HC Deb 08 February 2001 vol 362 cc1171-8

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Dowd.]

7.3 pm

Mr. Jonathan Shaw (Chatham and Aylesford)

I am grateful for the opportunity to bring to the attention of the House the damage being done to United Kingdom manufacturing industry by the massive hikes in wholesale gas prices. The issue is of great concern to many Members on both sides of the House. I pay tribute to my hon. Friend the Member for Selby (Mr. Grogan), who kick-started expressions of concern in the House by tabling an early-day motion a couple of months ago.

I am pleased to see my hon. Friend the Minister for Energy and Competitiveness in Europe in his place, because I know that he and the Government take the issue extremely seriously. When I led a delegation of energy-intensive users to see my hon. Friend a couple of weeks ago, it was clear that he understood the issues and was determined to act sooner rather than later. We saw that action the following day, when my right hon. Friend the Secretary of State for Trade and Industry announced that Commissioner Monti had acceded to the Government's request to investigate allegations of anti-competitive behaviour by companies using the interconnector pipeline between Britain and Belgium. That was a very welcome announcement indeed. I hope that my hon. Friend the Minister will be able to provide more detail about that investigation and—which is most important—say when it is likely to report and whether the Government will consider referring the matter to our own UK Competition Commission.

The backdrop to this debate is a manufacturing industry with contrasting fortunes. The pain and anger felt by communities in and near steel-producing areas at Corus's recent announcement of massive job losses have been voiced both inside and outside the House. Of course, that followed the disbelief of Vauxhall workers at Luton who learned of their fate on local radio. Both are examples of the fragility of part of our manufacturing base and of appalling industrial relations. I should certainly like to add my support to the calls for legislation on information and consultation that were made in Westminster Hall last week.

In contrast to that misery, other announcements have resulted in much celebration. Major investment by Nissan in the north-east, Ford at Bridgend and Vauxhall at Ellesmere Port have secured well-paid jobs for the foreseeable future. Without doubt, however, the most serious decision was that of Corns, the sheer scale of which will reverberate far beyond the immediate community. The difficulties have mostly been attributed to the strength of the pound and the fall in world orders. However, that is not the whole picture.

Steel is one of five major energy-intensive users, the others of which are cement, glass, chemicals and paper. With the exception of cement, all are major users of gas and all are being ripped off. In the past year, wholesale gas prices have doubled. Gas companies are making massive profits while manufacturing is getting caned. The combined increase in the cost to energy-intensive users has added £10 million a week—or £0.5 billion a year—to the bills of those valuable and vital industries in the UK. The bills of the chemical industry have gone up by £300 million; those of the steel industry by £90 million; and those of the glass industry by £10 million a year.

Paper is the greatest constituency interest for me; nearly 1,000 people are employed in the paper and board mills of Chatham and Aylesford, producing 1.4 million tonnes per annum—the largest single concentration anywhere in the UK. The paper industry has seen the cost of gas go up by £50 million a year.

At a time when our manufacturing industry is meeting the challenges of environmental legislation and the weakness of the euro, gas prices in the UK should provide it with a competitive edge. That used to be the case. The UK's competitive gas market was achieved through a lot of hard work. We are one of the few countries to be self-sufficient in their gas requirement. Until last year, our prices were lower than those in the rest of Europe. A typical paper mill bought gas at 13p a therm, but that has now doubled to 26p. UK industry is being charged more for its gas than our competitors in Europe, where there is not a competitive market and where gas prices remain fixed to oil prices.

The big question is why prices have risen so dramatically and why they are higher in the UK than in mainland Europe? In an attempt to explain that, the UK Offshore Operators Association—the industry body for oil and gas—last month commissioned an independent report by ILEX Energy Consulting Ltd. entitled "What influences Gas Prices in the UK and why have they increased through 2000?" That report was produced in direct response to the criticisms of many, including the energy-intensive users. It said that demand for UK gas was increasing as a result of exports to Ireland and the continent through the two interconnectors. It rightly pointed out that there is capacity to export nearly 30 billion cu m per annum. To put that in context, the report goes on to say that total gas demand in Great Britain, without exports, is currently about 90 billion cu m. What the report does not say is that last year the interconnector's full capacity was never reached—nowhere near it. The highest point, I am informed, was 17 per cent. of capacity.

