No Hot Air

An Independent view on Ofgem and prices

Leading article in today's Independent newspaper makes our view of Ofgem appear charitable. We almost feel sorry for them.  Almost, but not quite.

Such profiteering is little short of scandalous. And yet Ofgem, the most useless of the government's regulators, has done almost nothing about it. Instead it parrots industry PR about how since privatisation two decades ago prices have fallen in real terms and customers' bills have been reduced by £1bn per year. The truth is that privatisation has been a failure because public monopoly has been replaced only by private oligopoly. The number of suppliers has fallen from more than 20 in the late 1990s to six dominant conglomerates today. Bodies that big, and that few, do not need to collude; they have a confluence of interest which creates market failure. Their 4,000 different tariffs renders meaningful comparison – and therefore true competition – impossible.

The job of Ofgem should be to ensure that retail prices in the industry track international energy prices. To that end it must enforce greater transparency on the industry about how prices are calculated so consumers can tell whether they are being offered value for money set against the international market price. Instead, it seems to accept industry blandishments without question. It needs massive and immediate reform.

No surprise

From PA:

• British Gas parent Centrica has said its residential utility arm was on track to see profits soar by an expected 43% this year, despite a 7% fall in energy consumption.

Seven per cent drop in sales, 43% increase in  profits.  Why can't the rest of UK industry do this well?  Probably because they don't have an as blind, toothless and incredibly naive regulator as Ofgem.

Ofgem believes, solely because the Big Six told them so, that they simultaneously had the misfortune (ours, not theirs evidently) to buy July, August and September 2009 gas during the highest prices ever recorded in July 2008.  Ofgem has resisted calls to have an open book investigation of suppliers on the grounds of commercial confidence.

Unless the Big Six are complete morons,  they would have  contracted for that gas at the time, with the price set at the prices in effect on the wholesale markets at the time of delivery.  They would have perhaps bought an option to buy the gas at that price, or any number of derivatives to protect themselves but they probably didn't bother.  This was the time of $143 oil, and everyone knew which way that was going.

Wholesale prices today are up  to 70% lower than they were last year.  And that is the price that the big six are paying, which explains  how they increase profits even as sales decrease.  Ofgem is naive on the verge of incompetence if they believe, with no proof, that suppliers bought into iron clad agreements last year.

Utility bills are as unavoidable as taxes.  Utilities are essential a tax for modern life.  And they have a similar impact as taxes.  If they are higher than they could or should be, they have a macro economic impact that should take precedence over the narrow interests of Big Six shareholders.  Better economists than I can say what the £50 a month that the average user over pays would be equivalent to:  It would surely be equivalent to a point or two on income tax or VAT. Energy bills are an incredible downward drag on consumption and may explain why the UK is doing worse than other economies.  I don't believe this is deliberate, as it imputes competence they don't have , but the net impact of Ofgem sabotages the recovery. That £50 a month could be going from energy payers, which is just about everyone who also pays taxes (and those who don't like the unemployed and pensioners) into retailer tills, or paying down debt or even investing in companies like Centrica.

But we can do something about those who raise taxes.  We can't do anything about energy bills, because Alistair Buchanan says that British Gas's prices are just fine with him.  The Tories are allegedly planning to ditch Ofgem. 

What"s the betting that Alistair Buchanan ends up on one of the boards of the Big Six sometime in the future? 

Less Hysterical Tones on European Gas

From Datamonitor via iStockanalyst a story which starts out plainly noting that Nord Stream, the Russia/Germany pipeline under the Baltic has all the necessary approvals but then provides some of the best analysis of European gas going, and that includes us:

Thus it appears that the fundamental beliefs which have underpinned European states' energy planning for the past five years may soon be turned on their heads. From 2011, Nord Stream will increase the security of Russian supplies to Europe. LNG regasification capacity will also be far higher and it is reasonable to assume that LNG supply will remain strong for at least the next four years. Finally, indigenous supplies may not actually be declining at the rate previously assumed. Hence, over-reliance on gas (the central obstacle facing policy makers between now and the new generation of nuclear plants' activation around 2020) may not present such a critical flaw as previously thought. Of course, under-investment in new infrastructure resulting from the financial crisis could yet leave the gas market tight by 2015 (particularly if the global economy were to rebound powerfully) but perhaps the debate surrounding Europe's energy strategy might now be conducted in less hysterical tones.

Less hysterical, and less paranoid. And dare we ask realistic to boot?  It will take a while for the gas Chicken Littles to get worked out of the system, but their days may be numbered

Lower Carbon Future? Try Natural Gas.

 Tony Hayward of BP,  unable to find space in UK newspaper pages busily proposing outdated solutions to obsolete energy shortage scenarios has been reduced to writing op-eds for The Washington Post.

