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Gas Forum Opinion

 

Security of supply fears follow Ukrainian turmoil

4 March 2014

In an interview with Utility Week today, David Cox, Managing Director of the Gas Forum said that the Ukraine crisis could lead to higher gas prices for UK consumers.  He said  “Wholesale gas prices have already increased by 10% although Russian gas continues to flow across the Ukraine.  If there are physical interruptions as we saw in 2005/06, prices will increase more significantly.  However, Europe’s gas in store is relatively healthy at the moment and as we are coming out of the winter, demand is falling. Nevertheless, I would expect European gas prices to rise such that LNG cargoes come to Europe in order to maintain security of supply.“

Competition and Britain’s gas market – a lot of hot air?

11 February 2014
 
We conducted a lot of media interviews yesterday following Ed Davey’s comments on the level of competition in the retail gas market and the potential threat to break up energy companies if they were found to be operating monopolistic practices. Although it provoked a lot of interest in the media and once again raises the political temperature around UK energy supply, deeper analysis questions whether it is anything other than rhetoric.
 
If the current investigation by Ofgem, the Office for Fair Trading and the Competition and Markets Authority into the competitiveness of Britain's retail energy market finds any evidence of monopolistic practice, it will take at least two years or more to break up the companies involved. Any impact on competition or consumers bills would be 2-3 years in the future and well past next election so despite the bluster, is it kicking any perceived problem into long grass?
 
The gas supply margins cited by Mr Davey are not new and have been in the public domain for several years with no particular push back from Ofgem. As the table below clearly shows there is considerable disparity in energy companies’ profits, ranging from 11%+ for SSE and British Gas to losses by some companies, such as EDF with minus 4%. Additionally profits vary a lot year on year, illustrating that profitability depends on how good individual companies are in buying wholesale gas and controlling other costs.

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With 41% of the UK  gas market, it could be argued that British Gas has economies of scale that would be lost if it was split into 2-3 smaller units and which in turn could be detrimental  for consumers in the long run?
 
Energy companies need to make profits to support ongoing investment in new green infrastructure and make a return for shareholders, who ultimately are the majority of the British public via their pension and investment plans. In a truly competitive, free market regulators do not and should not set profit margins – their role is to protect consumers by making sure the market works! The theory is that market dynamics should apply and if a 10% profit margin too high, the other energy companies or new entrants will be able to enter the market and win significant market share from British Gas. Additionally comparisons with lower electricity company profit margins are unhelpful and irrelevant, as current electricity company profits are too low to be sustainable in long term if new low carbon infrastructure is to be built.
 
Ultimately such rhetoric could be extremely detrimental for the UK energy industry which is expected to invest in new infrastructure to meet the UK’s long-term energy requirements and carbon commitment. It is very difficult for investors to calculate and price in political risk for UK utilities at this time and many choose not to. So although popular, such statements could be counterproductive for consumers in the long term.
 

Myth busting – sifting energy facts from wishful thinking

7 February 2014
 
In the furore about the rise of energy costs, several factors have been cited as contributing to escalating prices. David Cox, managing director of the Gas Forum, untangles the truth from the myths in the government’s argument for committing a minimum £38bn to subsidise energy generation over the next eight years.
 
Following the tariff increases announced by all of the Big Six energy companies in late 2013, the UK energy market has come under intense scrutiny – from both the media and politicians on all sides of the House.  Receiving much less attention was the deal agreed between the British government and EDF to underpin the construction of the Hinkley Point C nuclear power plant, which will receive subsidies until 2058. Ed Davey sold the deal to the British public on the basis that it will contribute to UK targets for carbon reduction and perhaps more importantly given the recent debate on energy price rises, that it will insulate UK customers from the highly volatile gas prices associated with increased reliance on imported gas supplies.  [read more…]

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