Some of the exports would have been sold under predetermined contracts, which would not have affected price. One must ask what proportion of the amount exported was under predetermined contracts. We do not know. Only those who own and run the interconnector, which in the main are the gas producers, know. Can my hon. Friend tell the House whether the Commission will examine that issue in its investigation?

The UK competitive market, with a self-sufficient supply, has its price determined by a market in Europe that is not competitive. I know that my hon. Friend is determined to press ahead in Europe so that competition will be opened up. That may be years away, and in certain quarters it will be resisted. In the meantime, why should UK manufacturing suffer?

According to the industry's independent report, to which I referred earlier, supply is outstripping demand, even when exports are taken into account. The authors of the report do not know why such a large gap has opened up between the UK and Zeebrugge prices. The effect of the interconnector at best provides inadequate evidence to justify the gas price increases, and at worst is being used as a means of manipulating the market. If the interconnector was affecting the market, why has cheaper gas not flowed back to the UK?

The effect of the rises is hitting manufacturing, causing uncertainty and denting confidence among high gas users. One of the larger mills operating in the UK employs technical experts to study the market for the best prices. All have been unable to provide a satisfactory reason for the increases. It needs to be clearly established whether companies are using the interconnector to push prices in the UK up to European levels and above.

My right hon. Friend the Secretary of State for Trade and Industry was right to act as he did. I know from conversations with those in the industry that his response was warmly welcomed. Can my hon. Friend the Minister tell us whether the investigation will examine ownership? There should be greater transparency in the gas industry, particularly as there are only a few key players whose interests extend throughout the European natural gas industry.

The dominant forces in the European industry are four large producers, which have a substantial downstream interest. BP Amoco, which has 19.1 per cent. of UK output, has a 25.2 per cent. share in Ruhrgas, the dominant German company. Exxon Mobil accounts for 15.2 per cent. of UK output, and has a 25 per cent. stake in Gasunie, the Dutch monopoly, and 22.5 per cent. in the dominant German company. Shell, which accounts for 9.4 per cent. of UK output, has a 25 per cent. share in Gasunie, 15 per cent. in Ruhrgas and 25 per cent. in Thyssengas, the German regional monopoly. TotalfinaElf, which accounts for 8.1 per cent of UK output, has a 50 per cent. share in both the French transmission companies. It is no coincidence that these main players also own the interconnector. It is a pretty cosy picture.

For some time, experts have been expressing concern to the Government about the European structure. My hon. Friend's predecessor received a letter from Mr. Patrick Heren of PH Energy Analysis Ltd., who is highly regarded in the field. He stated: I do not suggest that these companies conspire together to maintain prices. They do not need to. The European gas industry is structured for their benefit. This structure is not conducive to effective competition which the European Gas Directive is intended to foster. Does my hon. Friend agree with that observation, and does he believe that the existing structure is conducive to achieving the competitive market for gas that we want to see throughout Europe?

Soaring gas prices have consequences that are more damaging than is immediately apparent. In the paper industry, there have been important moves towards installing more combined heat and power plants in mills. Almost 100 mills operate in the United Kingdom, 20 of which have invested in CHP since 1990. The average cost of a CHP plant is about £10 million. Such investments take years to pay back, but competitive gas prices have been an incentive. Some investments have been much larger. Shotton paper mill, which has a capacity of about 500,000 tonnes of newsprint per annum, spent £80 million on a new CHP plant.

The climate change levy is an added incentive for paper mills to invest, as it exempts good-quality CHP. However, I know of two UK paper mills that have cancelled the development of CHP plants since gas prices rose so dramatically. CHP development is crucial to our commitment to cut CO, measurements to 20 per cent. of 1990 levels. In 1990, before the installation of a CHP plant, Aylesford Newsprint in my constituency produced 1.2 tonnes of carbon for every tonne of paper. After the installation of the plant, 0.44 tonnes of carbon are produced for every tonne of paper. The site is operating some 450,000 tonnes of paper every year, so the savings to the environment are clear.

A finger of suspicion is pointing at gas producers. Manufacturing believes that it is being ripped off by anti-competitive practices. Many questions need answering, including those on the ownership structure in Europe. We have plenty of gas suppliers and, as I said, supply is outstripping demand, but our industries our suffering. The matter needs resolving quickly if we are to avoid manufacturing job losses. The Commission's investigation should be concluded sooner rather than later. I hope that my hon. Friend the Minister will reassure hon. Members that the Government will impress upon it the urgency of the matter.

