Examination of Witnesses (Questions 180
- 195)
MONDAY 16 JULY 2007
Ms Nicola Pitts, Mr Jake Ulrich, Mr Mark Akehurst,
Ms Florence Fouquet and M Bernard Brelle
Q180 Lord Geddes: Rather than
getting hooked on to this specific case, would genuine and, if
it can be done, total unbundling avoid the two situations which
you have instanced?
Mr Ulrich: I believe it would because the unbundled
investor, the infrastructure owner, would have the incentive to
increase revenues by increasing throughput where the supplier
may not have that same incentive.
Q181 Lord Geddes: I have the
feeling Gaz de France may have a slightly different opinion from
you.
M Brelle: Regarding this question of investment
and the way to avoid congestion, it is crucial for the development
of the market and it is also crucial for the overall security
of supply of the European market. There is a need for independence,
once again, of decisions for increasing and developing capacities,
but we do not see why ownership unbundling would be a better solution
for achieving this goal. Once again, we have at least the example
of GRT Gas in France which has considerably increased its investments
in order to create new entry capacities in the country and new
interconnection capacities within the country in the different
regions. This programme of investment has been decided in conjunction
with and controlled by the regulator, which allows this programme
and drives this investment programme for the reason that it is
deciding the tariffs. This model gives the proper incentives for
the operator to invest because it is reasonably paid for the investment
it makes.
Ms Fouquet: We can give you some figures. The
investments of GRT Gas have doubled in three years. They were
at €200 million in 2004 and they are now at €500 million
per year, so that is an important increase of investment. The
French regulator developed as well an innovative mechanism in
order to be able to organise the market before the launch of investment
because in gas when you have an investment, you need four or five
years to launch the investment. The French regulator developed
capacity release. It means that the integrated company is the
first which is interested in the investment because if you do
not invest you lose your capacity, so the regulator will take
your capacity and give it to new entrants. It is possible to organise
the market if there is a wish from the regulator when you are
an integrated company with capacity release. If you do not invest
and you are an integrated company, you will lose your right to
use the capacity. It is quite a strong mechanism but you can have
an incentive even with legal unbundling independent of the Regulatory
Framework. We presented this solution to the ERGEG working groups
and they said to us that only France did that, so it is up to
ERGEG to develop such systems in order to avoid congestion.
Mr Ulrich: It is a simple fact, and it may work
very well in France, but there is insufficient gas capacity from
Germany into Belgium, from the Netherlands into Belgium and there
is insufficient power capacity between Spain and France and between
Holland and Belgium. There are a number of cases where there has
been long-term structural congestion and this has not been alleviated.
Only last year there was an open season to start getting new gas
capacity, ten years after the interconnector was built, to try
to align more gas transit capacity across Belgium, the Netherlands
and Germany, so a very, very slow process where if driven slowly
by increasing throughput and increasing revenue would have happened
years ago.
Ms Pitts: I want to make the point that just
being a network company you are under an absolute incentive, where
there are opportunities to grow the network because of demand
you absolutely go for those because that is your income stream
for years to come. There is very much an incentive to invest and
invest the right amount. I think there is also another point around
having a Transmission system operator together in that relieving
congestion might be about configuring the system in a different
way so that there are system operation ways of doing it as well
as building new networks. Having that function together I think
adds a few more tools in the toolkit to be able to do that.
Lord Geddes: I think we have separated
unbundling fairly effectively, my Lord Chairman.
Chairman: May we move on now to the third
group on market concentration, Lord Haskel.
Q182 Lord Haskel: I agree,
we have certainly discussed unbundling and concentration, so I
wonder whether we could look at this from the point of view of
the consumer. Mr Ulrich mentioned the consumer, are there any
potential benefits in costs to consumers of further mergers or
de-mergers in the European energy sector?
Mr Ulrich: I think the merger takes place between
a national monopoly, like we had National Grid and Transco who
were not competing, and there is some room for synergies and cost
savings, that can help the consumer. You can also see it in a
very competitive market where two companies merge and, again,
are able to work more efficiently and pass those cost savings
on to consumers. Clearly there are cases where it does make sense.
There have been examples, for example the one where EDP and GDP
in Portugal were set to merge prior to the market opening and
that was blocked, where increase in market concentration may not
have helped the consumer. It depends on the progress within the
region as far as competition.
