Gas (Supply and Demand)

– in the House of Commons at 3:51 pm on 14th March 2006.

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Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley 3:51 pm, 14th March 2006

To ask the Secretary of State for Trade and Industry to make a statement on gas market prices and supply and demand.

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

Early yesterday, National Grid issued a gas balancing alert as a prudent signal to the market to increase gas supplies further. That was a planned measure and not an emergency response. National Grid took that action in response to an increase in gas demand due to the cold weather, problems on the supply side with the Rough storage facility being out of operation, and low delivery through the interconnector at the weekend. That resulted in a significant call on short-range gas storage and the resulting spike in the gas price.

As of today, the demand-supply situation has eased compared with yesterday. Demand has fallen to a near seasonal norm. Supply has increased, with greater flow through the interconnector. We are also seeing deliveries through the Isle of Grain and a further shipment of liquid natural gas is due to dock tomorrow. Deliveries from the North sea are performing strongly. National Grid expects supply and demand to balance today and does not anticipate the system being out of balance in the coming days. But National Grid, Ofgem and my Department will of course continue to monitor the situation carefully, in case of any change in the anticipated demand-supply picture.

There is no doubt that Rough being closed is making things more difficult than they otherwise would be. Rough accounts for about 80 per cent. of our total storage capacity. It can supply 10 per cent. of average daily winter demand. Were it in operation, we would not be experiencing any problems this week. Hon. Members may recall that an accidental fire a few weeks ago shut the main pumping station; the damage caused is still being repaired. We are in close contact with Centrica, which owns the facility, and understand that it will not be back in action for a couple of months.

It is, of course, normal for storage to be used during the course of the winter. We would expect the market to be drawing on short and medium-range storage in current circumstances, particularly at this late stage of the winter. We have had a spell of colder weather later in the winter and the UK's long-range storage facility has been shut for a month. The gas system and market has responded to those circumstances.

Let me reiterate that on present information, we are not expecting a formal gas supply emergency. While it is clear that we must not be complacent, it is equally important not to cause unnecessary panic. The present situation does not threaten domestic, or the vast majority of commercial and industrial, supply. And even were there to be an emergency, National Grid would be able to maintain supplies to domestic and other key gas consumers.

Of course the situation has had a major impact on prices. The spot gas price has increased significantly since the weekend. I know that for some heavy industry it is not easy to make alternative arrangements and the high prices will have an impact. The market is responding to a tight demand-supply situation, as we would expect. Gas suppliers have every incentive at those prices to maximise supply from all possible sources and we are in close contact with the operators of the interconnector to ensure that it flows as much as possible.

Market liberalisation in mainland Europe is a key factor in reducing energy costs for British consumers. That is why we have been encouraging the European Commission to take action and why we warmly welcomed the hard-hitting report that it published on 16 February. We shall continue to press for market reform.

Looking forward, significant new import infrastructure—new pipelines and liquefied natural gas import terminals, as well as increased storage—is to be delivered by the energy sector in coming years. Representing some £10 billion of investment, that will increase security of gas supply to the UK and should reduce upward pressure on UK prices.

In short, the circumstances are exceptional: our largest storage facility is out of action and we are experiencing an unseasonably cold spell of weather. None the less, supply is meeting demand and the market mechanisms are working, albeit at a relatively high spot price. National Grid, Ofgem and my Department continue to monitor the situation carefully.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

The country is on a knife edge. What will the Secretary of State say to the 7,000 people who may lose their jobs in the plastics industry? What will he say to domestic consumers, who have seen price increases and are likely to see more? What have the Government done since long-term storage went out on 16 February?

If there is too little storage, as I think we all accept, why do we not import more on mild days? Why is the trigger for a gas balancing alert so high? On Sunday 319 GWh was taken from short-term storage, but there was no gas balancing alert. Had the same rate been taken on Monday and today, we would be in a gas emergency now. How can the Government expect UK industry to cope with energy prices in this country that are 50 per cent. greater than those in the United States of America?

Why do the Government do so little about energy security and reducing demand? The Prime Minister says, "Not me, guv—nothing we can do." Cold weather is now predicted. Short-range storage has approximately 50 million cu m and the Hornsea facility has 48 million cu m. Why do the Govt not do something about demand and supply?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

I do not think that the country is on a knife edge. A gas balancing alert has been issued. That mechanism has operated in the electricity sector for a number of years, and as the hon. Gentleman knows, it has recently been introduced in the gas sector. It is an extremely important mechanism for telling the market that demand is exceeding supply, which means that the market responds to that. Saying that the country is on a knife edge is, I suggest, a wee bit of hyperbole.

