Centralizaci´ on de Contadores

Since 1994, gas prices in the British market have been driven lower by the emergence of oversupply as production from a spate of new fields has outstripped the increase in demand, partly due to delays in commissioning new gas-fired power-generation capacity. Detailed information on contracted supplies is difficult to obtain because of commercial confidentiality, but industry estimates put the surplus of supply — defined as the annual contracted quantities (ACQ) over demand — at around 1 000 mmcfd (10 bcm/year) in 1996 and 1997⁴⁹ Some of this gas has been paid for but not lifted under take-or-pay contracts (mostly held by Centrica). This gas was “banked” for delivery at a later time, though much of it was released from contract in Centrica’s recent contract renegotiations. Potential peak availability of gas has also outstripped peak demand. Total maximum potential supply at the beach and from storage amounted to around 18 mmcfd in winter 1997/8 compared to Transco’s estimated 1-in-20 peak winter day⁵⁰ demand level of 14.8 mmcfd (not allowing for interruptions). Both the base prices in new contracts and the spot prices of short-term gas sales have come under downward pressure with the build-up of surplus volumes (see Figures B-9/10). In short, the market has become supply-driven.

Since 1994/5, market prices have effectively been determined by gas-to-gas competition. Interfuel competition has rarely been a factor in short-term gas-price determination. The oversupply of gas since that time has pushed gas prices to levels well below those of competing fuel prices. At present, virtually all gas end users with dual-firing capability are already using gas. Thus, a fall in prices has no significant short-term effect on gas demand. Figure B-24 shows that, since 1995, even firm gas prices have been well below the price of heavy fuel oil — the primary competing fuel — for medium and large industrial consumers. Since the beginning of 1996, interruptible-gas prices have been lower than coal prices to large industrial consumers. Similarly, in the power sector, spot-gas prices to CCGTs have been consistently below average coal prices, adjusted for differences in thermal efficiency⁵¹ (see Figure B-25).

In principle, heavy-fuel-oil prices provide a ceiling for gas prices: were gas prices in new interruptible contracts to exceed oil prices to any significant extent, large industrial and commercial customers with dual-firing would postpone signing a new gas contract at the expiry of their existing contracts and switch to oil for as long as gas remained uncompetitive. This would gradually reduce demand for gas as increasing numbers of contracts expired, thereby alleviating the upward pressure on gas prices. In practice, this ceiling has not been tested since the emergence of competition in the British market.

49. See Wood Mackenzie, North Sea Report (July 1996).

50. Estimated peak daily load with a 5% probability of occurring.

51. There may, however, have been times when the cost of generation from imported coal at certain power stations located near to an import terminal was lower than that from spot gas.

164

94Q1 95Q1 96Q1 97Q1 98Q1

10 15 20 25 30

Gas-firm (50 mcm/yr) Gas-interrupt. (50 mcm/yr)

Fuel oil (4900-15000t/yr) Fuel oil (>15000t/yr)

Coal (>7600t/yr)

94Q1 95Q1 96Q1 97Q1 98Q1

10 15 20 25 30 35 40 45

Gas-firm (10 mcm/yr) Gas-interrupt. (10 mcm/yr)

Gas oil (>175 t/yr) Fuel oil (490-4900 t/yr)

Coal (760-7600 t/yr)

Medium

Large

Figure B-24

Fuel Prices to Industry, 1st Quarter 1994 to 1st Quarter 1998 (p/therm)

Source: DTI, Energy Trends (various issues)

For all their volatility since 1994, spot prices have on several occasions fallen to around 8.5-9p/therm, but at no time have they fallen significantly below that level. Prices have fallen to this level in the last two summers (1995/6 and 1996/7). This effective floor price appears to be determined by supply-side factors. During the summer, gas deliverability has been considerably in excess of end-user demand even allowing for scheduled maintenance and purchases by shippers and the Top-Up Manager for injection into storage. There has been insufficient downside flexibility of demand to absorb all this surplus deliverability, since all dual-fired capacity is already been running on gas. Price elasticity of demand is extremely high at that point along the demand curve.

Although the short-run marginal costs of production are generally much lower than 9p/therm, North Sea producers are collectively unwilling to offer gas onto the spot market at less than this price. They prefer to leave the gas in the ground for production at a later date when they expect prices to be higher. The determination of this effective floor price is, in effect, based on expectations of future price levels as represented by forward spot prices and market base prices for long-term contracts without spot-gas-market-related indexation⁵².

94Q1 95Q1 96Q1 97Q1

0.5 1 1.5 2 2.5

Fuel gas (steam turbine) Coal (steam turbine)

Spot Gas (CCGT) BG Contract Gas (CCGT)

Average Gas (CCGT)

Figure B-25

Fuel Costs of Electricity Generated, 1st Quarter 1994 to 4th Quarter 1997 (p/kWh)

Note: Assumes thermal efficiencies of 45% for gas and gas oil in CCGTs, and 37% for coal and oil in steam turbines (actual 1996 data).

Source: IEA, based on date from DTI, Energy Trends (various issues)

52. In a rational world, one would expect the marginal producer to set a minimum price which is equivalent to the net present value of the future revenue stream from the gas if produced at a later date, based on assumptions of future prices. However, we have found no evidence that producers regularly calculate such minimum prices in a systematic way.