June 2006
Ofgem Primed To Turn Up Heat On Gas Suppliers
As gas prices soared way above levels on continental Europe last winter amid fears that we might even have a shortage, Alistair Buchanan, chief executive of energy regulator Ofgem, was left scratching his head in disbelief.
The big mystery was why were European energy companies not exporting gas through a pipe called the interconnector, which links Britain's gas network with the Continent's, to make a killing by selling at our higher prices.
"You're left looking at this saying, 'What is going on?' No other business given that opportunity would turn it down," said Mr Buchanan in a slightly exasperated tone.
"Each time we came up to looking at what was potentially happening over the interconnector we were just dumbfounded." So he asked executives at some of the European companies to help him understand why they were not pumping the gas through.
"They said, 'Oh you British, you're absolutely stupid. Didn't you understand that upgrading the pipeline to Zeebrugge isn't all you have to do?
"You then have to upgrade the pipeline within Belgium and within France to be able to carry the gas."
Not only was the answer far from complimentary, it was also untrue. Within a few weeks of the New Year the interconnector was flowing at almost double the level before Christmas. Pipelines don't get upgraded fast enough for that sort of turnaround. "In other words that story was complete bunkum," said Mr Buchanan. "[There are] just bizarre explanations as to what is happening within Europe." So had he been lied to? "I'm not saying that was done out of malevolence, maybe it was said with a genuine view," came the diplomatic reply.
Yet Mr Buchanan may have the last laugh as the EU's competition commissioner, Neelie Kroes, subsequently launched an anti-trust investigation into gas and electricity markets.
As part of the inquiry, dawn raids were carried out on the offices of a number of European energy giants, including RWE and E.On Ruhrgas of Germany, Gaz de France and Belgium's Fluxys. So which European companies told Mr Buchanan he was being stupid? Mr Buchanan declined to answer but said with a smile: "A lot of the companies are now working with the EU competition commission in their investigations."
Difficulties abound in understanding the European energy market
The terms of contracts between gas producers and energy suppliers are unknown but are suspected to restrict the amount that can be sold to other countries such as Britain, even for higher prices. Data on how much gas is stored by energy companies is rarely available.
But while Europe is a big issue it can't be blamed for all of the UK's energy problems. Britain has only enough capacity to store 4% of its annual needs compared with around 25% in both France and Germany. With more storage Britain could have been better prepared for the tight supply over the winter.
However, Mr Buchanan believes Britain's lack of storage is understandable. Germany, for example, has long been highly dependent on imported gas through two pipelines. Such dependence encouraged large storage facilities to be built in case of disruption of supply, whereas Britain was, until recently, a net gas exporter with a range of domestic sources in the North Sea that lessened the need for storage. As domestic supplies declined quicker than expected, Britain became a net importer.
By the winter of 2007-08 Britain is set to have lots more storage facilities, incoming pipelines and ports that can process liquefied natural gas. Even if the whole network does not run at full capacity, it is expected to meet the country's needs without the sharp price spikes seen last winter. However, only a little of the extra capacity is scheduled to be available this winter. Ofgem has already said that consumers could pay up to £3bn more for its energy this winter in what could potentially be another year of tight supply.
"I hope that will be the last tight winter we have for a very long time because of this huge infrastructure that is being built at the moment," said Mr Buchanan.
The high wholesale prices still being experienced in Britain have been used by the energy companies to justify steep rises in bills. Consumer groups have complained as energy companies make large profits, which they say are needed to finance big investments in infrastructure.
"We don't feel comfortable with rising prices given that our primary duty is entirely to the consumer," said Mr Buchanan, but he felt the companies were justified in making the rises given the huge spikes in wholesale prices.
He takes heart from the fact that the energy retail market is competitive as lots of customers switch suppliers when price increases are announced. After the rises of last September the number switching suppliers jumped dramatically within six weeks as people sought better deals. But there's a quid pro quo for the energy suppliers. Mr Buchanan may be prepared to tolerate rising bills now but when wholesale prices start to fall retail bills should not be far behind.
But as last winter's combination of high wholesale energy prices and limited supply of gas showed, even if Britain has an open energy market, things may not always run smoothly, something of which Mr Buchanan is all too aware. "We see getting Europe right as so important," he said.
If high gas prices are hurting your competitiveness or you require assistance to become more energy efficient, contact Nersi Salehi on 01788 538 150 for a no-obligation discussion.
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