The hon. Gentleman asks what Government are doing. The one thing that the Government should not do is interfere in the market. I would be interested to know what the Conservatives would do in such circumstances. The days when our energy was provided by state monopolies were bad for the consumer, bad for the energy supply situation and bad for the country.

The hon. Gentleman talks about the effect on consumers, but according to the most recent figures, we in this country are still enjoying the cheapest domestic gas in Europe. Industrial customers have had problems this winter, not only because of the problems caused in all European countries by high oil prices—Germany's wholesale gas prices have increased by 80 per cent., Denmark's by approximately 40 per cent. and France's by 20 per cent.—but because we have a tight situation in the UK this year, and probably will next year, too. We discussed that during the important debate in the House in January.

The analysts and experts misjudged the amount of gas that would come from the North sea. The period of adjustment to that is difficult, but it would have been ludicrous for this country to have storage facilities when it had a reserve in the North sea. The Netherlands and Norway, which also have indigenous supplies, do not have huge amounts of storage. We must get the right balance in terms of transfer across.

I think that the system is working for the benefit of consumers. We have had a difficult winter, but what the Government should do about that is to ensure that the market is operating properly—that is a particular issue for Europe—and that Ofgem and the right mechanisms are in place to see any possible crisis coming and deal with it. There is no national emergency at the moment; there is a gas balancing alert.

Photo of Doug Henderson Doug Henderson Labour, Newcastle upon Tyne North

Does my right hon. Friend accept that John Hemming is displaying more than a little opportunism and hypocrisy, given the background of the Liberal Democrats' energy policy? Although he is right to raise the issue of gas supply and demand being in balance, he and his party fail to tackle the issue of the country's energy supplies being in balance. Will my right hon. Friend confirm that the Government's policy is to ensure that there is a balanced energy supply in this country, especially on the base load?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

My hon. Friend makes his point very powerfully. It is extraordinary that as we look to energy supply for the future and having security of supply, which every country is looking for, and given that the days of cheap indigenous fuel are probably gone for ever, the Opposition should rule out one option. We believe that all those options, including nuclear power, should be looked at properly. We do not rule out any of those options until we have had the arguments and the analysis to come to a proper conclusion.

Photo of Alan Duncan Alan Duncan Shadow Secretary of State (Trade and Industry)

On 16 February, I asked the Minister to explain the Government's policy for establishing onshore strategic energy stocks that stand a chance of lasting for more than a few days. The answer, in effect, was that we have very little storage and will not do so for some time. That largely explains why Britain is so acutely vulnerable to the sort of extreme price spike that we are facing today. British business lives in fear that its fuel costs will rocket to ever more punishing levels, and that it might even be cut off altogether. Yesterday National Grid, for the first time under the new warning system, issued a gas balancing alert. If there is one positive point to be drawn from this situation, it is that at least we know that the warning system is working.

For the next year at least, the UK will remain perilously sensitive to short-term gas price volatility. We have a free market in energy; the rest of Europe does not. Even when our prices are high, they still do not sell to us. This Government singularly failed to address this issue during their presidency of the European Union last year. Our gas production is falling, which is made worse by the Chancellor's tax regime, and during the winter we are now forced to import a growing percentage of our gas requirements. The gas comes mostly through only one pipeline, our shipped liquefied natural gas imports are not at the volumes we need, our storage capacity is puny and now our strategic vulnerability has been exacerbated by a cold snap across Europe, a fire at the Rough storage facility in the North sea, a drop in supplies from Norway and a strike by French gas workers. It is all happening at once.

Yesterday the price of gas for immediate delivery shot up from about 60p per therm to a peak of 255p—an increase of 400 per cent. Today it is trading at about 225p to 250p for delivery within the next week or so, but for delivery in April the market is much lower at about 65p. This is the ultimate short-term market squeeze. To put it bluntly, is it not the case that there is simply nothing we can do in the immediate future, and that the excruciating exposure that Britain and its companies face will not be remedied for at least another year? Is it not the case that additional capacity to import by pipeline or ship and our capacity to store larger quantities will not come on-stream for another year? Is it not also the case that British companies that will have to endure another winter of impossible uncertainty and soaring fuel bills will not thank this Government for their culpable lack of foresight?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

