Supplementary evidence from the Energy
Intensive Users Group
1. The comments below and attached charts
should be read in conjunction with the written memorandum from
the EIUG submitted in April 2008.
2. UK energy prices have risen significantly
in the last three months, largely in response to the worldwide
increase in the price of oil and coal. However, the differential
between UK and European gas and electricity prices has also increased,
and hence also the level of competitive disadvantage faced by
UK industrial energy users. As of July 2008, UK gas prices are
around 16% above those in continental Europe and UK electricity
prices are around 38% higher than those in Germany on a year-ahead
basis.
3. The level of competitive disadvantage
in gas is greatest during the winter periods, and in percentage
terms has now reached levels comparable with those experienced
during the problematic winter of 2005-06. Forward market data
for the next two years shows this is not a transient phenomenon
(see charts 1 & 2 appended to this memorandum).
4. It was suggested in oral evidence from
Ofgem that forward gas prices should not be of great concern to
large industrial users since a relatively large proportion of
their gas is bought under indexed contracts, typically linked
to day-ahead or month-ahead prices, and hence they are relatively
unexposed to market prices a year or more ahead. As we stated
in our original evidence, it is the fact that forward prices are
persistently uncompetitive that has left large industrial users
with little option but to purchase much of their gas in this comparatively
risky way. The Committee should be aware that this form of purchasing
is not an option for all large users, and is much less prevalent
in electricity supply (where the competitive disadvantage for
large consumer is currently even greater than it is for gas).
5. We question whether high global LNG prices
are an adequate explanation for the current high level of UK gas
prices. The US is at least as dependent on LNG imports as the
UK, yet US forward market prices are substantially below those
in the UK (see Chart 1). LNG continues to be delivered to the
US—yet little if any is coming to the UK. We remain concerned
to understand why UK suppliers do not appear able to deliver to
the UK market in a similar manner and at similar prices to the
US. In particular, we believe that Third Party Access arrangements
at Isle of Grain require independent investigation.
APPENDIX
ENERGY PRICE CHARTS
Chart 1
Chart 2
10 July 2008
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