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Gas Industry Awards Lunch

Lord Truscott,  Former Parliamentary Under Secretary of State for Energy
Hilton Hotel, London,  08 May 2007

Mr President, Ladies, and Gentlemen: I am honoured to be invited here today by your two distinguished bodies [the Institution of Gas Engineers and Managers and the SBGI ] – the one now in its 144th year, the other its 103rd. The Board of Trade – of which the DTI is the successor body – also has a long and distinguished history. I am delighted, on behalf of one august body, to pay tribute to two others, and to the culture of excellence that we are here to celebrate.

This is a particularly auspicious time to do so. For this is a time of unprecedented challenge, and unprecedented change.

Two great challenges - climate change, and import-dependence

I make no apologies for beginning, not with the gas industry, but with climate change - one of the great issues now facing humanity. The Stern Report, published just 6 months, ago, has changed the intellectual climate, if not – yet – the meteorological one. There is, at last, a virtual consensus – apart from Channel 4! - that global warming and climate change are real; that they have been caused by human activity; and that we have to do something about it.

“Doing something about it” – that is, of course, the great challenge. And it is a challenge that is bound to have major impacts on energy policy, and on the energy supply industries. In company such as this I need scarcely mention the EU’s demanding new target for renewables – a 20% contribution to energy consumption by 2020. This, I recognise, is something that you will be following closely.

A further major challenge, specific to the gas supply industry, has been the seismic shift towards ever-increasing import-dependence, and the security of supply issues that that raises.

These will be two of the great themes in the forthcoming Energy White Paper. But I run ahead of myself. What I propose to do in this address is to look, first, at the major challenges of the last 10 years; next, at the increasing focus on security of supply, and the role of Government in helping to provide this through an appropriate framework for the gas market, both domestically and internationally.

If there is a single theme running through my address, it is this: “Continuity through Change”.

A look back – 10 years of gas market reform

Before I look forward, a look back.

The British gas industry has come a long way from its origins, around the time of the Battle of Waterloo, when the first gas lights were installed in London. The last 10 years or so have been a particularly momentous period. Gas has carved out for itself a fundamentally important role in the British energy economy – accounting for some 50% of our primary energy consumption for non-transport purposes, and contributing equally to the household sector, to industry, and to power generation. Was the regulatory framework right? And how should we prepare for import-dependence?

For the Government, the immediate challenge was to finesse the legislative framework, to ensure continuing effective sectoral regulation.

So our first big decision was to establish Ofgem as the independent sectoral regulator for the gas and electricity supply industries . That was soon followed by the Energy White Paper of 2003, setting out a framework for energy policy:
to work towards cutting carbon emissions by 60% by 2050;
to maintain the reliability of energy supplies;
to promote competitive energy markets in the UK and beyond: and
to ensure that every home is adequately and affordably heated.

As the Government noted at the time, gas lay right at the heart of the White Paper. It has an environmental advantage over other fossil fuels; it contributes to the diversity and security of supply; it is delivered through the competitive market; and, with its cost advantage, it has a major role addressing fuel poverty.

Meanwhile structural change continued apace. Two years ago – in 2005 – we saw the separation of the 8 “Gas Distribution Networks” from the high pressure/long-distance National Transportation System [“NTS”] for gas, followed by National Grid’s sale of 4 of the DNs to 3 new owners. This was certainly the biggest change in the structure of the British gas market in recent years. I am pleased to see a number of the new gas distribution companies represented here today.

And, just to keep us all on our toes, there was the little matter of the transition to annual import-dependence in 2004 – a year or so earlier than many had expected.

Increasing import-dependence, and security of supply

The immediate impact of this – as I’m sure you all know – was the uncomfortably tight winter of 2005/06. The good news – too easily overlooked – was that there were no supply interruptions. That was a major tribute to the operation of our market, which (incidentally) set it apart from a number of continental gas markets in recent years. Price signals brought a significant demand-side response, particularly in the power sector.