I agree that the current situation shows that the gas balancing system works. I disagree with the hon. Gentleman's comments about our presidency. The major issue is still that, with prices yesterday running at their highest level ever, we were not getting the gas through the interconnector that we should have been getting. Some of that was caused by the strike in France, but the primary cause was that in the European Union, principle has not been put into practice. During our presidency—as we have explained on many occasions, most recently in the debate in this Chamber in January—my hon. Friend the Minister for Energy was instrumental in convincing the commissioner and the European Union to open not just one but three lines of inquiry, one of which will result in anti-trust cases against certain EU member states within a matter of weeks. That is just on the basis of the interim report from Commissioner Kroes. My hon. Friend the Minister for Energy is at the Energy Council in Brussels even as we speak, seeking to ensure that we maintain that momentum. I agree that we have not changed the situation in Europe overnight, nor did we change it during the six months of our presidency, but we have put in place measures that will lead to liberalisation across Europe.

As for our storage capacity being puny, 300 million cu m a day is coming into this country from the North sea, which is 75 per cent. of our supply. Rough has the capacity to introduce 10 per cent. of our daily demand in winter and, because total capacity is 3,340 million cu m and we can bring it in at a rate of 43 million cu m a day, we have 77 days of supply in Rough. There was an explosion at the Rough facility, which is close to my constituency, and I agree that there has been a combination of events, but we are not in an emergency. Our market has benefited UK consumers, both industrial and domestic, for many years. The worst thing the Government could do would be to step into the market with our size 16 hobnail boots. That happened in Canada and the Canadians have regretted it ever since.

Photo of Andrew Miller Andrew Miller Chair, Regulatory Reform Committee, Chair, Regulatory Reform Committee

The current situation underlines more than anything else could the need for a balanced energy supply. My right hon. Friend said that the vast majority of commercial and industrial users were not under threat, but in the light of the needs of large businesses in my constituency, can he assure me that supplies to major gas users in the north-west are being prioritised in the interests of those important businesses?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

We have not got to that situation yet. We have a gas balancing alert, but no action has been taken because we are not in an emergency situation. The only action that is happening is that companies themselves have decided to reduce their energy needs—and who can blame them, at the price—but that is a natural mechanism. There is no question of prioritising anybody's gas needs at present; there is just a gas balancing alert, not an emergency.

Photo of Edward Davey Edward Davey Shadow Secretary of State (Trade and Industry), Liberal Democrat Spokesperson (Trade and Industry)

Given that this is the first time that National Grid has ever warned British industry that gas supplies may be shut off, does the Secretary of State regret the fact that the Minister for Energy told the House only last November that the UK was "awash with gas"? What will the right hon. Gentleman say to the thousands of employees laid off because of the recent hikes in gas prices? Have the Government not been negligently complacent about Britain's gas crisis, especially the lack of gas storage infrastructure? When Germany has storage facilities for 75 days and France for 66 days, is the right hon. Gentleman not just a little embarrassed that without Rough the UK has storage capacity for only 12 days?

Rather than listing excuses, as the Secretary of State has done today, will he confirm that Ministers were warned about the danger several times in recent years? Is not it the case that if we had those extra facilities, gas prices for UK industry would be lower today and the alert would not have taken place?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

I welcome the hon. Gentleman to his new position—and immediately disagree with him. He says that this is the first time in the whole history of our fabulous nation that we have had a gas balancing alert. Yes, that is true—because gas balancing alerts were introduced for the first time this winter. That is the simple fact. The system worked, and it was right to introduce it. When my hon. Friend the Minister for Energy spoke last November, the situation was completely different; we had not lost the Rough facility. A cold snap in December led to companies taking gas out of storage early in the winter, which was expensive and put up prices. The issue was not about gas supplies; there was plenty of gas around in December.

The hon. Gentleman raised another issue that was completely wrong, too. He put a bizarre question: could I confirm that in Germany and France there is lots of storage, whereas in the UK, without Rough, we do not have so much storage? Yes, I can confirm that. As Rough holds 80 per cent. of our storage capacity, I can confirm to Opposition Members that when Rough is out of action our storage capacity is reduced. I hope that that helps them.

Photo of Paddy Tipping Paddy Tipping PPS (Rt Hon Jack Straw, Secretary of State), Foreign & Commonwealth Office

Does the Secretary of State recall that the hard-hitting EU report that he mentioned sprang directly from the Heads of Government discussions at Hampton Court? Is not the real issue before us—the key way forward—transparency in the European market? We have talked about that for a decade. Is it not now time that the EU took action?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

My hon. Friend is absolutely right: transparency is key. At the moment, we have to try to find out what facilities exist in other EU member states and what can come through the interconnector. It is because there is no transparency that no member state knows what is happening with energy supplies. He is absolutely right to mention Hampton Court, where we set in train the process for reaching an understanding across the EU about energy supplies, and the situation at Christmas between Russia and Ukraine was a real wake-up call. If we had not raised that issue at Hampton Court, other member states would have realised, following what happened at Christmas, the need to have an energy supply policy throughout the EU.

