Select Committee on European Union Fourteenth Report


What happens if the european energy market fails to liberalise fully?

62. At an early stage in this inquiry, we were struck by the potential tension[54] between Member States that had fully liberalised their energy markets and those that had not.

63. We asked what problems would arise for the United Kingdom's security of supply if Europe failed to liberalise fully, and what would be a possible strategy to ensure that the United Kingdom's security of gas supply would be maintained in such an event?

64. One witness[55] pointed out that a delay in completing the liberalisation of the European energy market would have the following consequences: a liquid pan-European wholesale market would fail to emerge; the lack of competition would result in an inefficient allocation of resources and inefficient price signals; and illiquid gas markets in mainland Europe might compound some of the other security of supply risks facing the United Kingdom. Such risks include sudden interruption of supply shocks; reliance on mainland networks and interconnector capacity; and the relative unattractiveness of the United Kingdom regime to gas producers.

Gas storage

65. The United Kingdom has relatively little indigenous storage that could act as "insurance" against a potential supply shock. The United Kingdom now has overall storage levels equivalent to less than 4 per cent of annual consumption, in comparison with other Member States such as Germany and France that have levels of 25 per cent and 22 per cent respectively.[56] As the United Kingdom becomes increasingly dependent on imported supplies of gas so its vulnerability to temporary interruption will increase. Consequently, we see a case as a matter of public policy for explicitly requiring suppliers to the United Kingdom market to make appropriate "insurance" arrangements, whether in the form of increased United Kingdom domestic storage, or by contracting storage operators in continental Europe. Such a requirement would undoubtedly incur additional costs. However, in the event of a supply shock, every affected Member State can be expected to wish to protect its local customers. This implies a risk that contracted and short-term flows to the United Kingdom via mainland Europe might be compromised. This risk argues in favour of increasing the level of United Kingdom domestic storage or, at least, of ensuring that contracts with mainland storage operators are enforceable under such circumstances.

We recommend that there should be a mandatory storage capacity obligation on companies supplying gas to United Kingdom customers.

Short to medium term threat to United Kingdom gas supplies

66. The same witness revealed that stocks had been tight during the winter of 2000/01 and even tighter during the winter of 2001/02[57]. He attributed this to the declining reliability of the United Kingdom offshore fields and the limitations imposed by the interconnector at Zeebrugge[58]. Increased compression at Zeebrugge will only come on line in 2005 at the earliest. The reliability of the offshore fields may be affected by the propensity of producers in a fully liberalised market to export to the maximum from these fields during the summer months in order to benefit from higher prices in continental Europe. There appears to be a potentially serious threat to United Kingdom gas supplies in the short to medium term, apart from concern about longer term dependency. When we consulted the Regulator, he said that he was not aware of such a threat to supplies at any time during this period; it was the Regulator's duty to ensure security of supply to the domestic gas market.

We recommend that, as a matter of urgency, the Government examine whether gas stocks are as tight as suggested by some of the evidence and report its findings to Parliament.

67. Whatever happens in Europe, the United Kingdom's future security of gas supplies will directly depend on the flexibility and resilience of the pan-European gas network. This growing dependence suggests that the United Kingdom should work for the establishment of pan-European security standards for network resilience and flexibility. European transmission companies currently adopt reasonable, if differing, security criteria. We applaud the initiatives of the European Commission in promoting the European Gas Standards Industry Board.

We recommend that the Government use its influence to bring about the establishment of inter-governmental agreements to ensure that there are common infrastructure standards.

Free market and long-term contracts

68. One argument raised in the press has been the alleged unwillingness of major gas suppliers to supply the United Kingdom market without the guarantee of long-term contracts. While we accept that long-term contracts have a part to play in the supply of gas, they introduce rigidities into the market and thus reduce the real security that the market can provide.

69. The argument also runs that long-term contracts are needed to provide comfort to financial institutions that fund the expensive infrastructure including interconnectors between Member States. Indeed, it is reported that the Commission concedes that infrastructure investments are usually underpinned by long-term take-or-pay contracts. But the Commission maintains that these should be flexible and reflect changing market conditions. In this context, gas release programmes could help to build a liquid market on the back on long-term contracts provided that the regulatory regime guaranteed transparency in both the long-term contracts and the gas released for trading.

70. Producers and suppliers are unlikely to be willing to assume the commercial risk of contracting long-term supplies into the United Kingdom unless there is reasonable predictability, as there currently is in other European Union countries, over the long-term availability of adequate entry capacity into the National Transmission System (NTS) and its price.

71. It appears, however, that the Regulator has recognised this need. On 19 December 2001 Ofgem published its final proposals[59] to provide the NTS operator with incentives to invest in entry capacity in response to changes in demand. These proposals, which have now been accepted by Transco, are to run from 2002 - 2007. The proposals enable the operator to earn additional revenue through efficient investment in infrastructure. The proposals also effectively link the off-shore producers to the NTS operator for purposes of infrastructure investment so that necessary investment is made at the right time, in the right place. The new regime allows Transco to auction long-term rights to NTS entry capacity. These auctions are planned to begin in August 2002. As well as contributing to achieving long-term security of supply, the incentives regime will also serve to address problems of the past where constraints occurred on the network as a result of too much gas being landed and too little capacity being available to transport it.


72. We have already drawn attention to the need for diversity as a means of managing risk. Currently, the United Kingdom has two major gas terminals at St Fergus and Bacton. Left to market forces, it is quite likely that importers would choose simply to build another terminal alongside the existing one at Bacton to add to the volume of gas coming into the country. This would not serve the national energy security interest because it would concentrate gas at one point of entry. An alternative or additional measure would be to encourage investment in LNG but this is essentially a commercial decision.

