Charles
Hendry: Does the Minister accept that the thinking driving
the amendments and the new clause is not problems of the past week or
so but the challenges of the future? If 80 per cent. of our gas is
going to be imported by 2020, that fundamentally changes the need for
gas storage in this country. The proposals are about driving forward
that necessary change, so it is wrong to tie them to the recent
challenges.
Joan
Ruddock: The hon. Gentleman makes his point but the
unprecedented weather and demand is extremely relevant. Did the market
prove effective in those circumstances? It did. He said that 80 per
cent. of our gas is predicted to be imported by 2020. The Government
are taking steps towards, and industry is responding well to, more
indigenous gas production. We cannot take that figure as absolute,
because more gas fields are being exploited and there is more reserve
than perhaps people anticipated. It may become more and more worth
while to get gas out of the sea.
We have seen
the market in action. National Grid issued four gas balancing
alerts—
Mr.
Binley: The Minister just said that we have seen the
market in action, yet she has not given us any indication of how much
more money we have to pay to maintain the supplies. She said that gas
storage is very expensive, but there was no understanding in that
statement of the difference between the cost of gas storage and the
amount that we might save if we were able to buy in the longer term.
Before making that statement, the Minister clearly had an understanding
of that difference. What is
it?
Joan
Ruddock: The hon. Gentleman would not expect me to have
those figures at my fingertips. I make the point again that to build
gas storage is enormously expensive. We are therefore both right to say
that, if the argument changes and gas storage becomes the best way
forward and the other things that I will address are considered to be
less effective, the comparison has to be made. I remind him that the
unprecedented demand that we have recently seen is a once-in-a-decade
demand.
There is therefore a major issue as to how much money should be invested
in gas storage to deal with an unusual situation where, as I will go on
to maintain, the market responded. It has been argued that people may
have paid more money, but that is not
certain. The
comparison needs to be made. I do not have the figures at my
fingertips, but our officials have looked into the issue and our
argument is that gas storage alone is not the answer to everything. It
will be part of the answer, but we will resist the new clause because
we do not think that it is the way
forward. Judy
Mallaber (Amber Valley) (Lab): I have lots of memories of
snow during my childhood. Would my hon. Friend care to note that, while
it may be unusual in this decade, I remember house supplies being cut
off on the Conservative party’s watch after it decided to close
down the
pits?
Joan
Ruddock: We are all very grateful to my hon. Friend for
that intervention. I am sure that Mr. Bayley does not wish
me to wax lyrical about the days of the three-day week, but many of us
will remember them and we do not wish to learn lessons from some
members of the
Committee.
Mr.
Binley: I must press the Minister further. I remind her of
the winter of discontent, but let us not go there.
[Interruption.]
The
Chairman: Order. I am not going to have a winter of
discontent. We are not debating the degree to which gas was the cause
of the three-day week, but whether this country needs to legislate for
more gas storage. The Minister was explaining her
case.
Mr.
Binley: May I press the Minister on the price issue? She
made a fair argument about the relationship between the cost of the
storage and the price of gas. In order to make that statement, the
Minister must have an idea of the relative prices. I understand that
she does not have them at her fingertips, but would she be kind
enough—she intimated that officials have done work on
this—to write to us with those figures? They are an important
factor in her
argument.
Joan
Ruddock: I am more than happy to do whatever I can to help
the hon. Gentleman. However, I ask him from a common-sense point of
view to realise that the proposal is for an obligation to build gas
storage, no matter what the price, for the whole year round, even in
years in which none of the events under discussion might ever occur.
Given that such events only rarely occur, that huge investment would be
dead money for most of the
year. 11.30
am
Mr.
Ellwood: Will the Minister give
way?
Joan
Ruddock: I will give way, but we might need to make a
little
progress.
Mr.
Ellwood: It was on a point of clarification. The new
clause does not say “build gas storage”, although some of
us would like eventually to wander down that route. It encourages the
Secretary of State to ensure that there is a minimum requirement. That
could still be achieved by gas companies owning a rig or a natural
refinery, or by venturing into other agreements with organisations to
ensure a guarantee of supply and avoiding the need to have gas storage
here in the UK. That is why it was written in this
way.
Joan
Ruddock: Perhaps the hon. Gentleman would like to invite
his Front-Bench spokesman to provide greater clarity on this
point.
Mr.