But supplies were undoubtedly tight; and prices were high. There was pain for consumers – industrial as well as domestic.

The Government’s immediate response was clear and consistent. We kept our nerve. No price controls. We understood - with clarity - if you play around with prices in a competitive international market at your peril. We were determined not to undermine the operation of the capital markets – providing the infrastructure that we’d be needing – or the commodity markets, in sending us the gas.

This policy soon paid off. Just look at the new gas import infrastructure commissioned for last winter alone:
expansion of the Belgium-GB gas interconnector, in October;
the new Langeled pipe-line from Norway, inaugurated by the two Prime Ministers also in October;
inauguration of the new BBL interconnector from the Netherlands, which I witnessed myself in December;
and the short lead-time Teesside GasPort LNG import facility, which Secretary of State Alistair Darling visited shortly before it commissioned in February.

The Teesside project was a world first for Great Britain – the shortest construction time in the world, and the first LNG import facility in the world with on-ship dockside regasification.

In all, these new facilities have provided a 140% increase in our gas import capacity, without requiring a single £ of public expenditure. And some of them, at least, would surely not have gone ahead if there had been any perceived risk of price controls.

Looking further ahead, the picture for gas supply infrastructure is looking good: two major LNG import terminals and a major new pipe-line under construction in South Wales; a number of other active proposals for gas import projects; and a range of proposals for gas storage projects, some under construction, others still on the drawing board. By 2010, provided the projects are able to go forward according to their plans, our gas import capacity will more than triple (by comparison with 2005), while our gas storage capacity will more than double.

But the winter of 2005/06 had raised important policy questions.

One concerned the regulatory consents regime. The tight market was partly due to a timing mis-match, between the decline in North Sea gas production and the commissioning of additional gas supply infrastructure – import and storage facilities. Did we have a fit-for-purpose regime, capable of dealing in a timely and balanced way with commercial proposals for the additional gas supply infrastructure that we would need? – And this question was particularly necessary, as there were live proposals, some commercially confidential at the time, for innovative projects, using innovative technologies, which might not fit happily within the current consents regimes.

The other big question concerned the operation of the international gas markets. Our tight gas market was not simply a “home-grown problem”. It was Ofgem that said that it was “a winter of two halves”. Particularly in the early part of the winter, gas supplies from international markets, and notably from the continental EU, did not respond to clear price signals. That was a matter of concern.

Our central answer to these questions was clear. It was to reinforce our commitment to the market – to finessing the British market and consents regimes, and to a further push to liberalise European markets. For we shall not have full security of supply while the EU fails to operate a fully liberalised energy market.

There are sceptics, who see security of supply and competitive markets as incompatible. This is not the Government’s view. On the contrary, they are mutually supportive.

The GB consents regimes

The DTI’s work with other departments, on finessing the gas consents regimes, had in fact begun well before the winter of 2005/06. So – following an initial Parliamentary Announcement in January – Alistair Darling made an important and substantial Parliamentary Statement last May. The 3 main components he identified were:

simplifying and streamlining the onshore consents regime;

ensuring an offshore regime that was appropriate to new technologies, for example offshore unloading of LNG tankers and the offshore storage of gas in salt caverns;

and thirdly better communication, to ensure that the need for additional gas supply infrastructure facilities is clearly understood.

The Secretary of State’s statement itself contributed to public communication, by including a detailed explanation of the need for additional gas supply facilities.

The Government’s work on facilitating new gas supply infrastructure has been a very active workstream. We have consulted on our proposals for offshore and I was delighted to open the Gas Storage Operators’ Group’s workshop at the DTI last December. I have no doubt that this area will continue to be very active - you will hear much more from us!

International energy markets – the EU and beyond

As I have noted, winter 2005/06 also highlighted problems with the international gas markets. Gas supplies from continental Europe were not responding to price signals. And events in North America – constraining gas production because of damage during Hurricane Katrina, and an exceptionally severe winter there – led to tight supplies in the Atlantic Basin LNG market, with an impact on LNG supplies into GB.

