APPENDIX 10
Memorandum by EDF Energy
ABOUT EDF ENERGY
1. EDF Energy is a major supplier of gas
and electricity with approximately five million customer accounts.
We also own and operate an 800MW CCGT power station at Sutton
Bridge, 4GW of coal fired-power stations currently being fitted
with Flue Gas Desulphurisation (FGD) equipment and some smaller
CHP generation assets. We have no gas "upstream" field
or pipeline interests and procure the majority of our gas on the
UK NBP balancing market ahead of the day. We are therefore reliant
on a stable and transparent gas market where gas prices reflect
market fundamentals.
2. EDF Energy welcomes the opportunity to
respond to the Trade and Industry Select Committee's new inquiry
into the security of gas supplies ahead of this winter.
SUMMARY
3. There have been several changes relating
to the UK gas supply position and the industry's perception of
market risk since the TISC presented its findings in March.
4. National Grid's (NG) forecast of beach
supplies for this winter has decreased several times this year.
In addition shippers and suppliers perception of market risk have
also changed due to the events of last March when, despite periods
of extreme prices and high demand in the UK, the interconnector
exported gas to the continent. Another contributory factor to
the market's increased perception of risk is the amount of regulatory
change that has taken place this year in anticipation of this
winter being the tightest on record. We believe that some of the
modifications recently implemented by Ofgem have significantly
increased shippers risk exposure and will do little to improve
security of supply this winter. Indeed, this extra uncertainty
and complexity could exacerbate a potential emergency this winter.
5. In the shorter term it would be useful
if Ofgem and NG gave a seminar on gas emergency procedures to
both Shippers and customers ahead of this winter to familiarise
the industry with the new emergency arrangements. Government should
also look at putting in place a mechanism to relax local environmental
constraints on non gas-fired generators before the winter so that
the system can benefit from having extra generation capacity available
if needed. In addition, Ofgem should not approve urgent modifications
affecting emergency arrangements close to winter, unless there
is a specific event that signals such a need. We have seen no
such event in the last few years that warranted changing cashout
prices or emergency procedures as close to winter as has been
done this year.
6. In the longer-term we believe Government
should continue to promote the liberalisation of European energy
markets to remove any artificial constraints that may be impeding
third party access or trading liquidity. The implementation of
information provision modifications to harmonise the level of
information available to gas market participants would also be
welcome to ensure the gas market is as transparent as the electricity
market.
7. We are committed to working closely with
Ofgem and DTI in the coming months to ensure that the market works
efficiently and effectively this winter and that security of gas
and electricity supplies are maximised.
Question 1: Is the supply situation in the coming
winter likely to be about the same, better or worse than predicted
in February this year?
8. The supply situation is worse than predicted
in February, primarily due to downward revisions in maximum beach
deliverability.
Beach supply
9. National Grid (NG) recently published
their final Winter Operational Report (WOR) for 2005-06 which
showed a maximum beach supply of 327mcm, which is 9mcm lower than
originally predicted in their May 2005 WOR forecast earlier this
year. This reduction is largely due to responses NG received in
July through their Transporting Britain's Energy (TBE) process
and shows supplies from the UK's Continental Shelf (UKCS) decreasing
faster than originally anticipated by NG. Also, due to the increasing
number of offshore production problems arising from ageing equipment
and mature fields, NG has estimated that on average only 92.5%
of maximum beach deliveries are expected to be delivered this
winter. This expectation is 2.5% lower than the 95% NG used in
their 2004-05 WOR. In the past NG has over estimated the amount
of beach supplies likely to be received over each winter period
and we welcome the fact that NG has consulted with industry this
year in order to produce a more realistic supply and demand assessment.
Demand-side response
10. NG has revised downwards its estimate
of the demand-side response that can be realistically expected
from gas-fired power stations (CCGTs) switching to distillate
in the event of an emergency in light of responses to their May
WOR. The actual level of response depends on a number of factors
such as the level of distillate re-supply, the technical ability
for CCGTs to successfully switch fuels without tripping and environmental
constraints. NG's new estimate looks more robust but these are,
as yet untested, estimates.
