Gas could be cheaper

Friday, August 01, 2008

Price rises from British Gas and EDF provide a further headache for households struggling to make ends meet. Thanks to the Government's dithering over new nuclear plants, British energy suppliers are reliant on competing globally for energy imports, which is likely to remain the case for the next decade.

Monday's report by the Business and Enterprise select committee argued that energy markets are "not functioning as efficiently as they should", in part because of short-termism.

Producers seem unwilling to sell gas into a forward market, which would enable suppliers to buy future supplies when prices are low. MPs have rightly called for the regulator, Ofgem, to investigate.

It is a pity, therefore, that Ofgem has been neutered, thanks to the Government's ironically-named programme of "better regulation".

Instead of the highly-accountable, single-person regulators that operated in the 1990s, who were able to speak powerfully for consumers, markets are now examined by faceless regulatory boards.

But, as Charles Clover argues elsewhere, it would be a mistake to deal with these state failures by imposing a windfall tax; the objective should be to cut bills, after all, not increase the size of the public sector.

Most vitally, the UK needs to build capacity for storing gas. Years of flowing North Sea supplies made this irrelevant, but now that we rely on imports, we are dramatically more vulnerable than our neighbours to short-term fluctuations in price. While the UK has capacity for 13 days' storage, Germany has 99 and France 122.

Perversely, mainland Europe buys our gas in the summer to cheapen their winter energy bills, but we then buy their gas during the cold months at higher prices. And, as the select committee points out, European suppliers can be remiss in lowering prices in line with the market when selling back to us.

This story was featured on the Telegraph website.

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