Examination of Witnesses (Questions 760-779)
MR SAM
LAIDLAW, MR
IAN MARCHANT
AND MR
RUPERT STEELE
24 JUNE 2008
Q760 Mr Hoyle: We are getting to
where I wanted to be now.
Mr Laidlaw: It is a different—
Q761 Mr Hoyle: Hang on, Mr Marchant
is answering this, Mr Laidlaw. We will come back to what your
disadvantages and advantages are.
Mr Marchant: In the gas business
we do not have the hedge that you would expect to see of better
profits out of an upstream business. We are a pure retailer.
Q762 Mr Hoyle: So you are more exposed?
Mr Marchant: On gas we are more
exposed.
Mr Laidlaw: On power we are more
exposed. We do not have the structural hedge on power. It is a
competitive market; we start with different asset positions; some
have more cover on power; some have some cover on gas but, as
I said before, the percentage cover we have on gas is very small.
Q763 Mr Hoyle: What were your total
profits this year?
Mr Laidlaw: Last year?
Q764 Mr Hoyle: Latest recorded profits?
Mr Laidlaw: Latest recorded profits
for the group worldwide after tax were £1.2 billion.
Q765 Mr Hoyle: 1.2 billion?
Mr Laidlaw: After tax.
Q766 Mr Hoyle: After tax, okay. Right.
The other argument is that, quite rightly, people believe that
the UK is becoming a gas lender of last resort to Europe. I wonder
outside European liberalisation what can Ofgem do—and we
talk about Ofgem as the "toothless tiger"—to reduce
the wholesale price volatility? Is it possible or is it not?
Mr Marchant: It is very difficult
for anyone within the UK environment, regulator or company, to
influence effectively what is a global market. I do not think
it is fair to characterise the UK as a gas lender of last resort.
We will have to import around 20% of our gas requirements this
year from somewhere. In the summer we tend to be marginal exporters
and in the winter we tend to be heavier importers. The reality
is the way the UK plays. It is where the global market volatility
tends to play out most because we have effectively three sources
of gas: we have Continental Shelf gas, we have Norwegian gas and
we have LNG. It is one of the very few markets where these three
sources can play out a gas price which then tends to echo around
the world and then back. Coming back to the very specific question
about what Ofgem can do apart from focus on Europe, which is absolutely
fundamental, I think there is one thing they could do which is
about making sure that it is easy for gas storage facilities to
be built. I am thinking particularly about access arrangements
to the gas grids where the regime is very, very complicated and
it is based upon an auctioning regime. I think that they could
help gas storage facilities be built in the UK. Gas storage is
naturally a dampener on volatility wherever it is built.
Q767 Mr Hoyle: Last year—and
tell me if I have got it wrong—the figure we got was that
it went as low as 13 pence per therm and then went right up to
60 pence per therm as we got near winter as demand went up. The
argument we keep having and you keep claiming about what investment
you have put in, about LNG facilities, wonderful, marvellous,
but that is about getting gas in so you can sell it, but why is
it you are not investing on the part that will keep the prices
down and take the volatility out (and that is what the Germans
concentrated on) which is storage? That is where you are failing
the customers.
Mr Marchant: We are investing.
Q768 Mr Hoyle: How many days can
you store for?
Mr Marchant: You asked whether
we were investing. We are investing in Aldbrough which is the
biggest storage facility being constructed in the UK at the moment—
Q769 Mr Hoyle: At the moment.
Mr Marchant: —So we are
investing.
Q770 Mr Hoyle: Okay, you are investing
at the moment but it has taken you years to come to it. How many
days of storage after this wonderful investment has taken place
will you have?
Mr Marchant: You can define storage
in a number of different ways.
Q771 Mr Hoyle: However you want to
define it.
Mr Marchant: If you take average
UK demand versus storage we have currently got 18 days in the
UK. That will go up by another 31 when all the facilities we expect
to get built—
Q772 Mr Hoyle: What timescale is
that?