7.17 pm
The Minister for Energy and Competitiveness in Europe (Mr. Peter Hain)

It is a pleasure to appear before you, Madam Deputy Speaker, as you are a Welsh Deputy Speaker and your distinction is increased by the fact that your husband comes from the Neath valley in my constituency.

I congratulate my hon. Friend the Member for Chatham and Aylesford (Mr. Shaw) on securing a debate on this important topic. I acknowledge his expertise and the energy that he puts into representing his constituency interests and the concerns of industries throughout the country, for which he has eloquently spoken. I valued the meeting that he initiated on behalf of the energy-intensive users group. Following that meeting, I received from the Confederation of European Paper Industries a well-argued submission that I have studied carefully.

I am all too aware that many important industries are paying substantially more for gas than they did this time last year, and that that has potentially serious consequences for competitiveness. I welcome this opportunity to state clearly the major causes of the price rise and the action that the Government are taking to address the problem.

An important cause of the doubling in wholesale gas prices has been arbitrage across the interconnector with high oil-related gas prices in Europe. The lack of liberalisation and competition in Europe and the consequent lack of competition among different gas companies meant that when oil prices went up, European gas prices did also, and British prices followed.

When the interconnector was commissioned in 1998, it did not have a significant upward pressure on prices because oil-related gas prices in Europe were very low at that time. However, as oil prices increased, so did continental gas prices. Trade and the opportunity for trade across the interconnector have caused the British price to rise as well. We have experienced not only physical interconnection, but economic and price interconnection.

Prices have also been affected by the tightening of gas supply and demand as gas has been exported to Europe. The difference in price between the UK and the continent during 2000 meant that exportation was very attractive and record levels of gas went across the interconnector. Gas demand was 20 per cent. higher on some days last year than it was in 1999. This winter there has also been upward pressure on prices because of slightly lower North sea production than was planned, owing mainly to breakdowns. Imports through the interconnector since October have often helped to meet demand as European prices have been passed straight through.

The situation is serious, and my hon. Friend was right to spell it out, but the Government have been active right across the gas market—from offshore production to the wider European market—in addressing the problems. I shall briefly outline our proposed three-point strategy before discussing the individual parts in more detail.

The key is to increase liberalisation and competition in Europe. The Government want the Stockholm summit in June to drive forward full liberalisation and reform of the gas market in Europe. We are also taking every opportunity to raise the need for liberalisation with our opposite numbers in other member states. This will, of course, not be achieved overnight, but it is at the heart of the problem and must be tackled.

We are looking at ways of improving the functioning of all parts of the market. That involves increasing the amount of information available to the market, both across the onshore-offshore interface and from the interconnector, to achieve full transparency. A well-informed market is an efficient market. Such action will help the market to work more effectively by, for example, enabling it to prepare when it sees that there are planned maintenance outages in the North sea.

We are also acting against potential anti-competitive behaviour, a phenomenon to which my hon. Friend drew attention. The operation of the interconnector has been giving cause for concern for some time, and my right hon. Friend the Secretary of State therefore wrote to Commissioner Monti requesting a Commission inquiry. The Commission has now indicated that it will look into the matter. We want the report that he will deliver to be finalised as swiftly as possible. This demonstrates that we shall not hesitate to refer any evidence of any kind of anti-competitive behaviour to the appropriate competition authorities.

It is vital for the interconnector to work in a transparent and efficient manner. Therefore, in a separate but related exercise, we are working with the interconnector shippers to establish whether more information can be made available to the market. We believe that that will produce a tangible improvement in the market. I know that some have suggested simply closing down the interconnector as a solution to all our problems, but that is not practical: closing it down would put us in breach of our European Union and wider international obligations, as well as exposing the Government to the possibility of civil action from interconnector shippers for many millions of pounds.

Moreover, the interconnector has a crucial function in regard to security of supply. Our forecasts suggest that Britain will be a net importer of gas by 2005, although there are indications that that may happen earlier. When the time comes, we shall rely heavily on interconnector imports; meanwhile we already need to draw on supplies imported through the interconnector from time to time. For example, this winter we imported for nearly two months—from November to January—and we are currently importing again.

