Further supplementary evidence submitted
by Ofgem
I enclose our supplementary memorandum to the
inquiry into energy prices.
As I mentioned last week to you I apologise
once again for the inaccurate figure cited in our oral evidence
and I won't hide behind the caveat I gave the Committee (in reply
to Q 545 of the transcript). The accurate figures are shown in
our follow-up memorandum to BEC.
There are two key points in our supplementary
memorandum which I think it is particularly important to reinforce.
The first is in regard to long-term contracts.
Energywatch claimed that 80% of gas entering
Britain comes from off-market long-term contracts. Energywatch
have now advised us that this figure is not correct. They have
revised that figure to 70%. Even this figure is, in our view,
inaccurate in that it is based on a report by Global Insight,
which dates from 2005 and is itself now out of date. Indeed I
believe that this admission from energywatch relating to the dubious
quality of their evidence will upset many observers.
Secondly as we observed in our oral submission
our assessment is that the GB wholesale gas market is the most
liquid in Europe by some distance. This is supported by information
from a range of sources, including the following:
— The current gas churn ratio
(the total level of gas trading divided by actual throughput)
is almost 11, meaning that, on average, each unit of gas is traded
11 times before delivery. This figure includes all reported trades
to National Grid and includes products for delivery within a few
months (known as the prompt) and those for delivery further in
advance (the forward market). By way of comparison, the Nordic
power market has a churn of 10.
— Figures from National Grid indicate
that 60 to 70% of total gas physically delivered is in fact visible
to the market, ie it is traded via the National Balancing Point
(NBP). This is up from just 20% in 2000.
— BP, Shell and ExxonMobil each
confirmed (as part of their evidence to the Committee) that around
60% of their gas is not reserved under long-term contracts but
is sold into the market. Indeed at Ofgem's Annual Open Meeting
(our AGM) last week Richard Guerrant confirmed that this figure
for ExxonMobil is nearer 70%.
Contracts are not one-sided and in my evidence
I spoke about the information provided to us with regard to the
Industrial and Commercial Purchasing Customers. The Major Energy
Users Council (MEUC) and Ineos Chlor have since confirmed to us
that many of the larger users do trade spot/short-term. At the
time of the last severe price increase I received a delegation
of large consumers, led by John Hall Associates, and they were
very clear that stock market considerations were key factors in
buying spot/short, as well as a perceived lack of contract choice.
The wholesale market for electricity is considerably
less liquid than that for gas. I will not repeat the comments
from our previous discussions but that I did acknowledge the "profound
illiquidity" in my oral submission. I would urge that the
historical context of this market be considered carefully in your
analysis. This is available in our written and oral submission.
26 June 2008
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