Some Governments have also seen these problems as a reason for moving away from the market – perhaps by setting up national champions, or by seeking to assure energy supply through political deals. That is not our approach. The main beneficiary of a national champions policy is the national champion itself. We see a functioning competitive market, with the diversity of infrastructure and the diversity of sourcing that that brings, as the best way to protect the interests of consumers – which is, after all, why our energy markets exist in the first place.

The Government was therefore pleased with the outcome of the EU’s Energy Council in March. This was a further step in a long path that evolved through the UK’s Presidency of the EU in 2005, including the agreements at the Hampton Court summit, and through the Commission’s Strategic Energy Review published this January. Throughout this process the Commission has had the full support of the British Government. We look forward to the Commission’s proposals for further energy market reform, including unbundling and improved market transparency, later this summer.

The benefits from energy market reform will accrue to all EU consumers. This is not a narrowly self-interested policy. A functioning Single European Energy Market will spread risk, and will improve security of supply for all the EU’s nearly half a billion citizens.

And we must not forget the emerging economies – China and India. Gas market globalisation brings with it the new phenomenon of “competing demand”. The best way to secure gas supplies for Europe is to have efficient gas markets, with lean and competitive gas supply companies; companies that can afford to pay international wholesale prices, without jacking up the price here in the EU and the UK.

Meanwhile the DTI and Foreign and Commonwealth Office work closely together on energy issues beyond the EU. This includes supporting the work of the International Energy Agency, the International Energy Forum; and bilateral relations, to help establish a framework conducive to commercial relations, with a number of important players such as Russia, Algeria, Qatar, and others.

… not to forget other issues affecting you in this room

There are also other important issues.

One, that no doubt affects a lot of you, is Ofgem’s current exercise on the forthcoming Gas Distribution Price Control from next April. This will be particularly significant, because it is the first time that Ofgem will be able to take into account the comparative performance of the 8 Distribution Networks – albeit only over the short period since 2005. That is potentially a very important development for consumers.

Another is metering. Smart meters have the potential to contribute to a variety of energy objectives, including the provision of a range of time of use tariffs that could lead to significant load-shifting in electricity supply. They can also contribute to environmental objectives, by giving customers wholly accurate information about consumption that helps them reduce their energy use. But the extent of those benefits is not entirely clear. And that’s why the Government will shortly, with a number of consortia led by energy suppliers, begin a series of trials to determine the level of the contribution that smart meters can make to reducing energy demand.

“Safety is paramount” – three short words, easily enough said, but which convey a profound moral imperative. The public understandably wish to be informed and reassured about the safety of proposed new gas supply projects, particularly those involving unfamiliar technologies.

The DTI has been active here also. Science and Innovation Minister Malcolm Wicks has recently reminded the House of Commons of the long and incident-free record of LNG imports into Japan. He told the Commons that there are no regulatory gaps regarding the safety of the LNG supply chain into Great Britain. Meanwhile the DTI is working with the HSE on the development of a publication aimed at interested citizens, explaining the risks – and I must say the very low risks – associated with gas storage facilities.

Downstream of the meter, there is work to encourage gas consumers to take the relatively simple measures to minimize the risks of Carbon Monoxide poisoning. I am reassured that a wide spectrum of industry representatives have committed themselves to a renewed programme of co-ordinated targeted action – to ensure that key messages are delivered, and hit home. CORGI is co-ordinating this work, and progress will be monitored by a new Ministerial Group on Gas Safety, of which I am a member. Reform of the gas safety regime, under the auspices of the Health and Safety Executive, is aimed at awareness-raising, simplifying the current registration arrangements, and protecting the public from unregistered installers, by squeezing the illegal black market.

Conclusion

In this address I have not – for reasons that I hope you will understand – been able to anticipate the Energy White Paper. That will be published shortly. What I can say is that it will help your – our – gas industry to thrive, and will reinforce the culture of excellence that we are here to celebrate today.