Monday 4 August 2014

Tim Yeo & Gas: Onto Something, Not What He Thinks

We have often had cause here to refer to the central role played by the natural gas market in the UK energy sector, beyond the fact that it provides a very large share of our primary energy, particularly for heating and (sometimes) for electricity.

The additional, crucial factor is that the wholesale price of gas can be (and in the past, often has been) price-setting for wholesale electricity prices: and in the UK the electricity sector is twice the size (by £££ gross) of the gas.  Since the dreadful days of Mili-Ed as energy secretary, UK energy policy has been predicated on the price of gas rising indefinitely, which is how DECC justifies the otherwise quite unbelievable prices - and index-linked to boot! - it is offering to nuclear, wind, solar, biomass etc etc.  We've already recorded here how wholesale gas prices are falling across Europe and the Far East: one glance at how those guaranteed 'low-carbon' electricty prices will look if gas stays soft for the next decade, and you realise what a gamble, a potentially suicidal gamble, this is.  (And all in the name of 'no-regret' policies !)

[Before anyone says, aha, but what about security of supply!? the answer is: it's the same thing.   If the supplies can't be secured well, the demand ain't going away so the prices will rise accordingly.  But actually, the supplies can be secured, provided we diversify intelligently.  It's called trade, and we've always been quite good at it.]

Of course, the fact of wholesale gas prices falling while retail prices stay the same has resulted in the retail sector being referred for a CMA enquiry - as well it might, because the issues are complex.  Now, up steps the disgraced Yeo: the enquiry will be “compromised from the outset” if it does not look at the wholesale gas market, says he, and currently the CMA is not minded to do this.

What's the answer?  Yeo is right to draw attention to the pivotal role of the gas market (see above): but that's as far as we need to agree with him, and the CMA is well-justified in taking the wholesale gas market as a given (see here, para 62-64).

That's because it is, and has been for several years, as close to being an open, competitive, international market as you'll find in most commodities.  Price formation is very well-behaved analytically which is always a good sign.  It is clearly based on the fundamentals of international supply, demand and logistics.  It arbitrages tightly (another good sign), has decent liquidity in Europe (& excellent liquidity in N.America), and has blown away Gazprom's very determined efforts over many years to have gas prices indexed to the price of oil - no small matter when the dominance of Gazprom as a producer is considered.  There are some subtleties:  what, for example, if UK power prices entirely cease to be set by gas price at any time, but are instead set by (e.g.) renewables and/or coal, as is mostly the case now in Germany?  However, the gas market remains a given in examining such possibilities.

In fact, the 'independence' of the international gas market is the one saving grace when DECC is busily trying to rig every aspect of our electricity sector (to call it a 'market' any more is to do violence to the term).  With every decision, regulation and diktat they prove just what unreconstructed interventionists they are at heart in a sector they control via the sweeping powers of the baleful 2013 Energy Act.  But, much as they would dearly love to, their ability to control the gas market is almost as limited as their ability to control oil.

As gas (and oil) price sink slowly in the West, and in the East, Praise the Lord for that.



Blue Eyes said...

Isn't this pretty much what happens when anyone tries to rig a market?

When they tried to rig the mortgage market, people just got around it by borrowing abroad. To take one example. When the price of beer was set by HMG, its water content increased. And so on.

Will humankind ever learn?

Sebastian Weetabix said...

"Will humankind ever learn?"

No. The sum of human vice will always remain constant.

On the subject of the post I look forward to the day when a future government is mugged by reality and forced to abrogate all these renewables obligations and subsidies. The first politician to establish contact with reality should do quite well, I think.