Supplementary evidence from INEOS ChlorVinyls
INTRODUCTION
Further to the oral evidence session on Tuesday
17 June 2008 (Mr Alistair Buchanan and Mr Andrew Wright of OFGEM)
there are a number of points of clarification and factual corrections
that we would like the Committee to be aware of.
We have structured these into sections that
do not follow the same order as the actual evidence session. Where
appropriate we have provided supporting data and/or links to sources
of public information.
We will, separately, provide comments directly
to OFGEM.
SHORT TERM
VERSUS LONG
TERM TRADING
(Q560)
We are surprised at the remark that industrial
users "seek to trade short term".
We (and we are aware that this is the case for
other industrial consumers) have consistently argued that we need
to have the ability to contract for our energy supplies on a forward
basis at competitive prices. We have made this point clearly,
we believe, to previous Select Committee Inquiries as well as
more generally.
The very harsh reality is that we are (again)
forced to a position where we no longer have a choice. Purchasing
forward contracts is simply not an option as prices are unaffordable.
For the avoidance of doubt, we have presented
again in Appendix 1, wholesale price comparisons for key energy
markets.
MOVING PRODUCTION
AND UK/GERMANY
PRICE COMPARISONS
(Q564)
The answer to this question included a comment
that there was the "the inference [INEOS Chlor] could
pack up Runcorn".
We refer back to our own oral evidence. We actually
highlighted that the longer the current situation of high energy
prices persists, the more we will be driven to put our investments
into Continental plants. Our business does need to continually
re-invest to maintain our assets and we always have to consider
where is the best place to do this.
Ofgem also suggested that once other factors
(such as the cost of carbon and transportation) are taken into
account, the UK actually is no more expensive than for example
Germany.
We can only comment specifically on the situation
facing Energy Intensive Users such as ourselves. For these end
users, "other factors" are actually lower in Germany
than they would be for comparable plants in the UK. Taking the
points raised by Ofgem in turn:
— It is beyond doubt that the cost
of carbon is being passed across all European Power markets largely
irrespective of the actual carbon intensity of generation in the
market. For example the Norwegian power market—which is
almost entirely hydro and nuclear (carbon free)—still has
an-uplift because of the price of carbon as the markets are physically
connected to others in Europe. We believe that the uplift from
inclusion of CO2 costs between the UK and German power markets
is actually very similar.
— For "other factors" we
share with the Committee publicly available information on the
cost of Extra High Voltage (grid) electricity connections in Germany
and the UK, and the add-ons faced by Energy Intensive Industry
in both countries for renewable generation. These confirm that
in Germany for very large users such as ourselves "other
factors" are SIGNIFICANTLY LOWER than corresponding charges
in the UK. We have shown a more detailed comparison in Appendix
2.
LNG
There are two key points that we would like
to clarify.
Q543. It was stated that 63 out of 64 delivery
slots were used. This was quite clearly not the case, with Isle
of Grain being idle for much of the this year and importantly
last winter. We understand there were three cargoes delivered
through the Isle of Grain terminal in Quarter 1 2008. The terminal
has delivery slots scheduled approximately every seven days, indicating
a utililisation of less than 25% of capacity.
Q546. With reference to imports of LNG to
the United States, it was stated that they "are taking none".
We have made further enquiries and would like to stress that cargoes
have continued to arrive in the US through the winter despite
price levels being much lower than in the European or Asian markets.
The latest official data can be found in the
link below (Energy Information Administration). It shows steady
volumes arriving from Trinidad.
http://tonto.eia.doe.gov/dnav/ng/ng_move_impc_s1_m.htm
GAS IMPORT
CAPACITY (Q541)
Reference was made to new pipelines and LNG
import capacity—around 100 to 120 MCM/day.
We would like to stress, again, that new capacity
does not (and demonstrably has not) guaranteed new supply. Unless
this new capacity actually has firm supply agreements behind it
(as appears to be the case in many other markets) then the UK
will remain exposed to high and volatile prices.
