ADDENDUM 5
MARKET STRUCTURE
Over the past decade UK markets for gas and
electricity have been open to foreign companies to invest in.
This led to a number of American and European companies buying
the UK regional distribution and supply businesses. In recent
years the American companies have largely sold their positions
leading to a second round of acquisitions in the UK supply market.
As this paper is being written there is much speculation about
a possible takeover of Scottish Power by E.on of Germany.
The result of years of takeovers is that the
UK market now has around 50% of supply controlled by foreign companies
that may well have competing priorities in times of energy shortage.
The same is not true of Northern European markets where the lack
of liberalisation has prevented any significant access by foreign
firms. The following diagrams show the extent of ownership that
foreign companies have over the UK energy markets.
In our view the economic drivers of the UK supply
businesses will quite reasonably include their whole European
portfolio. This means that the German and French supply companies
will need to work out what is in their best economic interest.
In times of gas supply shortage this may include protection of
their home market as well as trying to ensure reliable supplies
to the UK market. All gas markets have to be able to cope with
large changes in demand between winter and summer. The gas demand
in winter is around twice the summer demand on a daily basis.
This change in demand is managed by a combination of flexible
production and storage. Production assets are maintained during
the summer months to make sure they have maximum supply capacity
during the winter. Storage systems are filled during the summer
and emptied during the winter. Larger storage systems are, in
effect, able to move summer production to winter delivery.
CONTINENTAL MARKET
STRUCTURE
The continental gas market is very different
than the UK market. In general the continental countries have
very little indigenous gas production and therefore have to rely
on imports of gas and large storage facilities to ensure reliable
supplies. The imports are via long term gas supply contracts from
surrounding producing countries. These contracts link the price
of gas to oil products and typically have volume constraints (minimum
and maximum). The prices of these "border" gas contracts
are published by Heren. During the summer months the supply companies
on the continent will fill storage, which can then be used to
maintain supplies during winter months. As an industrial consumer
the typical supply contract will be an oil product formula (or
the same formula converted to a fixed price). The price is in
effect the border gas price formula plus an amount for distribution,
storage and profit. There is no seasonal pricing for end consumers
in the continental markets.
Supplies available to continental markets are:
(1) Volume available from border gas contracts
(pipe and LNG)
(2) Gas from large storage systems (mainly
held as strategic stock)
(3) Gas from UK market via Zeebrugge
UK MARKET STRUCTURE
The UK has historically had very limited storage
of natural gas with around 3% of annual demand compared to 15-20%
in markets like France and Germany. This low storage level used
to be supported by a gas production network that had spare capacity
to turn up in times of high demand. As UK production has declined
the occupacity of UK gas fields has increased, which now have
to run at maximum rates for most winter months. The lack of UK
storage capacity is supplemented by import systems. A key issue
for the UK is whether there will be sufficient gas available to
fill the import systems at times of need.
Supplies available to the UK market are:
(1) Volume available from beach supplies
(UK and Norway)
(2) Gas from relatively small storage systems
(3) Gas from continental market via Zeebrugge
(if available)
(4) LNG supplies via Isle of Grain
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