Ellwood: It is in the new
clause.
Joan
Ruddock: Yes, but I heard the speech as well. My
understanding, and I stand to be corrected and I would welcome an
intervention, is that we are talking about gas storage
facilities—
Mr.
Ellwood: It was drafted specifically in this
way
Joan
Ruddock: Let me seek clarification from the hon.
Gentleman’s Front-Bench spokesman. If we are talking about
market mechanisms we are talking about something quite different. We
have market mechanisms and it is very difficult to understand how one
would place an obligation on a company to enter into a market
mechanism.
Charles
Hendry: I hope I can provide that clarification. The new
clause talks about an amount of gas to be secured. I said in my opening
comments that that could be a company owning and running its own
storage facility. It could involve its contracting the storage out to
another organisation, or it could be done through long-term contractual
arrangements where those were seen to be sufficiently robust. There are
energy companies in this country that are looking to buy their own gas
fields internationally, so they know they will always have that
available and could use the existing pipeline structure to provide
that. That should be taken into account in handling. It is not purely
storage in the United Kingdom; it is allowing the Secretary of State to
say, “We want access to be provided by a number of
means”, but to be satisfied that they are in
place.
Joan
Ruddock: I am grateful to the hon. Gentleman for his
clarification. I think he weakens his case and makes the difficulties
for companies even greater. It would be extraordinarily difficult for
the Secretary of State to make such a requirement of companies, which
would then appear to be interfering entirely in commercial contractual
arrangements. That would be incredibly difficult. We have to deal with
the fact that it can be physical storage and look at that issue.
Perhaps the hon. Gentleman will reflect further on what he actually
means by suggesting that the Secretary of State could impose on
companies the need to enter into particular types of contract. Who
would police that? Who would decide whether their long-term contract
was sufficiently long term or secure, and so on? This is very difficult
territory. Let
me return to my overall argument about the nature of the existing
market and why we have confidence in that. I was about to say that
National Grid issued four gas balancing alerts earlier this month
signalling
that it needed the market to bring forward more gas in response to the
record demand. The market did exactly that. This serves to demonstrate
the robustness of the regulatory framework we already have in place,
within which the market delivers secure gas supplies. This includes
sharp financial incentives to ensure gas shippers provide sufficient
gas to meet customer demand; clear market information; and price
flexibility. The
current gas market arrangements have attracted unprecedented investment
in the UK gas import capacity over the last decade, leading to a
fivefold expansion. This is my first significant point, to which the
Opposition have not given sufficient weight. I know the hon. Member for
Wealden mentioned it, but we now have oversized import capacity that is
equivalent to 125 per cent. of the UK’s current gas
demand—about 100 billion cubic metres. That new capacity
includes the Langeled pipeline, the Tampen Link offshore pipeline
linking the UK and Norway, the Balgzand Bacton pipeline between the UK
and the Netherlands that has been built and upgraded, the
interconnector between the UK and Belgium that has also been upgraded,
the major new LNG facility at Milford Haven and the expansion of the
Isle of Grain LNG import
terminal. We
have not needed as much gas storage capacity as other EU member states.
In addition to our significant import capacity, we have had and
continue to have supply-level flexibility on our doorstep. The North
sea fields still meet some 50 per cent. of our gas demand on an average
winter’s day, and even during this period of high demand they
have produced about a third of the country’s
supply. We
do, however, recognise that as the indigenous gas supplies decline we
need to have robust arrangements in place to ensure continued energy
security. Part of our response is our commitment to diverse energy
supplies, by increasing our level of renewables, encouraging new
nuclear build and supporting the development of cleaner fossil fuels,
alongside our commitment to improving energy efficiency. Nevertheless,
gas will continue to be an integral part of our energy mix, and we are
taking steps to address the risks associated with falling UK
output. We
have taken action to maximise the remaining indigenous resources by
providing new tax allowances to support the development of particularly
challenging oil and gas fields, and by setting up a new taskforce to
explore the development options for gas infrastructure west of
Shetland. We have also encouraged more gas storage projects to come
forward. We reformed the planning regime, which is widely believed to
have been one of the most significant obstacles to new storage projects
being completed, or completed on time. In Budget 2009 we confirmed that
bought-in cushion gas was eligible for tax relief, and that should
benefit some storage projects. New projects are coming forward, such as
the Aldbrough facility in East Yorkshire, which started commercial
operation last summer. We also recently approved a project in the Irish
sea, which would add new capacity equal to approximately 30 per cent.
of current UK storage capacity. In total, there are 22 gas storage
projects at various stages of development in the UK, which, if they all
came forward, would provide sufficient storage capacity to meet some 20
per cent. of current demand by 2020.