...shaping our energy future will be more complex than simply using less fossil fuel and more alternatives. Getting to a lower-carbon world while also providing the increasing energy needed to power a growing economy requires a more nuanced approach.The issue, then, is not a choice between fossil fuels and alternatives but, rather, what combination can achieve the fastest carbon reduction at the lowest possible cost using available technology?

Hayward then goes to the usual arguments about how gas can replace coal, CCS is unproven and doesn't work yet and ramping nuclear up won't be quick.  He doesn't deny they'll ever happen but:

..providing the increasing energy needed to power a growing economy requires a more nuanced approach.

Renewable energy sources -- wind, solar, biofuels -- have an important role, and BP, the energy company I head, is investing significantly in all. Still, the shift to alternatives can't happen overnight.

Meanwhile here in the UK, it's going to be nuclear's day today, which is pushing an expensive, divisive and long winded solution to a problem of energy security that no longer exists. 

How dependent is Europe on Russian Gas? Not very.

Interesting post here from the pre shale days of long ago, although shale moves so fast that means we're talking November 2008, touching on the easy story of the  Russia narrative and finds :

Conventional wisdom has it that Russia dominates Europe’s natural gas market, and that European imports of Russian gas are growing and can only continue to grow. This supposedly places the EU in a dangerous state of dependency and compromises its strategic position towards Russia. All sides of the debate over Europe’s Russia policy share these premises, including those “realists” who argue that dependency on Russian gas makes it irresponsible for the EU to pursue policies that antagonise Moscow. But the conventional wisdom is wrong: Europe’s gas supply is not dominated by Russia, or, for that matter, by any other exporter.

Regular readers know that we just can't resist stories that start out "Conventional wisdom...",  because CW is almost invariably wrong. It was wrong about shale and it's definitely wrong on Russia:  Jonathan Stern has said so in any number of places and so has Peter Voser CEO of Shell in a widely ignored speech three weeks ago that we think has to be tattooed under the eyelids of energy reporters:

The U.K.'s fears of over reliance on imports of natural gas in the future are overdone because supply of the fuel will remain ample and secure, said Royal Dutch Shell PLC Chief Executive Peter Voser Tuesday.

The focus of the U.K.'s fears - supply from Russia - made up less than 5% of total supply in 2008 and will be a similar proportion in 2020, he said. Shipments of liquefied natural gas and pipeline imports from Norway will be a much larger proportion of U.K. supply, he said.

"The U.K.'s energy challenge is acute. This raises the question why it can afford to dismiss natural gas as a future source of energy

Back to Pierre Noel's piece from last year:

93.5% of the energy consumed in Europe is covered by sources other than Russian gas – and natural gas, unlike oil, faces direct competition from other fuels and technologies.

And of course as we highlighted last week, about 15% of UK electricity supply is directly dependent on Russian coal imports (!), but coal for some bizarre reason isn't considered a threat.

Two Upper Houses

In the House of Lords this week, one of the noble lords (are there any ignoble ones?) mentioned shale gas.  He got it a bit wrong, but still:

My Lords, it is now possible to convert the world's oil shale deposits outside Russia into enough natural gas to meet energy needs for the next 200 years. Will the Government increase gas storage facilities to switch more coal-fired power stations to gas to maintain stable energy prices,..

The obvious mistake is that oil shale and gas shale shouldn't be confused.  Oil shale via oil sands is an environmental nightmare totally as different from gas shale as well, oil and gas. 

But then Lord Tanlaw, missed an important, and rather obvious to us, point.  If we have enough gas for 200 years why on earth do we need to store it?  I'll do a post on storage one of these days because it's a classic example of the anecdotal beating the prosaic, and technically complex reality that we don't need to worry about storage.  We have a huge herd of dairy cows. Why should we get milk delivered?  We have at least 8 gas import terminals.  The chances of concurrent failure are literally astronomical.  If 8 meteorites hit the terminals at the same time, which is what it would take,  the impact on gas prices would be the least of our problems.

The answer was this:

Lord Hunt of Kings Heath (Deputy Leader of the House of Lords, House of Lords; Labour)

My Lords, I can assure the House on the latter point. We can depend on the world's scientists to take great care and note of what the noble Lord has suggested. On shale gas, he is right to suggest, as I think he does, that the availability of gas supplies has changed and is much more liquid as a result of activities in the US. In a sense, this country is in a good position because of the increased possibility of LNG coming to this country and the increase in our import facilities. Again, I am confident—one can never be complacent—that we are in a good position in relation to energy supplies at the moment.

