairman: Thank you very much. We are
going to move on to one of your other roles now. Tony Wright.
Q213 Mr Wright: In terms of being
an electricity producer, up until last week you owned seven combined-cycle
gas turbine power stations and you have just announced the eighth
one. It did take a considerable time from the first idea of having
the eighth turbine to the actual announcement of that; where was
the delay in the announcement?
Mr Ulrich: There are several things.
There are some commercial terms which needed sorting out, but
the biggest thing that is affecting our decision process right
now, not just on gas plant but also on coal plant, is what is
the carbon picture going to be beyond 2012. On gas plants you
are looking at a 25-year life, coal plants 35 to 40 years, and
we do not have much certainty of what framework will exist beyond
2012, so we need some clarity around that framework. What we were
able to get were assurances that we would be given carbon credits
for new build in phase 2, which helped the decision-making process
move along.
Q214 Mr Wright: Are you quite happy
now with that being there that you are competitive and you are
going to do well with that eighth project?
Mr Ulrich: Yes. There is at least
one other project that could be announced here in the next month
or two, so the decisions now are coming around and I think we
will see several plants built. The big issue is how many coal
plants get built versus gas, and it really is so critical as to
what the carbon price is.
Mr Clare: One of the key drivers
that we did focus on a lot, because the economics were not perhaps
as clear as we would have liked, was the supply margins which
National Grid talked about earlier. They do provide very detailed
and comprehensive information and it is clear to us that there
is a real squeeze on electricity that will occur and therefore
we need to ensure that new build occurs. We have one of the consented
sites, so that was part of the rationale for us to move forward
and there is real information that enables Centrica and other
energy companies to make these critical decisions in enough time
to ensure that the market is supplied.
Q215 Mr Wright: You did mention carbon
pricing and everything; in terms of the coal-fired power stations,
the electricity price increase has been partially attributable
to the fact that there has been an increasing demand from China
and India in respect of coal. To what extent do you think we should
be concerned about the security of our coal as well as the gas
supplies, and do you think that we need an indigenous coal industry?
Mr Ulrich: There are two separate
issues. You want diversity of sources so you would want to have
an indigenous supply source available and, again, there is more
coal than gas and oil, there is enough for several hundred years
if we can believe all the reserve estimate, so whereas it is not
necessary for the physical supply, again it gives more diversity
and increases security by having a local content.
Q216 Mr Wright: Do you see that as
a growth industry for yourself in terms of a coal-fired power
station with clean coal technology?
Mr Ulrich: We are pretty committed
to the fact that we will need a portfolio of plants and some of
those will need to be coal, so we are moving ahead on that.
Q217 Mr Wright: Finally, you state
that "centralised generation planning has a very indifferent
record in terms of delivering plant diversity". Would you
oppose the idea that the Government should try to encourage a
generating mix or would you generally leave it to market forces?
Mr Ulrich: I think the market
will deliver the mix, short term because the combined-cycle plants
are the quickest thing to build and move on and are fairly clean,
so we will see several of those being built, but in terms of clarity
on the coal picture, no-one is going to make a bet on just gas
or just coal or renewables, we are going to have a portfolio with
all those projects and I am sure that our competitors are thinking
the same way.
Q218 Mr Wright: You think that rather
than the Government giving guidance as to what they would like,
market forces will actually dictate and determine what we are
going to end up with?
Mr Ulrich: I do.
Mr Clare: I think it would be
wrong for Government to start choosing technologies. Clearly,
there are a number of moving parts, one of which is the need to
achieve carbon reduction which is obviously driving the fuel mix
that we are looking for—and potentially the technology—and
the other one is cost in the very short term. We have some diversity
and we have long-term contracts with British Energy and with other
coal plants so we have already got diversity in our own portfolio;
in the longer term we would look to have diversity in terms of
ownership as well as in our contracts, and I think all companies
will move the same way, trying to balance the price to the customer
with the need to hit the carbon targets.
Q219 Chairman: We have given you
a fairly difficult time in some sections of the evidence but we
are very grateful for the way you have responded. Let me end with
a gift to you, an easy ball. When the Secretary of State or the
Minister of State stands up in the House of Commons in a few weeks'
time and announces the energy review conclusions, what three things
will you be looking for first and foremost? What do you particularly
want to hear him say? Carbon pricing is clearly one of them, that
has been a common theme throughout our evidence sessions on nuclear
or gas or coal or microgeneration, the whole lot, but is there
anything else particularly that you are looking for, the headline
story?
Mr Clare: One from me would be
a real focus on demand reduction. It is not something that we
have picked up but obviously in our evidence we have made it very
clear that we are very supportive of the energy efficiency commitment,
but actually taking that much further. There is a real opportunity,
when you consider the amount of energy that is wasted, whether
it be commercial properties or domestic properties, that with
a real concerted effort we could see much, much more delivered
there, whether that be through regulation and legislation, fiscal
regime changes—and we have seen some of those already—or
simply suppliers and government working a lot harder to communicate
to consumers that this is very important. That would certainly
be on my list of things.
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