Energy: Gas Prices

rose to call attention to the rise in gas prices and the implications for energy policy; and to move for Papers. The noble Baroness said: My Lords, I begin by thanking all noble Lords who are taking part in this debate. There are only nine names on the speakers list, but what we lack in quantity we certainly make up in quality. I am particularly grateful to all of them because I know that this debate has delayed the great getaway for the Whitsun Recess. Furthermore, each person who will take part in this debate has a great interest in the subject and has made significant contributions in the past to the knowledge base of your Lordships’ House on energy and all related matters. The genesis of this debate was that I was asked whether I would put my name down for a ballot. That happened on 23 November. When my name came up some three weeks ago, I denied ever putting it down—I had honestly completely forgotten about it. My first reaction was that we had had so many debates, including one on energy supply and another on nuclear—and your Lordships will be glad to know that that is the only time the ““N”” word will pass my lips—in the past six months that another one would test the patience of the House. My second reaction, which followed rapidly on from that, was that I thought it important that an analysis be made of the recent developments in the pricing and supply of gas, as the market for gas has been in complete turmoil over the past few months. Furthermore, the huge price rises are detrimental and will have long-term implications, not only for consumers, but also for industry in this country. In addition to price rises, there have been many changes in the market for gas in the past six months or so, and many of those have impacted on the long-term likely supply, both in this country and internationally. In November, the Belgium/UK gas interconnector was commissioned. Great hopes have been placed on this development, but concerns soon developed. Some 22 days later, the noble Lord, Lord Davies of Oldham, whom I am delighted to see here today, admitted in response to a Question from the noble Lord, Lord Ezra, that the under-utilisation of the interconnector was ““a serious situation””. He told us that,"““the chairman of Ofgem has written to the European Commission indicating why this situation is utterly unsatisfactory””." He went on to say that the price being offered was high enough and competitive, but that,"““there are imperfections in the market which alone explain why this gas is not available””.—[Official Report, 30/11/05; col. 216.]" On 15 December, the tenacious noble Lord, Lord Ezra—I am sorry that he is not in his place today—asked another Question, and again the noble Lord, Lord Davies, had to field it, saying,"““the Chancellor of the Exchequer and the Secretary of State for Trade and Industry wrote to the European Commission indicating that the malfunction of the European market—caused principally by German companies—was very serious””." Earlier, he said:"““I am pleased to indicate that the German equivalent of Ofgem has indicated that changes are necessary as far as the German market is concerned””.—[Official Report, 15/12/05; cols. 1365-66.]" It seemed that all the worries we had voiced about the long-term security of supply were beginning to come home to roost. We were becoming too reliant on organisations beyond our control. The new year of 2006 dawned and with it the most disturbing situation in the dispute between the Ukraine and Russia, which resulted in the appalling act of Russia cutting off gas supplies to Ukraine in the depths of a most harsh winter. This caused great concern not only about the plight of the people in Ukraine, but also about the implications for other countries reliant on gas supplies from Russia. The poor beleaguered Minister, the noble Lord, Lord Davies, was put in the unenviable position of praying in aid the co-operation of the European Union. He told us that the Government had brought the issue before the European Community ““in very strong terms””, and said:"““I can assure the House that part of the Energy Review will look at the proper functioning of the European gas market and the provision of gas to that market””.—[Official Report, 10/1/06; col. 58.]" Ah, the energy review! On 27 February, the noble Lord, Lord Tomlinson, who was in the Chamber earlier but is not now in his place, asked his noble friend Lord Davies about the energy review and whether he would give us,"““with greater precision some idea of when we might expect it””." The reply was:"““My Lords, the important thing is that the review considers all the issues in full and effectively and gets the long-term energy supplies of this country right. We are talking about decades. It is not a question of rushing out a review””." So a long wait is forecast because it is not a question of rushing out a review. Again I quote what the noble Lord, Lord Davies, said:"““This is not an issue to be rushed””.—[Official Report, 27/2/06; col. 8.]" I hope that it is not too embarrassing for the Minister if I ask him three questions. First, whither now the energy review? I read a tantalising article published in the Financial Times on 15 May to the effect that the review would,"““axe the 2003 approach of relying on increased renewable energy and energy efficiency to meet the UK’s targets for reducing carbon dioxide emissions””." I have to say that I await the outcome with great interest. Secondly, who is personally in charge of the energy review? In view of the comments I have just made, I hope that it is the Secretary of State at the DTI, who seems to have read all the debates held in this House on this subject because it looks as though he is coming up with the right answers. My third question to the Minister is this: are the many people who have spent long hours over days and weeks producing submissions to this review happy that a pragmatic, politically expedient stance has been taken by the Prime Minister, who seems to have taken a one-man stand on the issue in order to win brownie points at the CBI dinner last week? The gas price rises have come as an unwelcome surprise to us all, although they probably should not have been. We all plan on the basis of the best and worst possible cases. I sense that no one really saw how bad the worst case could be. Until recently our economy has benefited hugely from being a producer of oil and gas, and perhaps we have become complacent. I hope that that complacency has now been put aside, but I am not sure that the message about the fragility of security regarding our future energy supplies has got through. I was not wholly reassured when I read that the Government set great store by the fact that,"““President Putin is chairman of the G8 this year and has already indicated that he intends to put the security of energy supplies as the prime issue during his presidency””." That section of the Official Report continues:"““The recent conflict between Russia and Ukraine shows how far countries from the former Soviet bloc have to go in terms of open markets. But there is no doubt that the G8 will be a forum for these issues, particularly in the context of energy policy, as soon as it meets this year””.