Following our agreement at the Lisbon European Council meeting last year to speed up liberalisation across the European Union, the Commission will shortly propose a directive to bring about a properly competitive single energy market. We welcome that, and the Commission has the Government's full support in pressing ahead with the Lisbon-Stockholm process, leading to early full gas market liberalisation. The Government also welcome the measures that the Commission has been taking from time to time to challenge restrictive provisions relating to the supply of gas to the EU from other areas and other states, including Norway and Algeria. Progress in that respect is essential if we are to achieve the full "gas-to-gas" competition towards which we are all working.

As well as ensuring that the European market works, we need to ensure that the British market works and is seen to work, and is seen as being fully transparent. We have therefore been working with offshore companies and interconnector shippers to see what scope there is for making more information available. I am encouraged by the co-operative spirit that we have seen so far, and believe that it may result in a tangible benefit to all players in the market.

We will act forcefully against anti-competitive practices, which were mentioned by my hon. Friend. If there is evidence of anti-competitive behaviour, the Director General of Fair Trading, John Vickers, has strong powers to act, and should he find evidence of any anti-competitive behaviour prohibited by the Competition Act 1998, he will act promptly.

We acknowledge that recent higher gas prices add to the burdens on businesses, and we take seriously their concerns on the matter. However, the climate change levy is being introduced as part of our response to the real, long-term threats posed by global warming.

The recent upward movement in gas prices reflects short-term fluctuations in the markets, but the climate change levy is intended to produce significant carbon savings, up to and during the Kyoto target period of 2008 to 2012. That mechanism will stay in place, and we are working with industry—particularly highly intensive users of energy—to minimise the impact of the levy on them. The Chancellor has introduced an approach that will achieve that.

As part of the climate change challenge, the Government are serious about their target of achieving at least 10,000 MW of combined heat and power capacity by 2010. That will make an important contribution to meeting our climate change objectives set out at Kyoto. The Government will be consulting on a draft strategy shortly, setting out measures already announced, and other new ones that will help to achieve that target.

High gas prices may have had an impact on investment in combined heat and power. By affecting the relative price of gas and electricity, they may make CHP less attractive in the short term. However, our commitment to CHP is long term, and high fossil fuel prices tend to sharpen commercial incentives to use those fuels as efficiently as possible. Recently, I had a meeting as a result of representations by my hon. Friend the Member for Slough (Fiona Mactaggart), because CHP forms an important part of the electricity market in Slough, and we want to safeguard its interests. We are working with the entire industry to advance its opportunities and protect it against uncompetitive attack.

The paper and board industry occupies an important place in the UK economy, and my hon. Friend the Member for Chatham and Aylesford drew our attention to that most appropriately. The industry has some 20,000 employees in about 90 mills spread all over the country and contributes more than £4 billion in gross value added to our GDP. Despite that enormous contribution and large turnover, the profit margins of the industry are very small—minute, in fact. I was given a figure of about £150 million by the delegation from the paper industry that my hon. Friend brought to see me.

The industry has already spent an extra £50 million as a result of this enormous explosion in prices in the gas market. That represents a big squeeze on profits, and it is unsustainable. I recognise that, and we want to work closely in partnership with the industry to ensure that it will not be affected in too dramatic a fashion as a result of that squeeze.

Although the industry faces competitive challenges in a global marketplace and employment is contracting, output has continued to increase and productivity has been increasing substantially, much to its credit. Nevertheless, I recognise that the industry faces a number of economic challenges to ensure its future strength. We want to put in place an action plan with the industry to overcome those challenges, and I hope that my hon. Friend and others will work with us to achieve that.

In summary, I agree with my hon. Friend about the seriousness of the matter. The Government recognise the damage caused by the artificial behaviour in the gas markets, which is difficult to explain. We have identified the principal causes and are well on the way to providing solutions. I want to work with the gas industry, the associated oil industry and those who have to pay the increasingly high prices, to tackle the problem as quickly as possible.

I call on our colleagues in the European Union to work with us because an uncompetitive gas market does not benefit Britain and is also damaging to Europe's long-term future. We are suffering although we are innocent. We have put our house in order and reduced gas prices, but are suffering from artificially induced pressure on gas prices.

I thank my hon. Friend for bringing the matter to the attention of the House and for the opportunity to set out the Government's action programme, which is clear and dynamic and shows that we are committed to solving the problem. We will leave no stone unturned.

Question put and agreed to.

Adjourned accordingly at half-past Seven o'clock.