Energy Intensive Users Group

Position papers

EIUG Policy Statement on Security of Gas Supplies

1. Compensation for Risk of Interruption in the event of an Emergency
EIUG believes that current emergency arrangements, under which firm industrial gas demand is at risk of compulsory interruption - without compensation - in order to preserve security of supply to other consumers, are fundamentally iniquitous.

The priority given to domestic supplies may be sensible from a practical point of view and socially desirable, but the difference in risk of interruption should be reflected in the cost of supplying gas to domestic and industrial premises. Current arrangements are unjustified on economic grounds and result in industry subsidising security of supply in the domestic sector.

It is variable, temperature-dependent domestic heating load that strains gas supplies during a winter period - not flat industrial loads - yet it is industrial supplies that are at greatest risk on interruption in the event of an emergency. The contribution of industry in ensuring security of domestic gas supplies should therefore be recognised explicitly in transportation charges or other equivalent means.

We believe Ofgem should identify a means by which a change in National Grid's transportation charges, or other arrangements with an equivalent effect, could be used to redress the current cross-subsidy by: ·
- Reducing charges to large firm industrial gas users to reflect the higher risk of supply interruption
- Compensating large firm industrial gas users in the event that emergency supply interruptions occur
- Some combination of the above

We believe such measures ought to be introduced as a matter of urgency in view of the material risk to industrial supplies this winter.

Furthermore, we believe that the issue of priority sites should be assessed to ensure that industrial consumers can respond to an emergency in a controlled manner. Current arrangements do not take into account the fact that some industrial sites require a small amount of firm gas either continuously, or for a number of days in order to switch off safely, and that continuous or batch processes need to be allowed to continue to the end their cycles to avoid having to reject batch charges because processes have not been completed. We are working on this issue with National Grid, Ofgem and DTI to ensure that these sites can provide the response required in an emergency.

2. Transitional Arrangements in the absence of full EU Gas Market Liberalisation
EIUG fully endorses the goal of achieving fully liberalised European energy markets, and is grateful for the efforts of DTI and Ofgem towards this end, but believes that transitionary arrangements are needed to manage the UK's transition towards import dependency within the wider and as yet largely unliberalised EU gas market in order to ensure security of supply.

We believe DTI and Ofgem should work together to review the boundaries between open competition and the regulated market in gas supply and that this work should include, but not necessarily be limited to:

- Extending the role of National Grid in balancing the gas system to include securing options for supply enhancement and/or demand reduction services beyond the within-day period (analogous to its existing role in electricity), including the purchase of gas to maintain adequate stocks storage is under pressure and yet import capacity remains underutilised.

- Strategic Storage - the market will not deliver adequate strategic storage under the current regulatory framework, as a recent UKOOA/Ilex report has shown - and events have demonstrated how the absence of strategic storage has left security of UK gas supplies to the mercy of factors outside our control - so there is an urgent need for a new regulatory structure that ensures National Grid, or other parties, have the incentive to provide such a facility.

- Extending regulated third party access to natural monopoly infrastructure assets such as long-range storage, interconnectors and LNG terminals, in line with arrangements already in place onshore.

- Extending the role of Ofgem to ensure independent market regulation offshore (analogous to its more comprehensive role in the electricity market), freeing DTI to deal with licensing and other matters related to its role as the sponsoring department of the oil and gas industry without conflict of interest.

EIUG believes that transitional arrangements in these areas could significantly improve security of supply whilst progress is being made towards full EU market liberalisation - a process that will take many years. Some or all of these changes might be reassessed if and when full EU market liberalisation is achieved.

We believe that new arrangements should be put in place as early as possible in 2006, i.e. well in advance of the 2006-07 winter period.

© Energy Intensive Users Group 3 January 2006