Gas imports and price arbitrage
11. LNG imports are likely to form the peak
day marginal therm of gas in the UK this winter. The volume of
LNG imports into the UK will therefore depend on the price arbitrage
between other continental LNG markets such as Spain and even the
USA. Similarly imports of gas via the UK-continental interconnector
will depend on the price arbitrage between these markets. For
example, in March this year, the interconnector exported gas to
the continent during periods of high UK demand and high UK gas
prices making the National Transmission System very short. This
was efficient market behaviour as prices on the continent, where
severe weather conditions meant that many large loads were interrupted,
ended 20-30p/therm higher than the UK on the day.
12. Uncertainty in LNG and interconnector
flows creates uncertainty in the absolute level of supply available
for this winter. However this isn't new information. We believe
that the market has factored in the likely increase in peak prices
into this winter's risk premia when deciding how much gas to contract
for ahead of winter.
13. Spain has recently introduced a new
cashout price regime that sets prices to 1.5 times the higher
of the Henry Hub or the IPE index during an emergency. This type
of arbitrary price fixing does little to promote an efficient
and single liberalised market as per the recent second European
Gas Directive and is likely to raise prices in neighbouring economies
because of the level of interconnectivity.
Weather
14. NG's base case assuming average temperatures
in their WOR forecasts that demand will remain broadly the same
as last winter, with slight increases in domestic volumes offset
by decreases in industrial and commercial volumes due to high
gas prices. The UK Meteorological Office has recently issued a
forecast that gives a 66% chance that this winter will be colder
than average. Even in an average winter NG predict that a small
volume of demand response will be required to balance the gas
system. The forecast of an increased probability of colder weather
suggests that significant levels of demand response are likely
to be required this winter to balance the gas system.
Question 2: If worse, what will the consequences
be, and what the Government's and Ofgem's responses to the problem
should be?
Consequences of tighter supply margins
15. NG has stated that it can meet all gas
demand requirements this winter under average weather conditions
with only a modest amount of demand-side response required and
in a one in 50 winter with 3.7bcm demand-side response. However,
the UK has never had a gas emergency and the ability for the market
to respond accordingly will depend on:
— significant, as yet untested, volumes
of gas demand response from both power and non-power daily metered
customers;
— prudent use of storage throughout
the winter period. This potentially includes prudent use prior
to it becoming apparent that the winter is going to outturn colder
than average[13];
— successful operation of the electricity
system at peak requiring some CCGTs to switch to distillate and
others to be displaced by oil and coal plant. This may be limited
by environmental constraints;
— no major unplanned plant, field or
terminal outages occurring; and
— users understanding of the different
cashout, balancing and emergency arrangements in the UK and the
continental markets.
Government response
16. In the short-term the tight supply margins
in gas and electricity are clear to all energy market participants
and market prices provide a clear signal to maximise the availability
of energy installations and infrastructure this winter. We welcome
the DTI's initiative to produce real-time offshore gas information
on an aggregate level but we believe that the market would have
benefited greatly from having Energywatch modification 727[14]
implemented to provide sub-terminal level information in time
for this winter. It would be prudent if Ofgem, system operators
and the Government familiarised themselves and the industry with
the procedures for operation in an energy emergency[15].
17. To prevent non gas-fired stations being
hindered from running to displace CCGTs, it may be useful if the
government put in place a mechanism to relax short-term environmental
constraints on non gas-fired generators before the winter so that
system can benefit from having extra generation capacity available
if needed. Examples of limits that could be relaxed are spot particulate
and cooling water temperature limits. Similarly, limits on the
number of days on which stations can run using back-up fuels could
be relaxed. There is no need to relax annual emission limits (eg
sulphur B limits at coal stations) as any increased emissions
during winter can be accommodated by lower use of the affected
plants in the spring and summer when the gas supply position will
be less tight and by the trading of sulphur bubbles between operators.
18. In the longer-term Government should
promote European market liberalisation to remove artificial constraints
to gas flows and market liquidity and streamline planning and
licensing processes for new installations. The government should
also encourage diversity in the UK generation fleet. The UK is
fortunate that it has a diversified generation mix—c.30%
of capacity is gas-fired and of these around 30% (5.7GW) have
the ability to use back-up fuels. In future, if the UK has a higher
dependence on gas-fired generation then the impact of tight gas
supply margins on electricity security of supply could be much
more serious.
Ofgem response
19. The amount of regulatory change that
has taken place this year in anticipation of this winter having
the tightest supply-demand balance on record has increased the
perception of risk in the market. For example:
— Ofgem has encouraged NG to raise
urgent modifications to the Unified Network Code (UNC) to introduce
more penal balancing signals ahead of this winter[16].
