INDUSTRIAL GAS PRICES
Action points from the Gas Prices Working
Group
INTRODUCTION
Over the past two years, gas supplies into the
GB market have tightened, contributing to substantial rises in
the prices of both gas and, consequently, electricity. The price
differential with the Continent for wholesale gas is also significant.
In response to concerns from industrial users, the DTI established
a Gas Prices Working Group (GPWG) with the EIUG in January. In
addition, officials from Ofgem and Treasury were asked to attend
to give advice and support. The DTI and EIUG have identified a
number of key issues and conclusions:
— Recognition of the very serious implications
of current prices for UK competitiveness and potentially for the
continued viability of some manufacturing operations;
— Analysis commissioned from Global
Insight[1]
which concluded that forward gas markets are functionally liquid
but more should be done to build confidence and increase liquidity;
— A potential for distortive interactions
between the UK's liberalised market with the less liberalised
markets on the Continent, and the urgent need for rapid progress
towards full liberalisation and effective market arrangements
in Continental markets in order to remove such distortion; and
— New import projects that help ease
market tightness are expected to reduce upward pressure on prices.
This Note reports the conclusions arising from
the Group's work, including the report on the forward gas market
by independent consultant Global Insight, and a stakeholder seminar
for 40 senior players across the gas chain.
As a result of the work done since January,
the DTI/EIUG have identified the following actions:
ACTION LIST
Maximise gas supplies from UKCS
North Sea gas continues to make a significant
contribution, and DTI is working with industry to maximise production.
This year's licensing round attracted unprecedented levels of
interest. Ministers have been in contact with the key producers
operating in the North Sea to stress the importance of securing
maximum flows and reliable deliveries over the winter months.
Maximise gas supplies from storage
DTI will continue to do its utmost to ensure
that new UK storage projects commission on time, and is supporting
the work of the Commission and the European regulators to provide
non-discriminatory access rights for storage facilities across
Europe.
Maximise gas import capacity
DTI will continue to work closely with new import
projects (pipelines and LNG terminals) to ensure that there are
no avoidable roadblocks in the Government's control.
Ensure interconnector and LNG import capacity
is fully utilised
DTI is introducing this autumn a new licensing
regime for all interconnectors; regulation for LNG import facilities
was introduced last August. All unused capacity on interconnectors
and LNG facilities will have to be made available to the market
under the "use it or lose it" obligation. All import
facilities and interconnectors will be brought under Ofgem's regulatory
oversight. DTI and Ofgem have hosted a meeting to discuss the
new provisions and details of these proposals with EIUG and its
members.
Encourage Demand Side Response
Ofgem's Demand Side Working Group has, in response
to requests made by the group's members, increased its efforts
to identify and assess any practical and/or commercial obstacles
to demand side participation in the wholesale gas trading arrangements.
Ofgem is urgently progressing work in this area, with the help
of EIUG members.
Further improving information flows
DTI and Ofgem will monitor the provision of
upstream information through the voluntary agreement with gas
producers, and Ofgem will consider whether more downstream information
could be provided to enable wider market transparency. In particular,
Ofgem is progresssing improved downstream transparency in its
work with EIUG members on demand-side response.
Confidence-building arrangements for forward markets
DTI is planning a series of one-to-one meetings
or a seminar with banks, commodity traders, hedge funds, etc.,
to identify if/why they are not directly trading on the forward
market.
Reform of Gas Imbalance Charges
Ofgem is considering various code modifications
to improve the functioning of the market in delivering security,
including reform to gas emergency "imbalance charges".
Ofgem considers this a key priority for this coming winter.
Pursue energy market liberalisation in Europe
DTI will use the UK Presidency to make progress
on the liberalisation agenda. DTI, Ofgem and EIUG will support
the Commission inquiry into gas and electricity markets in Europe
by highlighting any concerns about the operation of the market,
such as reported differences in contract terms and conditions
for industrial consumers between the Continent and the UK.
NEXT STEPS
DTI, EIUG and Ofgem will continue to work together
to deliver these and other actions*. They will meet again early
in the autumn to review progress.
DTI
Energy Markets Unit
July 2005 (Amended August 2005)* EIUG endorses
this as an account of a programme subject to review, in which
other actions EIUG believes are necessary, not listed here, will
be discussed.
1 http://www.dti.gov.uk/energy/publications/policy/forward_gas_markets.pdf
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