Energy Bill

Memorandum submitted by the Gas Forum (EN 42)

1 Introduction

1.1 The Gas Forum was established in 1994, acting as a body that represents the views of Gas Shippers and Suppliers active in the GB Market. The Forum now counts among its membership virtually every significant GB gas shipper and gas supplier. Its members are Centrica, BP, Total, Shell, E.ON, npower, EDF Energy, BG Group, Scottish Power, Statoil, Corona Energy, ExxonMobil and GDFSuez.

1.2 The Gas Forum promotes policy developments that support the continued development of the competitive energy market in the UK, building on the trading arrangements that exist today, in order to allow gas to take its rightful place as a fuel of choice in a low carbon economy.

2 Drafting comments

2.2 The Gas Forum’s comments are restricted to Part 2, Chapter 2 of the Bill concerning G as Supply.

2.3 The Gas Forum supports the market oriented approaches set out in the Energy Bill in preference to administrative solutions. Nevertheless, we would caution against placing too much reliance on market based financial incentives under all circumstances. After all any gas emergency, however improbable is, by definition an extraordinary event where normal assumption about efficient market operations may not apply.

2.4 In the event of a ‘rapid emergency’ such as an unplanned major terminal shutdown, it would dangerous to rely upon market participants responding to a market signal, as envisaged in the drafting.

2.5 A ‘rapid emergency’ will, most likely, lead to extreme market prices and subsequent illiquidity as participants attempt to minimise commercial exposure. The Gas Forum believes that this outcome would be detrimental to resolving the emergency and the market in the longer term. A combination of high prices and market illiquidity will not elicit the required physical response from the market and may lead to general market contraction as some participants are unable to service inappropriate and excessive "penalties".

2.6 The Gas Forum recommends that the following amendments are made to address these concerns.

Chapter 2: GAS SUPPLY

Power of the Gas and Electricity Markets Authority to direct a modification of the Uniform Network Code

…….


36C Power to direct a modification…….


(3) The Authority may give a direction under this section only if it considers that the modification will do either or both of the following-

(a) Decrease the likelihood of a Gas Supply Emergency occurring;

(b) Decrease the duration or severity of a Gas Supply Emergency which occurs.

and provided such a modification is not likely reduce the prospect for effective competition between gas shippers and gas suppliers once normal market arrangements have been resumed.

…….

(5) For the purposes of subsection (2), a modification is "market-based" if it relates to the creation of financial incentives for gas shippers or transporters applied in circumstance where such parties could reasonably be expected to respond to such incentives.

June 2011

Prepared 22nd June 2011