—[Official Report, 10/1/06; col. 60]" Truly, I do not share the Government’s optimistic view. Indeed, recent reports that a former top economic adviser to the President of Russia has revealed that a new form of gas cartel is being developed between Algeria and Russia fill me with foreboding. I am not the only one. The CEO of Italian energy giant ENI has, according to a report in the Times on 23 May, told officials in Brussels that his country,"““risked being caught in a pincer between two powerful gas exporters””." The big increases in gas prices over the last months were not foreseen because none of us realised how high the oil price was likely to rise. The huge increase in the price of oil had a consequent impact of large increases in the gas price. There was not much that anybody could do about that, I guess. However, gas prices here in the UK were some 30 per cent higher than in continental Europe, and still are. To be fair, the additional transport costs could justify a differential, but surely an additional 5 per cent or thereabouts would be acceptable—not 30 per cent. Our situation became much more difficult—again, since we had all these debates in this House—due to the fire at Rough. Rough accounted for 90 per cent of our storage capacity. Another issue was described to me as the ““fear factor,”” because of our perceived inadequate storage capability. To be fair to the Government, it was not an easy situation. We have got through the past winter—though the last couple of days do not fill me with joy that winter will not come again next week—but what are we going to do at the end of this year and in the winter to come? This is not scaremongering. All the negatives present at the end of 2005 and the beginning of 2006 are likely to prevail in the winter of 2006–07. Is there any way that the provision of additional storage can be speeded up? Fortunately, it seems that the current worrying situation of high gas prices is probably relatively short to medium term if the experts, including economic forecasters, are correct. The theory is that the oil price will reduce to between $45 and $50 per barrel, due to a probable downturn in economic activity resulting from high oil prices. In addition, the very large increase in LNG production should lead to an overall reduction in the price of gas. Gas prices will still be subject to market forces but, with a greatly increased supply of LNG, prices should reduce. The Motion talks about gas prices and energy supply; I turn now to the effect on energy supply. We have recently become a net importer of gas and can, we believe, rely on Norway and the Netherlands to meet the deficit in supplies. A new pipeline from Norway will supply some 10 per cent of peak needs, and an overall 15 per cent of annual requirement. I am informed by experts in the field that the international oil reserves are likely to run out long before the gas reserves, hence my relative optimism. A report prepared for the DTI by the consultants Energy Markets Ltd, entitled Conditions for Truly Competitive Gas Markets in the EU, states that the Government should promote the construction of new pipeline links and try to reduce the influence of what it calls the ““incumbent producers””—namely, Algeria and Russia, to which I referred previously. This would enable us to become a transit country for gas transmission, as well as protecting the security of our supply. Incidentally, the report—which is well worth reading, if a little long and not exactly in layman’s language—is available on the DTI website. In addition, the report recommends that more LNG terminals than we ourselves need should be built in order to facilitate this new sector of, if you like, business. That would enable this country to be an exporter of gas when other countries were running out. This is a novel twist to the conventional wisdom that suggests that we should be running out of energy supplies. But it is not a crazy proposal. We could import competitively priced gas into the UK and re-export it to continental Europe. This is something which, long term, might be a good idea to look at. Because of the rundown of both coal-fired power stations and nuclear power stations—I apologise to the Liberal Democrats for using the ““N”” word, but that will be the only time—we shall almost certainly have to build more gas-fired power stations to cover until the new generation of electricity generating plants comes on stream. That could be, as we know, some 20 or 30 years hence. I know that the idea of building new gas-fired power stations is not great when it comes to carbon emissions but, in an interview with the Financial Times last week, the Secretary of State for Trade and Industry indicated that he proposes to boost gas storage. The measures are said to include changes to the planning guidelines to try to stop the nimby effect, whereby local objections would block multi-billion pound plans for new gas storage infrastructure. The Government are not actually suggesting that they are going to fund these projects; they are just suggesting that they will make it easier for the construction and engineering companies and so on to get on with it. Mr Darling is quoted as saying that security of supply is absolutely fundamental. This is really good news. I know that this solution does not greatly help the targets for reduction of carbon emissions, as I have said, but we are going to have to accept that we shall not be able to maintain electricity generation without an increase in gas utilisation to fill the gap. This is why it is so urgent to take decisions about planning now. The big question is whether the Government will be able to make the planning process easier for the construction of new pipelines, new terminals and new gas-fired power stations. That is the only way in which we can guarantee a crisis-free situation in our medium and long-term energy supply needs. I beg to move for Papers.