Photo of Peter Luff Peter Luff Chair, Trade & Industry Committee, Chair, Trade & Industry Committee

There is nothing particularly unseasonal about the weather this March—March can often be a very cold month—and we face these problems again next winter. Indeed, the problems are exactly as the Select Committee on Trade and Industry foresaw in its report published in December, to which the Government responded so constructively. As little can be done over the next 12 months to correct the situation fundamentally, we referred to the need to take mitigating action, particularly for industrial and commercial customers—for example, fuel switching and removing some of the restrictions on emissions. The Government responded positively to that idea and said that they were exploring it with the Environment Agency. Can the Secretary of State update the House on what more the Government have done to enable such mitigating action to be taken—not just for this winter but, I am afraid, for next winter as well?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

The hon. Gentleman and the Trade and Industry Committee produced an excellent report. We are acting on those recommendations. Indeed, if we do get into an emergency—I do not think that we will, and we should get things into perspective, as I have been saying—such mitigating factors can be introduced. We are a long way along the route to helping, in strict accordance with the recommendations that he made. He is right to suggest that the weather may not be unseasonal, although I think that the weather has improved since 1997—I would make that claim on behalf of the Government. None the less, a cold spell this late in the winter with storage capacity out of action is a series of events that we could have done without.

Photo of Helen Goodman Helen Goodman Labour, Bishop Auckland

In my constituency two factories—Potters Ballotini and Weinberger—have been closed since November, allegedly temporarily, even though their sister plants on the continent are still open. At the same time, I understand, Barclays bank is paying its energy traders record bonuses. I find the Secretary of State's statement that supply is meeting demand—other than in a textbook sense—extraordinary. Can he not admit that it was precipitate to liberalise our energy markets before countries in the rest of Europe liberalised theirs?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

No, I think that that was absolutely the right thing to do. As for how it has worked for our customers, both domestic and industrial, British industry, for instance, has paid something like £8 billion less for its energy since liberalisation than German industry. The record of UK companies' energy costs has been very good. We have a problem this winter—my hon. Friend refers to companies in her constituency—and I do not want to diminish in any way the effect on energy-intensive users: it has been dramatic this year, and it is something that we cannot deny.

My point about demand meeting supply is that National Grid issues a gas balancing alert when supply is not matching demand. It looks at the situation every day. Yesterday morning it decided that it should issue a gas balancing alert, because supply was not meeting demand. This morning it decided that it should not do so, because supply is meeting demand. That is the only point that I was making on behalf of National Grid. I was not trying to make some great philosophical point about the political situation with energy.

Photo of Alex Salmond Alex Salmond Parliamentary Leader, Leader, Scottish National Party

Does the Minister accept that it is little consolation for consumers facing sky-high prices and major users facing interruptions in supply to be told by the Minister that yesterday's announcement is part of a grand master plan that is working exactly as it should? Is it not weak-kneed and feeble to claim that a fire in a single installation can bring the UK gas market into chaos and disarray? When will the Government accept responsibility for the lack of capacity in the system and the lack of investment, principally caused by Ofgem, which has delayed Norwegian supplies to this country? Why, with 24 discovered but underdeveloped gas fields west of Scotland, have the Government imposed a 10 per cent. supplementary charge on pipeline infrastructure, which has delayed their development? Does the Minister think that that is a good idea, in the circumstances?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

Last year there were a record number of licences for exploration in the North sea, and we are pleased by the amount of interest there. All the major explorers have continued to make the point that they are interested in looking for supplies in the North sea, but increasingly they are looking longer for fewer resources. In the spirit of knockabout it is good to suggest that there is a magic wand that we could wave to put the situation right this winter. All that we can do is put it into context and make the argument about what needs to be done to rectify the situation for British business. What is needed is liberalisation in the European Union and more investment in pipeline facilities and storage. Some £10 billion of investment will be made by the private sector—we would never have been able to do that in the public sector—in the next few years. It is easy to exaggerate the problems and the situation in the UK, but it is incumbent on us to put the issues in perspective and to repeat yet again that there is no emergency.