M Brelle: I think you cannot answer this question
in general but there are mergers that can bring value to the industry
and to the consumer. For each important merger you have the European
Commission which decides if the merger is possible and, if the
answer is yes, what remedies have to be brought to the market.
If I take the example of the possible merger between Gaz de France
and Suez, the idea of this merger is to create a really competitive
company able to bring competition both on the gas market and the
electricity market to all the European territory. By merging a
big gas company in France and a big electricity company in Belgium
this builds a European energy company able to compete with the
biggest companies in Europe and at the same time creates a company
which has the size and the strength which makes it able to discuss
with the producing countries and companies. We think this type
of merger can bring something to the consumer. In this case of
a possible merging between Gaz de France and Suez, the European
Commission has decided some remedies to avoid a market dominant
position and we observe that they have not decided any remedy
for the French market, which means that type of merger, in the
Commission's opinion, does not create any reduction of competition
in the French market.
Q183 Lord Haskel: How would
you decide where the consumer is better off? Would you decide
that the consumer is better off in Britain where energy prices
are, I think, cheaper, or better off in France where the situation
is as you have just described it?
M Brelle: I would not want to decide which country
is happier, in France or Great Britain or elsewhere. Frankly,
I do not know.
Q184 Lord Haskel: The matter
for the consumer is surely paramount because consumer demand leads
to innovation and innovation leads to development rather than
the other way round. Surely what we want to do is to stimulate
consumer demand and that will stimulate innovation in the business.
Mr Akehurst: Prices in the French market are
always difficult because you get the comparisons between the UK
and France with tax and without tax, depending on consumption.
We are slightly higher than the prices in the UK but still competitive.
There is also the question with the French which we mentioned
earlier which is the French market is in transition, so going
from a particular market structure to another market structure.
The competition process began much later and is ongoing and will
continue. The consumer's interests were defended in one way in
the previous structure and the regulator is looking after the
consumer's interests as the transition goes through.
Ms Fouquet: For the electricity in France there
were some problems with big industrial consumers because certain
of them consider now that there are higher prices for their electricity
than before, so it depends on energy, it depends on the type of
industry, on the consumers, and it is quite a difficult problem.
Q185 Lord Whitty: If I could
just approach this from a slightly different angle. In terms of
the UK market it is usually assumed, and I think the prices tend
to bear it out, that because there is some ability for the consumers
to switch, and Mr Ulrich mentioned this, and quite a lot of consumers
have taken advantage of that, that denotes a competitive market.
Actually the structure of the market is not that competitive,
there are relatively few large companies involved, and from all
you have been saying you seem relatively relaxed about more mergers
taking place. Whilst on a day-to-day basis the consumer has choice,
the structure of the market in a more classic approach to competition
is not that competitive and is becoming more concentrated across
Europe, do you see that in the long run that benefits consumers
or would you want to see more breaks? Clearly the Commission can
put conditions on mergers, and indeed block mergers, but the tendency
is towards mergers. Do you think that more breaks would be in
the interests of the consumer?
M Brelle: Maybe if we observe what is happening
on the French market now, we see a small number of medium-sized
companies, or big companies, which are competing for gas or electricity
and we also see some smaller companies which are acting with not
exactly the same approach, who are not active on the whole market
but more on the niche market, which are very innovative. What
I want to say is that at the same time you can have a limited
number of big companies big enough to ensure a large part of the
market and to ensure security of supply of the European market
and, besides, a number of smaller companies which are developing
a business, a profitable business, in competition with these big
companies because they are more innovative, maybe more efficient,
and they are developing a business. We see that in France, we
see new companies which are really developing an interesting business.
Q186 Lord Whitty: In relation
to the domestic consumer, most of those new businesses are, in
effect, brokers who deal with the larger providers. There are
some industrial users who have niche markets but you have still
got the dominance of the large companies. Would you be so relaxed
about the tendency towards mergers if the driver for the merger
were a non-European company, Gazprom for example?
