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Malcolm Wicks MP, Minister of State for Energy
Café Royal, Piccadilly, London, 20 February 2008
Our energy markets - not just gas but electricity and oil as well - are currently attracting a great deal of interest. From the public; from industry; from the media; from Members of Parliament; and indeed from the House of Commons BERR Select Committee, which is now beginning an enquiry into gas and electricity market structure.
That close interest is entirely right. We have in this country a very clear grasp of the relationship between energy markets and consumers. The cart comes after the horse. The markets are there to serve the interests of consumers, not vice versa. And so it is entirely reasonable that consumers and their representatives should expect an explanation when they see the prices that they have to pay increasing so sharply.
You will understand, I hope, that I would not wish to say anything now that might appear to pre-empt the conclusions of a Parliamentary enquiry.
After the splendid lunch that we have enjoyed today, I imagine that you do not have the stomach for a detailed analysis of the behaviour of the “forward curve”, or other splendid pieces of analysis that Ofgem have carried out in this area. But it is worth reminding ourselves of the upward pressure on the commodity price for gas in international markets, and of the global environmental factors which are also contributing to sustained upward pressures.
These factors - changing international energy markets, and the need to tackle climate change - have profound implications for all of us in this room. Those implications go well beyond the gas market, and well beyond GB.
For an illustration of some of those implications, it is worth starting with the British gas market itself. This has certainly come a long way in the last couple of years. Many in this room will remember the winter of 2005/06 - with an unprecedented Gas Balancing Alert, and record spot prices.
This winter has been nothing like that:
And dare I say it, this is exactly what we predicted when we went through that difficult winter. There can of course be no room for complacency - current energy markets are not a comfortable environment for consumers. But there is certainly now much more stability, largely because of reduced dependence on continental Europe - vastly greater import capacity from Norway, together with improved connectivity across the Netherlands to the new BBL pipe-line, and direct access to the global LNG market.
We have seen a massive increase in our gas import capacity, and in the diversity provided by that capacity. Diversity of infrastructure, and diversity of sourcing. And with it, security - by spreading eggs across baskets.
In short, the UK’s “competition-based gas import policy” is achieving security of supply as a by-product of the diversity that results from competitive supply.
This contrasts with the “national champions” model, which does not even aim at competitive supply, and which - in some Member States - puts a large number of eggs into a very small number of supply baskets.
This is a fundamentally important lesson. It shows that markets will deliver - provided you get the framework right.
Of course, the framework must cover a much wider area than gas wholesale markets. As last May’s Energy White Paper shows, it must also cover:
Fuel poverty is a matter of great concern to the Government. Those who are familiar with me and my career will know it is a particular concern of mine, too. Action is under way on a number of fronts:
Work on the market framework is not neglecting gas. The Planning and Energy Bills, now before Parliament, will improve the regulatory regimes for new gas supply infrastructure. This includes onshore storage projects, as well as projects using innovative technologies such as the offshore unloading of LNG tankers and the storage of gas in sub-sea salt caverns.
But I come back to the point I mentioned a few minutes ago - the impact of rising commodity prices for gas in international markets. This is a major challenge - not just for GB, but for the EU as a whole.
Wider issues – the global gas market
High wholesale gas prices into Europe are underpinned by high demand for gas. Demand for LNG has come from Japan, taking more gas because of earthquake damage to some of its nuclear generating capacity. And it has come from the emerging economies of China and India.
The potential impact of “competing demand” has long been foreseen - I mentioned it in a speech back in 2005, soon after my appointment as Energy Minister. But we are now moving from potential to actuality - to a world where gas market conditions in Europe can increasingly reflect circumstances on the other side of the world.
The challenge of competing demand needs a response. As I have said before, the best way to compete for global gas supplies is to have efficient European 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 to intolerable levels.
And efficient gas markets would of course also benefit all EU consumers - by driving down costs, by enabling gas to move around within the EU in response to market-reflective price signals, and in this way by spreading risk.
All this is highly relevant to next week’s meeting of the EU Energy Council. That will be discussing Commission proposals for the development of the internal energy market, including further unbundling of transmission networks from vertically integrated energy companies.
It is hardly surprising that a number of the vertically integrated incumbents are lobbying hard against the proposals.
I am told that some of them are running the argument that the sale of UKCS gas into the British market at international prices is evidence of a deep-seated failure in the British market, and that what we need is price controls. Presumably, they think that gas should be priced on the “cost-plus” model used by corner shops.
I cannot help wondering what the effect of cost-plus pricing, enforced by price controls, would be on North Sea exploration and production; on investment in gas supply infrastructure; and on our ability to attract gas imports from international markets.
But the attitude of a number of other Member States - concerned about security of supply at a time of increasing resource-nationalism amongst energy exporters - shows that the argument has yet to be won.
That the argument can be won is demonstrated by the British gas market. A competitive market is compatible with security of supply. And key to all this is that the British model depends fundamentally on the non-discriminatory access to transmission networks that is guaranteed by the unbundling of the networks from other supply functions.
You, the members of the Gas Forum, will understand all this, with great clarity. It is, after all, the “shippers” in the British gas market, many of you represented here today, who have non-discriminatory access to our gas network.
The British Government firmly supports the Commission’s proposals. Further structural reform - through the unbundling of transmission networks - is essential if we are to get a functioning internal market. I am pleased to say that a number of other Member States take the same view. We are ready for the argument.
Where does this leave us? It leaves us, I think, with a few bold and simple truths:
This is the issue before Europe at the moment. I believe that it is fundamentally important for all EU energy consumers - electricity as well as gas - that the right decision is made, and quickly.
Who knows - in a year or so’s time, we may be celebrating the European Gas Forum Annual Lunch!