We recommend, therefore, that the Government look closely to determine what means it has to ensure that new terminals are so sited as to increase the diversity and flexibility of the infrastructure.

Preserving the nuclear option

73. The United Kingdom's nuclear power stations are ageing, and unless a programme of building is started, will go progressively out of service in the years up to 2025. The effect will be to increase the United Kingdom's dependence on gas generation of electricity from the current 40 per cent to around 60 per cent in 2010 and 80 per cent by 2025, the balance being provided by coal and renewables.

74. This progression is unavoidable without nuclear power generation: evidence presented to us still makes it clear that renewable sources will not make a sufficient contribution in the period we are considering. In our earlier Report Electricity from Renewables[60] we acknowledged that both European Union and United Kingdom national targets were technically feasible. In Paragraph 2 of the Summary of Recommendations of that Report, however, we did not think that the United Kingdom's targets would be achieved under the policies obtaining at that time. We remain sceptical about the United Kingdom's ability to meet these targets (see paragraphs 43-47). Coal generation has greater potential for expansion but presents environmental problems: even with clean coal technology a major expansion in coal generation would threaten the Kyoto targets.

75. Security of supply—and stable prices—depend on diversity, and without nuclear power that diversity will not be available to the United Kingdom. The preservation of nuclear power generating capacity cannot be left to the private sector alone. There are four substantial barriers to progress, none of which can be surmounted without Government action.

76. The first is the apparent inability of the United Kingdom to decide how to deal with nuclear waste, highlighted in the report by the Select Committee on Science and Technology under the chairmanship of Lord Oxburgh.[61] As the Report observes, the United Kingdom has to deal somehow with nuclear waste being produced by our existing nuclear power stations and also with waste produced by the military sector and the medical sector, so a solution has to be found. The problem is not going to go away, and other countries with nuclear industries are finding solutions.

77. The second barrier is the difficulty of getting planning consents. We await the results of the Green Paper[62] on streamlining planning procedures but the difficulties facing the nuclear industry mean that it needs more than procedural help. This is something that the Government will have to look at carefully. New sites need not be found, because modern nuclear power stations now require much less space for the same output capacity, but the Government would need to agree that sites could be redeveloped.

78. The third barrier is cost. We challenged British Nuclear Fuels Ltd (BNFL) on this issue. BNFL submitted supplementary evidence[63] that sought to demonstrate that even including the cost of dealing with nuclear waste, the electricity generating costs for an AP-1000 nuclear reactor would produce a levelised cost of 2.2 to 3.0 p/kWh.[64] While we were not able to contest BNFL's estimates, if these figures truly reflect all costs involved, including those pertaining to the managing of nuclear waste and decommissioning, then the general perception that only governments can afford the cost of building new nuclear generating plant would prove to be unfounded.[65] But this proposition remains to be examined .[66]

79. The fourth barrier is the perception among much of the general public that nuclear power is dangerous and the world would be a better place without it[67]. Dealing effectively with the problem of nuclear waste disposal would contribute greatly to overcoming public resistance. We see a certain inconsistency in opposing nuclear power generation as such in the United Kingdom when we already benefit from power generated by nuclear fission outside the country—for example, we import electricity from France that is certain to have been generated in this way. And the fact that French nuclear installations are so sited that many neighbouring Member States would be as much, if not more, affected by any leak of radioactive material from a French nuclear installation as France itself, makes a nonsense of policies which call for nuclear-free zones in individual Member States. French nuclear plants are on average only fifteen years old,[68] so nuclear power is here to stay for the foreseeable future in Europe[69] as well as being well established in North America. Its vital role in providing security of supply will also need spelling out. A government wanting to preserve nuclear power will need to be publicly committed to its future.

We recommend that Government should maintain the United Kingdom's present ability to produce no less than 20 per cent of United Kingdom electricity demand from nuclear power generation, and proceed as a matter of urgency to agree a method of dealing with nuclear waste and an appropriate planning policy for new nuclear power stations on existing sites.

80. The Committee considers that the Commission's Green Paper raises important questions to which the attention of the House should be drawn, and makes this Report to the House for debate.

54   Evidence from Professor Nigel Lucas-Q 602 Back

55   Supplementary evidence from the Lattice Group-pages 192-194 Back

56   Ibid Back

57   Addendum to the Supplementary evidence from the Lattice Group-Page195 Back

58   The interconnector is governed by a bilateral treaty between the United Kingdom and Belgium. Back

59   "Transco's National Transmission System Operator Incentives 2002-2007: Final Proposals Back

60   12th Report, Session 1998-99, (HL Paper 78-1&2) Back

61   Managing Radioactive Waste: the Government's consultation, 1st Report, Session 2001-02 (HL Paper 36) Back

62   Planning Green Paper: Planning: Delivering a Fundamental Change- Back

63   Supplementary Memorandum by BNFL-pages 226-228 Back

64   Evidence from BNFL-Q 783-799 Back

65   Evidence from BNFL-Q 793-796 Back

66   See the evidence from M. Rene Pellat, Haut Commissaire a l'Energie Atomique-pages 125-131 and Evidence from Commissioner De Palacio-Q 613 Back

67   Evidence from Greenpeace-Mr Mark Johnston-Q 567 Back

68   Evidence from French Ministry of Industry, Economics and Finance-Q 475 Back

69   Evidence from EDF-Q 490 Back

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