Mr Ulrich: I was waiting for that! Look at the
UK, for instance, we have six major healthy competitors and it
is a very fierce environment. We are also in the Belgian market
with our friends at GdF, we are co-owners of SPE. I think we are
the second largest supplier in that market, and we have five per
cent market share as the second largest supplier. Is that a competitive
marketplace? I do not believe so. I do have a problem with a number
of large companies who are dominant in their own area and then
take small slices in other countries because that, to me, is not
competition. What we need to see are the large buyers mixing it
up in each of the Member States and in that way the consumer would
have a better deal. As far as non-EU, that is a very difficult
question. We have had no discussions with anyone outside the EU
regarding that. Again, if the regulator is strong and the rules
are enforced then it should not really matter if it is a non-EU
owner coming in.
Chairman: We will move now to security
of supply.
Q187 Lord St John of Bletso:
Thank you, my Lord Chairman. M Brelle, you spoke in your opening
remarks about the likelihood in the future that Europe will need
to import, I think, 80% of its energy needs from less stable regions
in the region, and certainly this highlighted the importance of
security of supply. We have also spoken about the ever-increasing
need for increased investment in the network infrastructure both
in electricity and gas. My first question is what are the major
barriers to investment? We read a very interesting paper submitted
to us by National Grid that, "we have the increasing difficulty
of obtaining planning permits, particularly for electricity".
The second is the so-called regulatory gap. Could I just put that
to the panel, talking here about the constructs rather than how
much has been invested.
Ms Pitts: Really a very, very big issue is the
whole area around planning and we are absolutely supportive of
the Government's proposals for reform and we see that as a very
large barrier to achieving both security of supply and tackling
climate change. For example, close to 75% of the generation projects
that want to connect by 2010 in the UK have not received planning
permission as yet. As you will probably all realise, building
pylons on anybody's land is probably more controversial than having
a wind farm, so we face a really big problem between consumer
desires for energy and actually delivering that through to the
end consumer. I would say that planning is a big issue. We are
also getting to the situation where we will be increasingly dependent
on gas-fired generation. We estimate that in the next ten years
about 55% of our generation will be gas-fired. Obviously that
brings a very strong impetus to try to make sure that the European
market is actually feeding us gas as much as possible and to ensure
that we are an extremely attractive location for LNG ships. There
are some big issues facing us and the one that Government and
public policy can do the most is tackling the issue of planning.
Mr Ulrich: I would concur that planning is clearly
at the top of our list. The other issue is around having an integrated
Single Market. The analogy I would use is if you are booking a
train ride from London to Edinburgh, you do not book three different
segments through three different agencies and then try to make
sure that the capacity is available. For us to book gas molecules
from Germany to the UK is physically very, very difficult, it
is extremely time-consuming, people have different open seasons,
there are different constraining issues as far as when capacity
will be built, different terms that have various degrees of overlap.
If the European energy system is going to perform efficiently
and more like the transit system it is then we do need to see
the Commission and the national regulators step up and give us
a single integrated system.
M Brelle: What are the obstacles for the necessary
investments in the network? The first one could be the lack of
long-term visibility to the operators of the regulatory regime.
If this long-term visibility is not available to the market participants
we probably would have insufficient investment in transit routes
or in interconnections between member States. Another factor probably
is insufficient co-operation and co-ordination between the Member
States and the national regulators. It is very clear that what
we observe is there are lots of difficulties for the national
regulators to agree on ways of developing new interconnections.
There is probably a need for European supervision of all of these
cross-border interconnection issues and also a need for better
harmonisation of technical rules in order to facilitate these
interconnections. The last point I would like to mention is that
we need appropriate tools to make long-term forecasts or long-term
assumptions regarding the needs for infrastructure. This is probably
not given by the existing regulatory framework today and the existing
environment.
Ms Pitts: Can I just add on that, the whole
issue of interconnection. Going forward potentially in a world
where we have much more wind-powered generation, greater interconnection
does afford us the opportunity to share generation on non-windy
days, so I think there will be much more interchange of electricity
between us and the Continent. It is also quite an efficient way
of doing it. It means overall across Europe probably we will not
have to build quite so much gas storage, quite so much generation,
because we are actually sharing the power and gas where we can.
I think it is quite an important thing for us going forward in
filling that regulatory gap.
Q188 Lord St John of Bletso:
Thank you. If I could now touch on the whole issue of the need
for a physically integrated EU transmission network. Clearly the
feeling is that this is fundamentally important to the efficient
operation of a Single European Market, however I think I heard
Mr Ulrich say that you did not feel this was essential in the
operation when it came to Centrica's operations, or did I hear
you wrong? Is this critical?