Paying Lord Hunt's ticket to the Buenos Aires World Gas Conference was not wasted. Although it must be asked: Why can't we be complacent, given the facts of shale?  Why spend a lot of money putting gas that is flowing out of various holes in the ground into other holes in the ground. This is simply energy whack a mole. But Lord Hunt, along with almost everyone else in the UK, has to break the habit of a lifetime, and that habit is confusing a carbon constrained future with an energy constrained future.

Meanwhile in another place, sadly not the House of Commons but the US Senate,  an upper house that actually has some power, they are both better informed and way ahead of us in planning for the new world:

Development potential from unconventional sources in the Lower 48 states has definitely changed the domestic gas supply outlook, they told members of the Energy and Natural Resources Committee. Richard G. Newell, administrator for the Energy Information Administration, called it “the major and very positive story” in terms of production, proven reserves, and estimates of technically recoverable reserves. 

Very positive story and DECC or Ofgem have never been known to appear in the same sentence. The EIA then went on to admit they got it wrong:

"EIA has traditionally taken a relatively optimistic view of the unconventional natural gas resource, even at a time earlier this decade when many other analysts were suggesting that the lack of gas resources in North America would lead to a rapid and inexorable increase in our reliance on imports of LNG,” Newell said. “Recent shale gas developments suggest that even our perspective was not optimistic enough.

Lamar McKay, president of BP America was there.  There was a time when the UK press and energy establishment hung on every word uttered by chief executives of companies like BP or Shell, but now the press simply calls up a switching site and asks them for a unbiased opinion. McKay noted:

“Current legislative proposals do not create a level playing field and, as a result, natural gas is danger of being squeezed,” he said. “In spite of its economic, energy security, and environmental benefits, gas is caught between support for emerging low-carbon technologies on one hand, and relief for coal generation on the other.” 

Jack Fusco, CEO of Calpine,

Fusco said existing gas-fired power plants could make a bigger immediate contribution if they were more fully utilized. “In other words, a near and medium-term solution to our climate-change solution is at hand. No guesswork. No huge spending programs needed. The power would reliable—available all day, every day,” he testified. “And if we embrace this solution with the right incentives, American business would continue to invest its own capital in existing proven technologies to build even more gas-fired plants to dramatically further reduce emissions for the longer term.”

Fusco said Calpine, a Houston-based operator of power plants in 16 US states and Canada, already emphasizes lower-carbon sources with its geothermal and gas-fired installations. The company has historically been involved in the climate change and clean energy policy debate and generally supports the bill which passed the US House on June 26 as well as the measure currently before the Senate. But it also believes that real incentives to encourage more gas use to generate power are missing from the bills, he said. 

Imagine if a Big Six Utility CEO in the UK said that. One reason they don't is that they have no incentive to disagree with regulators who consistently predict woe and havoc and high prices.  It would be nice to have some regulation from the reality based community.

CCS at coal-fired plants to almost double cost of power production

Based in Canberra, the Global Carbon Capture and Storage Institute is a cross government organisation that is tasked with promoting CCS.  But if this is promotion,  we'd hate to hear anything negative:

The use of carbon capture and storage (CCS) technology at coal-burning power plants would add 78 per cent to the price of producing electricity, according to a new report released yesterday.

"A viable business case for commercial-scale, integrated projects has not been established at this time for coal-fired power generation and other large CO2-emitting industries," said the report, titled Strategic Analysis of the Global Status of Carbon Capture and Storage.

Their solution of course is for governments to dip into our pockets and support coal CCS.  Whereas last time we looked, all gas is asking for is a level playing field and a carbon price. Which won't cost most people anything at all, and certainly far less than the untried CCS technology which appears to be up to 20 years away anyway. We're trying to find out about CCS at gas plants, but can't find much that makes sense. The GCCSI report states that gas carbon capture is twice as expensive as coal.  Any hints out there as to why?

Ofgem loses it entirely....

What planet is Ofgem on?

Alistair Buchanan, chief executive of the energy regulator, has found that Europe could be under-supplied by 41bn cubic metres in six years’ time, if key Russian projects – many already delayed – fail to deliver. This will affect the UK if it relies on a significant expansion of gas-fired power stations to replace retiring coal stations, while nuclear plants are not operational until 2020 and energy demand rises in a strong global economy. It would narrow to a 33bn cubic metre shortfall of gas by 2020

On AB's planet, Shale has never happened.  Shale in Poland, Germany, the Netherlands, France, Switzerland, Sweden, Hungary or Austria doesn't change a thing, especially by 2020.

