L´ınea General de Alimentaci´ on, LGA

PRICE TRENDS

Differences in the way gas supplies are contracted for and priced, described in the previous section, are reflected in divergent price trends and patterns across and within different stages of the gas supply chain and customer categories. In contrast to the North American market, where spot prices now largely determine prices for term-contract supplies, actual prices of bulk British gas supplies, delivered to the beach or to the NBP within Transco’s transmission system, can and do vary considerably according to the type of contract. This is because bulk supplies are priced using an array of indexation formulae: only a minority are currently priced on a spot or spot-price-related basis, although this proportion is rising steadily.

Centrica’s gas costs, until now, have been insensitive to spot price movements (see Figure B-9). Recent contract renegotiations will take effect towards the end of 1998.

Figure B-9

Spot Bulk Gas Prices at the Beach, January 1994 to May 1998 (p/therm)

Note: BG WACOG is the weighted average cost of gas for British Gas (Centrica). The spot price at Bacton (Heren Index) is the weighted average cost of full-month gas in over-the-counter deals. Prices at the NBP are typically a fraction higher than at Bacton.

Source: WACOG: European Gas Markets (various issues); spot price: World Gas Intelligence (various issues)

Jan 94 Jan 95 Jan 96 Jan 97 Jan 98

5 10 15 20 25

Spot price (Bacton) BG WACOG

45. This section does not consider in detail price setting in the regulated tariff market for residential customer, since full competition in this sector was not introduced until May 1998.

Spot prices have shown considerable volatility over the past three years. First month-forward spot prices collapsed from an average of 23p/therm in January 1994 to under 9p/therm by summer 1995. The spot market recovered in the autumn/winter of 1996/7 to over 20p/therm on the back of a very cold spell, but quickly fell back to under 10p/therm in summer 1997. An analysis of spot prices for gas delivered to the NBP reveals a close relationship between gas for one-day-ahead and balance-of-the-month gas, and some divergence between very prompt and forward-month and quarter deliveries (see Figure B-10). There is normally only a very small difference between month-ahead spot prices delivered at the NBP and Bacton. Seasonality of spot prices emerged for the first time in 1997.

Figure B-10

Spot Prices Delivered to NBP, 1997 to May 1998 (Monthly averages, p/therm)

Source: Petroleum Argus Gas Connections (various issues)

Spot prices for very prompt delivery for the day ahead and the same day have shown even more volatility than month-on-month prices Figure B-11 plots daily prices for day-ahead gas deliveries since 1997: prices have been particularly erratic during the winter months. Price spikes, such as the one on 7 January 1997, when the average day-ahead price reached 29 p/therm and another on 17 December 1997 when the average price was almost 23 p/therm, were caused by system buys at extremely high prices by Transco’s flexibility mechanism. The SAP (system average price) has on occasions exceeded £1/therm and on one occasion, SMP (system marginal price) reached almost £5/therm⁴⁶, due to cold weather and real or imaginary problems with deliveries from offshore fields (see Figure B-12).

Jan 97 Jul 97 Jan 98

8 10 12 14 16 18 20

Day ahead Current month 1st month forward

1st Q forward

152

46. On 17 December 1997, offshore production problems and the sudden onset of cold weather exacerbated by the cut-off of interruptible storage under the 85% rule led to record prices on the flexibility market: SAP for the day reached £1.27/therm and SMP-buy £4.97/therm.

1/1/96 1/1/97 1/1/98 5

10 15 20 25 30

Figure B-11

Day-Ahead Spot Prices, 1 January 1996 to 28 July 1998 (Daily, p/therm)

Note: Bacton until 9/96; NBP thereafter Source: Petroleum Argus

1 Aug 1997 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 1998 1 Feb 1 Mar 1 Apr 1 May

0 10 20 30 40 50 60

SAP SMP Buy SMP Sell SAP = 127p/therm

SMP Buy = 497 p/therm (17 Dec 1997)

Figure B-12

Transco Flexibility Mechanism Prices, August 1997 to May 1998 (Daily, p/therm)

Source: BG Transco

Seasonality in futures prices since the IPE contract began trading in February 1997 is marked (see Figure B-13). As in the United States, near-month futures prices tend to converge on the near-month spot price at the NBP. The seasonality of forward spot and futures prices is analysed below.

Figure B-13

IPE Futures Prices, February 1997 to March 1998 (p/therm)

Source: Petroleum Argus Gas Connections (various issues) Note: Prices at end-of-month settlement date for near month.

As with bulk-gas prices, end-user prices also show divergent trends depending on the pricing mechanism used in contracts. Power-sector prices under existing contracts have generally fluctuated much less than spot-gas prices, partly for historical reasons. They are largely linked to competing fuel prices, electricity prices and inflation. Figure B-14 shows that prices under BG’s long-term interruptible (LTI) contracts have tended to increase gradually, while average gas prices to power generators, which include an element of spot purchases, have been more volatile.

Prices to industry began to fall steadily in 1994, picking up pace over the winter of 1995/6. After levelling off during 1996, prices for all categories of industrial customer started to rise during 1997, partly reflecting higher spot prices over the winter of 1996/7 and towards the end of 1997. Figure B-15 shows price trends since 1994 for industrial customers for firm delivery. Figure B-16 compares firm and interruptible prices to medium and large industrial customers.

94Q1 95Q1 96Q1 97Q1 98Q1 8

10 12 14 16 18 20 22 24

BG LTI Average Spot price (Bacton)

Figure B-14

Average Prices Paid by Power Generators Under Existing Contracts, 1st Quarter 1994 to 1st Quarter 1998

(p/therm)

Source: BG Long Term Interruptible prices: World Gas Intelligence; Average gas prices to power generators: DTI, Energy Trends (various issues); Bacton spot price European Gas Markets (various issues).

Jan 94 Jan 95 Jan 96 Jan 97 Jan 98

5 10 15 20 25 30 35 40

V. small (0.1 mcm/yr) Small (1 mcm/yr) Med (10 mcm/yr) Large (50 mcm/yr) Spot price (Bacton)

Figure B-15

Firm Gas Prices to Industry, January 1994 to May 1998 (p/therm)

Source: Industry prices: World Gas Intelligence (various issues); Bacton spot price: European Gas Markets(various issues).

SUPPLY AND DEMAND FUNDAMENTALS