The recent
cold weather has tested our capabilities to the limit, and those
capabilities have
responded.
Mr.
Binley: What does the 20 per cent. mean in terms of days
added to our existing 14 or 15 days’ storage? What are the
projection and the time
frame?
Joan
Ruddock: I am being offered advice, which I am trying to
understand. I will check, and give the hon. Gentleman a precise answer.
I think we both understand what 20 per cent. means—it is one
fifth—but I want to be sure about how we express it. There is
constant mention of number of days and, as I have tried to make clear,
if we simply took a number of days, it would mean that that was
equivalent to all the gas supply we could conceivably need. We do not
draw on storage to replace all gas supply but to contribute to it, so
the number of days can be expressed but the figure is not entirely
meaningful. The hon. Gentleman should therefore beware of asking for
information that does not add greater
clarity.
Mr.
Binley: It is relevant to the ability to purchase gas at
the best possible price.
Joan
Ruddock: On that point I have no dispute with the hon.
Gentleman—I agree with him. We expect a fourfold increase in our
gas storage capacity.
Judy
Mallaber: Is the point the hon. Gentleman is making, which
might give a wrong impression, similar to saying there is five
days’ supply of fresh milk in the shops? That might make people
think we were going to run out of fresh milk in five
days.
Joan
Ruddock: My hon. Friend is correct. There is a difference
between the understanding that we have in the Committee, and what the
person in the street might think if it was suggested that milk or gas
could run out.
Bill
Wiggin (Leominster) (Con): Oh no, a milk crisis as
well!
Joan
Ruddock: Yes, we are getting into very difficult
headlines.
I am trying
to make it clear to the Committee that the actions we have taken to
increase import capacity have delivered and the actions we have taken
to increase gas storage capacity are already having an impact. The
introduction of the kind of requirement envisaged by the new clause
would be very likely to have a detrimental impact on the flexibility of
the British market and to increase costs to consumers. That would
particularly be so if the new clause required a certain level of gas to
be secured, irrespective of costs or market conditions. That is why I
made the point to the hon. Member for Northampton, South that the
proposal prompts the question, would the obligation exist regardless of
the cost and the impact on the market and consumers?
Guaranteed
stores of gas would weaken the incentive for gas shippers to respond to
market signals. There would be less drive to reduce gas consumption
when demand was high and power generation switches from gas to other
fuels, such as coal. That facility is an
important strength of the British gas market, which other European gas
markets do not have, and it leads to lower gas prices
overall. If the powers
set out in the new clause were used to impose an obligation on gas
shippers, they would effectively require them to contract to hold a
certain amount of gas, which would have cost implications for consumers
of gas and electricity. For example, gas prices would have been higher
recently if market participants had not been able to take advantage of
competitively priced LNG, which has dropped in price recently due to
falls in world demand for gas. Those facts go to the heart of the
points made from the Opposition Front Bench and by the hon. Member for
Northampton, South. What are the implications? What are the effects on
prices? Which best advantages the customer? Frankly, the situation
cannot be predetermined. We have a sufficiently robust market that is
properly regulated, and which comes forward and meets our needs, as we
have recently seen.
The licensed
gas shippers already have a strong financial incentive to balance their
portfolios. There is a range of balancing tools on the supply side to
which they have access: imported flows by pipeline, LNG by tanker, and
storage. The shipper can purchase gas from the most economically
attractive source, enabling consumers to benefit from the lowest
prices. I
recognise that the new clause is only an enabling power. Even so, it
could create regulatory uncertainty in the market, which could reduce
investment in new infrastructure and increase costs to consumers,
either through taxes or higher gas prices. The Government take security
of both gas and electricity supplies very seriously. We keep the issue
under constant review, working closely with National Grid and Ofgem,
through its Project Discovery, and are committed to taking appropriate
action to maintain our current high levels of energy security. For
those reasons, I believe that the new clause is unnecessary and, worse,
that it could have an adverse impact on the security of our gas
supplies and the cost of gas to
consumers.
11.45
am
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