We cannot believe that a public official (salary £260,000) is so inexpert! Has no one in Ofgem read the papers or perhaps they should ask Jonathan Stern his opinion:

Worst Crisis of Russian gas supply imaginable had no significant effect on UK gas supplies and prices

We'll call out each and every paper who prints this rubbish!  We remind them again of the words of someone who Alistair Buchanan obviously thinks is a rank amateur compared to an expert such as himself:  Peter Voser the CEO of Shell quoted in the WSJ of October 13:

The U.K.'s fears of over reliance on imports of natural gas in the future are overdone because supply of the fuel will remain ample and secure, said Royal Dutch Shell PLC Chief Executive Peter Voser Tuesday.

The focus of the U.K.'s fears - supply from Russia - made up less than 5% of total supply in 2008 and will be a similar proportion in 2020, he said. Shipments of liquefied natural gas and pipeline imports from Norway will be a much larger proportion of U.K. supply, he said.

"The U.K.'s energy challenge is acute. This raises the question why it can afford to dismiss natural gas as a future source of energy," particularly because it contains less carbon than other fossil fuels, Voser said.

Journalists at least should expect some minimum level of competency from such an important person.  What's Mr Buchanan's excuse?

No wonder he gives a free pass to suppliers, the man is either totally inept or simply the most gullible man in Britain.

Lessons to be learned from Canada

The UK and the EU aren't the only places where there are long held dreams of expensive grand energy projects. Alaska has been dreaming of gas pipelines tothe lower 48, and next door the Mackenzie Valley pipeline from the Beaufort Sea to Alberta is another project that at one time might have made sense.

Today?  Reality intrudes:

Ottawa has decided not to proceed with its investment in the $16.2-billion Mackenzie Valley Pipeline, sources said, throwing the future of Canada's largest construction proposal into doubt....

Bob Hastings, an analyst at Canaccord Adams, who has been following the pipeline saga for decades, does not think it will be built.

"The price of gas isn't fantastic and the only thing that has really happened in the last year or so is that we've found a heck of a lot of shale gas close to consumer markets," he said. "And what would you rather do? Buy gas from up in the Northwest Territories, a long, long, long, long, long, long ways away at a very high cost, or get the gas that is just next door?"

Will Europe learn similar lessons regarding Nabucco?  Or Carbon Capture, or nuclear or storage for that matter? 

At the end of the day, most of the money will come from banks anyway, with government guarantees unable to cover anywhere near the entire cost. All of the above projects are underpinned by gas being  constrained physically or politically. Take away the foundation and nothing may ever get built, grand or small.  

Simply substitute Turkmenistan for Northwest Terrritories above, and ask does Nabucco make sense?

Why do we fear Russia on energy?

A foundation of UK energy policy is that we're running out of gas, making us dependent on the charity of others.

A sub text of much of the same policy is security of supply. But why are fears over security of supply directed against Russia who is accused of following in the footsteps of Molotov in any number of places, this one just happening to be today's FT, but it could be anywhere

 The US ambassador to Sweden last year denounced Nord Stream as a "special arrangement between Germany and Russia" and called on the EU to counteract "Russia's energy weapon".

The reality is far more boring, and one of Britain's top energy experts, Jonathan Stern of the Oxford Institute for Energy Studies pointed out earlier this year talking about the Russia/Ukraine dispute of January 2008, in slide 16 of this fascinating presentation:

Worst Crisis of Russian gas supply imaginable had no significant effect on UK gas supplies and prices

No Hot Air, somewhat like Jonathan Stern, believes in facts, not anecdotes.  He points out that the worst disruptions to energy supply come from the UKCS not from external sources.  He also points out that they are for the most part short term, not structural. In other words, sometimes bad luck happens. To which we would add, it's much more bad luck to try and avoid it. Think of how many people bought long term prices that only provided the dubious value of paying double or more for energy in the name of risk avoidance.

Back to the Red Menace.  Oops, we don't call it that anymore. Maybe we should mention the Cold War, so we can see how insane today's view of Russian energy weapons are. Example number one: Coal.

Coal and Gas are roughly tied as sources of generation. We always thought it bizarre that although 70% of UK coal is imported, no one has kittens over security of supply. But that was before we found out who the number one source of imports to the UK is.

How does the UK reconcile dependency on Russian coal with concerns about over-dependency on gas?

Coal supply is fundamentally more flexible  Not dependent on pipelines
More diverse supplier base

We know a thing or two about energy.  But we didn't know this!  Coal supplies about 40 per cent of UK electricity, 70 % is imported (28% of total), Russia supplies 60% of that.  Or in other words, 15% or so of UK electricity is directly at the mercy of the evil empire:  Russia's energy weapon.

But why do we hear about gas. Russia supplies at tops 5% of UK demand, and that is debatable, Jonathan Stern says it's none and there isn't a better expert on Russian gas around.  But why don't we hear how insecure we are about coal?  Gas is just as fundamentally flexible, doesn't depend on pipelines and has a far more diverse supplier base than coal.