Mr Marchant: That is within the
next five years
Q773 Mr Hoyle: After all that wonderful
investment do you not still think you are failing your customers
when we talk about France at 122 days or Germany at 90 days? We
are exporting cheap gas in summer; they store it for the winter;
and what we do is buy at the spike and rip our customers off.
Mr Marchant: Absolutely that is
not the case. I believe that the UK has had the most flexible
gas market—
Q774 Mr Hoyle: Had?
Mr Marchant: That is on the decline.
However, we will still have flexible fields producing for many
years. The market has responded by delivering new gas storage
facilities as fast as both regulation and physics allow. It takes
some time to develop gas storage facilities, up to five years,
because basically creating salt cabins takes time to dissolve
things.
Q775 Mr Hoyle: Absolutely no argument
with you—it takes time, but you have had time. Why is it
that France has got 122 days, Germany has got 90 days—
Mr Marchant: They did not have
the North Sea.
Q776 Mr Hoyle: It did not have the
North Sea, so therefore we should have been in a better position
to see what was happening.
Mr Laidlaw: If I may come in here
just to build on Mr Marchant's point. In looking at number of
days' storage and making those comparisons we have just been making,
the flexibility that currently exists in the North Sea fields
has been excluded. What has historically happened is that a number
of fields have been operated at low production in the summer and
high production in the winter. That is not included in that storage
definition. That has historically provided the cushion. As those
fields are decommissioned and dismantled in the next few years
then there will be clearly an increasing need for storage. Like
Scottish and Southern, Centrica is very much involved in moving
forward new storage projects. One of our big challenges has been
the planning applications for those projects; and we are delighted
to see the progress that the Government is making on the planning
bill. I think that is very important if we are actually going
to get new storage facilities built.
Q777 Mr Hoyle: Okay, so we can match
Germany in France in, what, eight years?
Mr Marchant: I am not sure that
is the right thing to do. We could significantly overbuild storage
if we mandate it. You need to get the right level of storage.
Storage is not a cheap option. It costs significant sums of capital
to develop these things. The fact is, you need a flexible gas
system which would have a range of different storage facilities
and a range of different import facilities, and a range of different
contractual support for it.
Q778 Chairman: We will have a chance
to revisit this issue with the next set of witnesses. There is
a concern about inadequate gas storage, and there is a concern
about the adequacy of the forward gas market. That is what we
take from this session?
Mr Marchant: The thing which causes
me most concern is the inability to contract long-term for gas
molecules, whether I am going to put them in the storage in the
summer and bring them out in the winter, or float them throughout
the year. Up to three or four years is fine—beyond that
the market is very, very illiquid.
Q779 Mr Weir: Moving on to the liquidity
of the electricity market, we have heard a lot from the smaller
suppliers who say there is a lack of liquidity within the market
and that dulls the price signal for investors. What are your comments
on that? Do you agree there is a lack of liquidity in the electricity
market?
Mr Laidlaw: Our experience would
be that there is less liquidity than there is in the gas market
but, nevertheless, for up to two years out there is reasonable
liquidity. It is not obvious to me that actually a process of
releases and mandated sales would help here, because we would
be in the situation of selling out but having to buy back; and
buying back might actually increase the cost to our customers.
Mr Marchant: We have tried to
get some data on the volume of trading in the electricity market
versus annual demand, and we think it trades around between four
and eight times—there are different data sources. Four times
the UK's annual demand is trade—whereas gas it is ten to
15. Clearly the gas market is more liquid; there is more trading
going on; but it is still four to eight. For our own company,
to give you a flavour, last year we generated around 45 terawatt
hours but we traded over 200. You can see we are active in the
market, balancing our position and trading our position in short,
medium and long-term markets. The other thing is, you say: is
there a barrier to new entry in generation; of the four gas projects
that started last year, two of them have non-Big 6 participants.
One, Caron Energy is being done completely by a new entrant; and
Marchwood is a project we are involved in where 50% is owned by
ESB the Irish utility. New entrant is still happening in generation.
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