Mr Ulrich: No, we think it is essential.
Q189 Lord St John of Bletso:
It is essential?
Mr Ulrich: It is essential.
Q190 Lord St John of Bletso:
If I could possibly look to expand the question to the rest of
the panel.
Ms Pitts: Absolutely.
Q191 Lord St John of Bletso:
You all agree. If I could then go on to the whole issue of storage
capacity. Mr Ulrich, you mentioned that you felt there was a necessity
for unbundling of storage capacity and certainly here in the UK
we have low storage capacity in relation to the larger European
countries. Perhaps it is a question more for National Grid. What
measures do you think are being taken to improve the position
here in the UK?
Ms Pitts: One of the key blockers at the moment,
because there is a huge amount of storage projects which are being
proposed which could take us up to, say, 15 per cent of our national
demand, and we are at around four or five per cent at the moment
so that would be a massive increase, and I do not want to hark
back, is planning. A number of those storage projects have been
rejected already and without planning reforms I fear that a number
of the other projects will go the same way.
Mr Ulrich: On the Continent, the issue of access
to storage is controlled by incumbents and it is absolutely essential
that you have that flexibility if you are going to provide a service
to residential or heating load customers. There is very little
other way to provide that kind of flexibility. The ability to
get access to storage in a non-discriminatory manner is key. We
do have that in the UK. In Centrica Storage Limited we have a
wall between my group and Centrica Storage's group. Centrica Storage
is restrictive as to how much space we are allowed to take, the
rest of it is auctioned and transparent, so anyone can enter this
market and pick up storage capacity. We do not have that same
ability in many of the Member States. There may be auctions but
the incumbent already has a better, lower regulated tariff that
we are competing with with other players for a very small amount.
Again, this access is essential if we are going to see competition.
M Brelle: I fully agree that access to storage
is essential to allow competition in the final market. It is also
essential in order to ensure the public service obligations of
the suppliers and to ensure security of supply. We have to have
in place an environment that is favourable to investing in new
storage capacity which will be necessary throughout Europe. We
have to have rules which oblige storage operators to offer transparent
and non-discriminatory access to storage for all suppliers. In
France we have very clear rules granting access to storage to
any supplier who wants to supply domestic consumers or industrial
consumers. This is fully applied by the infrastructure branch
of GdF.
Q192 Lord Geddes: This is
a personal question. You were talking of planning consent and
you referred to pylons, but what is the multiplier cost of burying
cables rather than putting them on pylons?
Ms Pitts: It is about 20 times more expensive.
It is a few million to do a kilometre of pylons.
Lord Geddes: 20:1. Thank you.
Q193 Lord St John of Bletso:
I am just wrapping up the question because most of this debate
has been answered, but my final question is what are the security
of supply implications of progressing with market liberalisation?
Ms Pitts: I think it is a positive thing. Market
liberalisation is absolutely critical to get gas through, it is
critical to be able to share generation, so I see it as being
positive.
Mr Ulrich: Yes, very positive. More diversity
of supply, more players and more investment.
M Brelle: What we think we need for guaranteeing
security of supply in the long-term is, first, strong operators
which are able to guarantee this security of supply. Second, we
need long-term supply contracts and transmission contracts in
order to be able to guarantee these long-term supplies, taking
into account the fact that the producers want to be secure for
their investment and new capacity. Third, we need to keep Europe
attractive for the producers in order to be able to compete with
the other regions in the world which will compete for access to
resources, which means counterparts which are able to take, vis-a"-vis
the producing countries, the commitments they want to have from
their consumers.
Q194 Lord Whitty: In parallel
with this Committee I am also sitting on the Committee on the
legislation on climate change, which has been referred to in passing
as one of the main objectives of energy policy. The main instrument
at European level is obviously the Trading Scheme, there are also
commitments at both European and national levels to targets and
there are various interventions at the national level, in the
UK, for instance, we have the Renewables Obligation, to try and
reduce carbon or greenhouse gases as a whole. In the Centrica
evidence there was quite trenchant criticism, I felt, of the effect
of the European Trading Scheme at present in calling for reform
suggesting its outcome had not achieved huge environmental benefits
at the expense of consumers. What changes would you like to see
at the European level on the Trading Scheme? Are there other regulatory
interventions which would help meet the climate change objectives,
either at European or national level?