INFORMATION TRANSPARENCY
(Q578)
It was stated that storage information is not
available in Germany.
While information provision is not as good in
Germany as it is in the UK, German stock data is published weekly
and can be found at:
http://transparency.gie.eu.com/
Although we believe better information is a
positive step, it is clear that on its own it will not change
the situation we face in the UK.
APPENDIX 1
WHOLESALE GAS AND ELECTRICITY PRICES
APPENDIX 2
COMPARISON OF "OTHER FACTORS" ADDING
TO THE COSTS OF WHOLESALE ELECTRICITY TO ENERGY INTENSIVE USERS
IN GERMANY AND THE UK
Our comparison is (by nature of common experience)
between large directly connected sites (that means connected to
the National Grid directly at very high voltage and not through
a local distribution company) in the UK and Germany. In both cases
the sites are purchasing wholesale power through a supplier, and
delivering it to the site. The site is a high load factor industrial
user with a normal demand of 50MW consuming 400 GWh per year.
Treatment of losses has been ignored for simplicity.
CHARGES IN
GERMANY
Grid and connection charges
We assume the user is connected to Eon NET (as
is our sister site in Germany). The published connection tariffs
for the site are:
— a unit charge of 0.06c/kWh; and
— a capacity charge of €27.39/kWa;
for the example above this gives rise to an annual
unit charge of €240,000 and an annual capacity charge of
€1,369,500—a total annual connection charge of €1,609,500—equivalent
to €4/MWh.
Other charges
Supplier charges in addition to the wholesale
price are very low. Our experience suggests these are in the range
€0.05-€0.15/MWh. The most significant other charge in
Germany is the Renewables charge.
Businesses in Germany are obliged to buy a proportion
of their energy as Renewable Energy at a higher price than the
normal rate. For a non Energy Intensive business, the obligation
would be to purchase an average of 18.34% of electricity consumption
at an average price of €118.8/MWh. For Energy Intensive users,
German law caps the amount at a value of €0.5 million per
year. The actual additional cost of this is estimated to be €0.25
million per year,[278]
or €0.63/MWh for our 50MW site.
CHARGES IN
UK
Grid and connection charges
The charging regime is slightly different in
the UK. The "capacity" charge is paid for in a fee commonly
known as "Triad" charges. Unit charges would be more
commonly recognised as "BSUoS" charges, which vary by
half hour.
— In the North Wales and Mersey region
of England connection charges are £15.46/kW for 2008-09.
— The forecast rate for 2008-09 for
BSUoS is £1.24/MWh (see
http://www.nationalgrid.com/NR/rdonlyres/11BE6CED-FD6B-49FF-BF90-F1FB69C14F1B/26463/01_Op_Perf_OpsForumJun08.pdf)
Therefore for our 50MW site, the annual unit
charge (BSUoS) charge is £496,000 and the annual (triad)
charge is £773,000—a total annual connection charge
of £1,269,000—equivalent to £3.17/MWh.
Other charges
As in Germany, the largest "other"
single element is payment for renewables. For 2008-09, UK electricity
suppliers are obliged to buy Renewables Obligation Certificates
for 9.1% of their supplies, or alternatively pay the buy-out price
of £35.76/MWh (recently published by OFGEM). Irrespective
of the way suppliers meet this obligation, our experience is that
they charge the impact of the buy-out obligation, averaged over
the whole supply. This means that £35.76 on 9.1% of the supply
is equivalent to £3.25/MWh charged on 100%.
SUMMARY OF
"OTHER FACTORS"
In Germany, an Energy Intensive User connected
directly to the grid would face costs of less than €5/MWh
for delivered electricity in addition to the wholesale price.
In the UK a similar site would face costs of
over £6/MWh for the same elements.
11 July 2008
278 The €0.5 million payment delivers approximately
€0.25 million of electricity-hence the true cost is actually
half of the obligation. Back
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