This was done even though industry spent eight months discussing
cashout issues at Ofgem's Cashout Review Working Group (CORWG)
meetings and concluded that no better alternative to the existing
gas emergency cashout arrangements could be found. Ofgem then
prevented the industry from appealing its decision to implement
modification 0044 using Article 12 of The Electricity and Gas
Appeals Order.
— NG has also fundamentally changed
its safety case by introducing Monitor Levels[17]
into their contract with the HSE without consulting the industry.
The introduction of safety monitors means that withdrawals of
gas in store may be curtailed during periods of high demand if
NG believes the monitor levels will be breached. This could precipitate
an emergency as shippers withdraw gas to prevent it being trapped
in storage by an emergency even though if left in storage this
gas could have ultimately resolved a supply or transportation
constraint that eventually causes an emergency.
20. These modifications have significantly
increased shipper's risk exposure ahead of this winter as many
of their interruptible and storage contracts were signed before
these modifications were implemented. Changes such as these, with
limited lead times, make it difficult for industry participants
to plan efficiently for winter in confidence that market rules
will not change significantly. Indeed, we believe these modifications
to the UNC and NG's safety case have created greater uncertainty
and do little to improve security of supply ahead of this winter.
The perceived increase in market risk may have contributed to
the increase in UK gas prices and it reduces the confidence of
shippers and consumers that the market is producing cost-reflective
prices.
21. The creation by Ofgem of a gas sub-group
of the Demand-side Working Group (DSWG) has been a welcome development
and EDF Energy has participated in these meetings. However, we
are disappointed that, despite this sub-group being set-up a year
ago by Ofgem, it has only met twice—once early this year
and then in late July following a request by a customer representative.
The plan to provide the Summary Gas System Information Service
to all shippers and customers via NG's website is a sensible and
prudent step to ensure that the whole market receives the same
information at the same time. This should be implemented on the
1st November. However, many interruptible contracts are "buyer
nominated" which means that not all shippers will be able
to interrupt their sites ahead of an emergency even if they are
aware that an emergency is imminent. The provision of this information
may therefore not be able to avert a potential Gas Supply Emergency.
22. Ofgem should investigate further the
role of demand-side services in balancing the gas system. NG has
stated on several occasions that it is not its duty to contract
with end-customers for demand-side response but Ofgem's legal
opinion, and ours, is that there is nothing in the Gas Transporter's
licence, which prohibits them from entering into such contracts.
Indeed, Transco spent a considerable amount of time three years
ago working with the industry to design gas demand-side and "turn-down"
services and ultimately raised modifications to the Network code
to introduce this[18].
This reluctance to contract for demand-side services is in direct
contrast with the activity of NG in balancing the electricity
system.
23. As previously mentioned we believe it
would be useful if Ofgem and NG gave a seminar, ahead of this
winter, on emergency procedures to both Shippers and customers
to familiarise industry now that the emergency procedures have
been fundamentally changed.
24. In the longer-term Ofgem needs to liase
more closely with industry rather than getting NG to make changes
to industry arrangements that have no support from other market
participants. Supply issues will become more significant as the
UK begins to import much of its gas needs. Early and effective
dialogue with industry should allow the design of solutions that
meet the needs of all parties.
October 2005
13 NG's modelling assumes gas is withdrawn optimally
from storage to meet demand peaks across the winter. In reality
gas will be withdrawn in response to price signals. These signals
may not always be caused by, or coincident with, demand peaks. Back
14
UNC mod 006-"3rd Party Proposal: Publication of Near Real
Time Data at UK sub-terminals". Back
15
NG Transco has recently completed an emergency simulation called
Operation Moscow. Back
16
UNC modification 0044 "Revised Emergency Cash-out &
Curtailment Arrangements" and UNC mod 0021 "Revision
of the Emergency Cashout Arrangements". Back
17
Safety monitors are used to determine the amount of gas that
needs to be retained in storage for NG to safely operate the network
and maintain sufficient gas supplies to deliver security of supply
to domestic and non-daily metered customers. Back
18
Network Code modification 584 "Provision of Contestable
Transmission Support Services", and modification 585 "Provision
of Contestable System Reserve Services". NG subsequently
withdrew these proposals without any explanation. Back
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