ADDENDUM 1—KEY PRICE INFORMATION
During the mid 1990s the UK successfully pushed
ahead with liberalisation of its domestic gas market, which included
a gas release programme, full unbundling and creation of a transparent
wholesale market. This significant transformation initially created
a competitive market and attracted many new entrants. Customers
benefited with prices falling to levels reflecting costs of production
as gas competed with gas rather than prices being set through
artificial indexation to other energy products.
The opening of the Bacton to Zeebrugge Interconnector
quickly eroded this short lived benefit, as producers were able
to sell UKCS gas into Continental European Markets. The gearing
effect of sales of gas through the interconnector also resulted
in pulling UK gas prices back up to the European price level—again
set artificially through indexation to oil products. Thus, it
was very quickly, "Business as Usual" for companies
producing gas on the UKCS. (See Graph 1).
As the UK moves to being a marginal net importer,
UK consumers have suddenly become exposed to unaffordable prices
and a fundamental loss of supply security. This has been created
by the unequal levels of liberalisation that exist between the
UK and Continental European markets.
Graph 1
Forward market prices (Graph 2) in the UK are
now unaffordable and uncompetitive with forward winter prices
having reached a level 100% higher than those in Europe. As a
result UK manufacturers are simply unable to purchase ahead to
properly manage business risk.
The impact is already being felt with business
failures increasing, investment being curtailed and a whole range
of sectors being forced to divert resources.
Graph 2
The uncompetitive price of UK energy is also
seen in the power market (see Graph 3) and is set to continue
for many years to come. Graph 4 shows that each winter (Q1) gas
price has been increasing year on year. The Q1 price for 2007
(and indeed 2008) are already at levels that imply security of
supply concerns for those winters.
Graph 3
Graph 4
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