THE energy director of one of Britain’s largest industrial companies has a problem. Gas prices are expected to hit a record this winter. They could go so high, in fact, that his company is thinking the unthinkable and considering temporary plant shut-downs.
It is such a sensitive issue that neither he nor his company, one of Britain’s largest industrial users of natural gas, wants to be identified. Plant closures would spook its workforce. Nor does the company want to be publicly linked with its opinion on the real reason for the price hikes — profiteering by gas producers and traders.
Energy minister Stephen Timms may hear those reasons first-hand next month if the company’s plans for a meeting with him come to fruition.
It will be speaking for a lot of British industrialists. Companies across Britain are agonising over a forecast rise of 30% to 50% in gas and electricity prices. Companies in energy- intensive businesses, such as paper production, chemicals and steel-making, say the rises, added to similar price jumps of the past two years, will wipe out profits at low-margin plants in Britain, dissuade further investment, and may lead to operations moving overseas.
Many companies believe they are the victims of, at best, an inefficient gas market and, at worst, deliberate price-fixing. The sharp price rises cannot, they say, be explained by the steady increase in oil prices. The British market is out of kilter with the rest of the world, they claim, and they want to know why. The energy director said: “We are worried about how we will manage this winter.” Jeremy Nicholson, director of the Energy Intensive Users Group, said:
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“We are very concerned about wholesale gas prices. They have departed from the fundamentals. National Grid Transco has said there is adequate gas and electricity to cover all credible scenarios, yet winter prices are very high.”
A partial answer is expected next month. Ofgem, the energy regulator, is expected to publish the results of a two-year inquiry into wholesale gas prices.
Energy prices paid by British firms have soared. In 2003, when the issue was first raised with Ofgem, companies were paying about 15p a therm (a unit of energy) for wholesale gas and were complaining about sudden rises above 34p. This winter they expect to be paying more than 40p.
Gas is used by many companies to generate power, and has a role in the manufacture of chemicals and plastics. Power stations use it to generate much of Britain’s electricity.
Last week Eon Energy, the German utility that owns Powergen and supplies power to about one-third of British industry, warned that its business customers faced a 40% jump in electricity prices. The increase was the result of rising wholesale gas prices, said Eon.
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Ofgem’s response to the 2002 complaints was to launch an investigation. In an open letter to gas producers and shippers, it said it was not sure “that market fundamentals can explain the recent gas price movements”. It had received “allegations concerning the conduct of participants in the UK gas market”.
The regulator published its interim findings earlier this year. For smarting industrialists who had hoped for blood on the carpet, they were disappointing. The two specific allegations of market-rigging, concerning the manipulation of indexes used to price contracts, and the use of large-volume trades to swamp the market, were deemed to be outside Ofgem’s ambit, and have been referred to the Financial Services Authority.
Ofgem said it would pursue two lines of inquiry; why supplies of gas from the North Sea had turned out at times to be less than promised, and why gas flows in the pipe that allows the export and import of gas to and from the Continent had not behaved as expected.
It is understood that part of next month’s announcement will be an agreement with oil and gas companies to provide daily updates on gas production. Industry sources claimed the problem lay in too few gas shippers, which had resulted in an illiquid market. This had led to a shortage of companies willing to sell gas for future consumption at a sensible price.
Meanwhile, industrialists are struggling to cope with this winter’s energy prices. Paper manufacturers, which buy gas to generate steam and also take electricity from the grid, will be particularly hard hit. Graham Bernard, director of the Confederation of Paper Industries, said paper mills were “caught between a rock and hard place”.
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He added: “Energy accounts for 20% to 25% of the costs of a mill making low-margin products. Rises of the size forecast will probably wipe out any profits this winter.”