Mr Ulrich: To briefly reiterate the main point
of that, we do find it rather odd that those who pollute the most
are rewarded the most under the current Trading Scheme. With the
absence of auctioning it is very difficult to ascertain the value
of these carbon permits. By awarding free certificates to the
highest polluters and the price of carbon is already incorporated
in the electricity price, so we are covering both the cost of
generation and giving the free certificates, it is a windfall,
and I see the DTI number of £1 billion per annum even here
in the UK, so they are staggering numbers. The German and European
estimates are that it could be €6 billion to €8 billion
per annum for the four or five largest producers. We are talking
significant value that is not going to consumers but staying with
the generator. We think there are a number of things, the primary
one being that these have to be auctioned, that there is no room
for free allowances post-2012. The second thing is we do need
to see transparency and a long-term commitment to whatever scheme
or whatever trading system is put in place. The investments that
we make, Grid makes, Gaz de France makes, are long-term. A gas-fired
power plant is 20-plus years; pipelines 40-50 years; clean coal
plants a 30 or 40 year lifecycle. We are basing these on a carbon
pricing scheme that has not been finalised yet and it is a real
deterrent to investment in the UK power sector, especially in
areas of clean coal. Auctioning should be wider so it is not just
the energy and a few large industrials, we do move it into other
sectors. Controversially, transportation may or may not be a large
part of it but, again, there still need to be allowances across
the breadth of the system. The third one is more difficult, which
is how do we make it deeper and how do we get it down to the actual
household level. I am not advocating that we move the Trading
Scheme down to you or me but there need to be some efficiency
standards, like we have the new housing standards, applied standards.
There need to be ways in which we can help people make the right
decisions. All of these things are necessary if we are truly going
to see a change in the carbon footprint. My final point is the
focus does need to be on a reduction of carbon as opposed to an
increase in other things. It is great having renewables but I
think the target should be a reduction of carbon and we cannot
favour specific technologies but move forward with the most market
efficient solution.
Q195 Lord Whitty: I can see
the widening of the scope, tighter caps, auctioning of certificates
and so on, would lead to a more effective carbon price but probably
it would not lead to a stable carbon price, which is what you
also seek here in talking about long-term investment. It would
be an escalating carbon price probably if the trading system worked
over time because carbon would become more expensive and more
susceptible to trading. If the market were clearly signalling
a long-term escalation in the carbon price, do you think we need
anything else apart from the trading system as a regulatory intervention
or would the trading system, given all those rather politically
difficult changes, deliver on its own?
Ms Pitts: I would say, again, planning because
otherwise you just cannot build anything.
Mr Akehurst: The point we would stress is it
is vital that whatever scheme is put in place there are important
decisions to be made about the nature of the scheme. I would go
back to the point Mr Ulrich stressed on the importance of the
fact that for long-term investments you must give investors the
confidence over the long-term and if it is going to be a rising
price of carbon then it is a rising price of carbon, but something
that gives you that visibility so that as an investor you can
make a commitment. The concern would be, and obviously this is
particularly in power generation, if that does not happen then
we will not be getting the level of investment we want.
Mr Ulrich: The other issue is there are a lot
of schemes out there and if we had the correctly planned scheme
it would probably be adequate, but right now we have the Energy
Efficiency Committee and that goes into the carbon emission reduction
target sometime post-2011 and we have the Climate Change Levy
and the Climate Change Levy will be moving into the Carbon Reduction
Commitment for large users. So there are a number of different
schemes operating with slightly different rules and slightly different
standards, and the more we can harmonise and have a transparent
well-planned concept or scheme, the easier it is for everyone
to make planning or investment decisions.
Chairman: One final supplementary question
from Lord St John.
Lord St John of Bletso: I will not ask
the question, time is going on. I would have liked to have found
out more from the panel because clearly nuclear power has been
a major breakthrough for many years in the whole carbon emissions
issue. I would be interested to know the panel's view about the
proliferation of nuclear plants in the rest of Europe. It is too
big a question and that is why I simply flag it up as an issue.
Chairman: I think Lord St John's question
is slightly wide of the mark. Perhaps we could pursue it in our
Sub-Committee. Thank you very much indeed. We have trespassed
on your time but sincere thanks for a very, very helpful series
of answer to our questions. Thank you.
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