Since last summer, the Department and OFGEM have been working closely with the Futures and Options Association (FOA) to identify the reasons for the lack of liquidity in the gas and power markets and to see if there are any barriers the Government could help overcome.
The FOA organised a roundtable on 1 November 2005 and have been taking forward work on a number of priority actions with a particular focus on power:
To establish a Steering Group to assess the viability, and, as appropriate, take forward the establishment of an auction market for the trading of UK power—this is expected to make a recommendation to the industry in the summer with a view to implementing changes before the winter.
To respond to the Government announcement for reviewing energy policy, particularly in the context of appropriate market mechanisms, and to brief MPs on energy issues—the FOA organised a briefing session under the auspices of the Associate Parliamentary Group on Wholesale Financial Markets and Services on 6 March.
The FOA held a further roundtable for investment banks and brokerage houses on 6 June to ascertain their views on the state of the energy market, and what could be done to improve liquidity.
In addition to the work with the FOA, DTI officials have been holding separate meetings with representatives of traders and exchanges to investigate why there are not more players and whether there is anything that could be done to improve the structure of the market.
Preliminary figures from the Office of Government Commerce (OGC) indicate that public expenditure on gas and electricity was between £1.5 and £2 billion in 2003-04. This figure is indicative as it is based on information from a sample of public sector administrations. This information is not regularly updated.
The latest DTI statistics, March 2006 (http://www.dti.gov.uk/files/file26972.pdf) indicate that retail prices paid by small industrial consumers—a proxy for the public sector—for gas and electricity increased by 80 per cent. and 53 per cent. respectively, between January 2004 and January 2006.
The Government take the recent increases in energy prices very seriously, and particularly their impact on the competitiveness of UK industry. We have been engaged in continual dialogue with industry to find solutions and mitigate the impacts of high gas and electricity prices. Our discussions with the Energy Intensive Users Group and others have helped us focus our efforts on maximising gas and electricity supplies, improving the operation of the market, encouraging demand side response and pursuing fair access to markets across Europe.
Over the summer we will be pursuing a detailed work plan with Ofgem, national grid, industry and others to ensure we are in the best possible position ahead of next winter. And at a higher level, the new Business Energy Forum will discuss security of supply from a strategic viewpoint.
The impact on UK businesses of increases in gas and electricity prices will depend on a variety of factors, including how much gas or electricity a particular company uses, the degree of their exposure to spot and forward prices and the duration of high prices. It will also be affected by the energy prices paid by their competitors. A further sector-specific issue is whether they are in a competitive market where international trade sets the price or in a sector where prices are determined more locally and rising energy costs could be passed on.
It should be noted that between 1990 and 2004, the relative costs of gas and electricity to UK industry were approximately £8 billion and £9 billion less respectively than their German counterparts. I do however recognise that the UK has seen sharp price rises since then.