Photo of Bob Blizzard Bob Blizzard PPS (Mr Douglas Alexander, Minister of State), Foreign & Commonwealth Office

Is not the lesson from yesterday that even in exceptional circumstances the system worked as it was designed to work? A couple of weeks ago, I asked the head of one of the largest European gas companies why his company was not trying to sell more gas to this country when our prices were higher. His answer, quite simply, was, "I am sewn up in long-term gas contracts with my customers, and I have to put them first." Does my right hon. Friend accept that explanation, and if so, does it not say something about the balance between the amount of gas that this country receives on long-term contracts and the amount that people are buying or supplying on spot prices?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

It is undoubtedly the case that in continental Europe there are far more contract supplies of gas and energy. In this country, the position was similar until recently. More companies have decided to buy on the spot market, and who can blame them, as it was producing gas at 22p a therm only 18 months to two years ago? In Europe there are more contractual supplies than in the UK, but across Europe we need transparency, as my hon. Friend Paddy Tipping said, and a liberalised market. If we can achieve that, we can ensure that instead of having national champions—a system pursued by many European Union countries—we have consumer champions producing the low energy costs that we have enjoyed in this country for many years.

Photo of Peter Bone Peter Bone Conservative, Wellingborough

The Secretary of State is right to say that the problem lies with liberalisation in Europe and that the Government have tried to do something about it. However, they have been trying to do that for many years, so why does he think that the Europeans are going to listen to him now?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

I do not know how many years we have been trying, but one thing is different: the Commission, and Commissioner Neelie Kroes in particular, are determined to tackle the issue. The Barroso Commission is a breath of fresh air, given the intensity of its desire to liberalise not just in energy but in other areas that remain unliberalised, and given its whole approach to regulation throughout the European Union.

Photo of John Grogan John Grogan Labour, Selby

The Government have said that the owners of LNG terminals and gas storage facilities must either use them or lose them. Is there not a strong case for establishing the principle of third-party access for suppliers to storage facilities and terminals to enable the market to operate more effectively?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

There may well be a case. That is an issue that we will examine in the energy review.

Photo of Mark Pritchard Mark Pritchard Conservative, The Wrekin

Does not the recent series of events show how UK plc is vulnerable when its energy supplies are disrupted? If the Secretary of State agrees, will he tell the House what new measures have been put in place to ensure that our storage and infrastructure facilities are protected from malicious attack?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

We have a vulnerability this winter and next winter. Beyond that we do not expect our situation to be any more vulnerable than that of any other country. We are fortunate that we still have an indigenous supply. [Interruption.] It may be declining, as Mr. Duncan says from a sedentary position. We may be a net importer of gas—but of all the G7 countries, only Canada is not a net importer of energy. I think that we will be in a position similar to that of other countries. As for malicious attacks, if the hon. Gentleman is talking about terrorism, we have long-standing measures in place to protect against that, particularly at our nuclear facilities. We believe that those measures have worked, and will work in the future.

Photo of John Redwood John Redwood Conservative, Wokingham

What specific measures would the Secretary of State like the European Union to take to address the gross distortions of the continental gas market, and what is the time frame for getting those remedies in place so that they take effect?

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

The specific remedies will be, first, transparency, with everyone being absolutely open about the energy supplies that exist in the European Union. That is a big issue for the EU. Germany imports about 41 per cent. of its gas from Russia and is extremely worried about being over-dependent on Russia. There is an urgent need for the European Union to look at its own resources. Secondly, although other member states were due to liberalise seven or eight years ago when the directive went through, that has not happened. Policy has not been put into practice. That needs to happen, which is why Neelie Kroes is looking at anti-trust measures that should be adopted to galvanise the situation. On the time scale, we expect anti-trust measures to be taken within weeks, as I said earlier. Beyond that I am not sure, but we are seeing a level of activity in the Commission that we have not seen for many years.

Photo of Daniel Kawczynski Daniel Kawczynski Conservative, Shrewsbury and Atcham

May I tell the Secretary of State that three British companies are drilling for gas off the coast of Mauritania and have found significant reserves of gas in that country? Will he agree to meet representatives of those companies? Does he agree that it is disappointing that we do not have an embassy in Mauritania? If we are to start exploring for gas in such countries, we need representation there.

Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry

I, or my hon. Friend the Minister for Energy, would be glad to meet the hon. Gentleman's constituents, although I am not so keen to go to Mauritania. His question about Britain having an embassy in Mauritania is more properly one for the Foreign and Commonwealth Office, which I am sure will consider it with interest.