Minutes of the Meeting of the Gas and Electricity Markets Authority
17 December 2009 at 8.15 am
Ofgem, Millbank, London SW1P 3GE
Chairman’s introductory remarks
1
The Chairman noted that there had been no apologies for absence, and
that declarations of potential conflicts of interest would be recorded in
respect of one Member whose organisation was following Ofgem’s work
consumer and social affairs; and in respect of another Member whose
organisation was in receipt of funding through the Innovation Fund.
There were no other declarations of conflict of interest.
2.
The Chairman, on behalf of the Authority, expressed warmest thanks to
Judith Hanratty who was now stepping down after five years, paying
tribute to her very significant contributions to the work of the Authority,
and wishing her all the best for the future.
3.
The Chairman noted that the Secretary would soon be in touch with NonExecutive Directors individually with proposals for their allocation to
Committees of the Authority, and the areas of special interest which they
might shadow in Ofgem and E-Serve. If NEDs were content with the
Chairman’s proposals, a note would be circulated at the next meeting.
The Chairman proposed, and the Authority agreed, that Jayne Scott
should chair the Audit Committee during 2010.
4.
It was noted that the Authority would be joined by Prof David Mackay,
Chief Scientific Adviser to DECC, for a meeting over lunch.
Minutes of previous Authority Meetings
5.
Subject to one minor change, the records of the Authority meeting on
19th November, and of the Special Sessions on 24 and 30 November,
were agreed.
Report from the Chief Executive
6.
The Chief Executive presented his monthly report, and drew out the
following main issues:
The relationship between the key Ofgem project Discovery and the
issues of liquidity and global capital.
The pressing need to mobilise capital, on new and significantly larger
scales than hitherto, for energy infrastructure development in order
to meet both projected energy demand in the medium term and
environmental and carbon-reduction targets, and the implications.
The likely picture on future global supplies of gas to GB, by country of
origin, with an analysis of projections that some 80% might need to
be imported by 2020; and hence the role which globally traded LNG
could play, given sufficient and timely investment in production,
transportation and distribution.
The potential risk factors in relation to future gas supplies by source
under the scenarios developed in Project Discovery and the role and
timing of delivery of other energy supplies including coal, renewable
sources and new nuclear build.
The role of demand side management in future energy usage and its
contribution to coping with possible shortfalls in gas supply.
A view on the key EU energy policy developments, including medium
term security of supply, and the links to the EU’s Third Package and
the EU Security of Supply Directive, and the position on long term
European contracts for gas.
The scale of global capital investment challenges for energy, and the
competition, within and between, investment markets.
The importance of gaining and developing a good appreciation of
market rules and their impacts.
7.
The Authority welcomed this comprehensive, contextual review which
helped to not only in underpinning the development of Project Discovery
but also in providing an analysis of the related global changes. In debate,
a number of issues were noted including:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
The importance of the timing of infrastructure investment decisions.
The significance of the global competition for investment funds, and
the roles and value of both institutional investors and of other
potential sources of funding.
The importance of demand-side management and its potential
scope and contribution in response to tightening supplies and rising
prices.
The role which could be played by energy efficiency schemes.
The likely pressures on energy work force numbers, and needed
skills, for infrastructure investment and in dealing with the demand
for energy efficiency improvement measures and their installation.
The key significance of diplomacy in dealing with emerging
geopolitical energy issues and their consequences.
The need to understand and track the parallel evolution of oil
supplies, prices and markets, given energy feedstock interrelationships, and factors such as indexation.
Reports from the Senior Partners
8.
Senior Partners tabled short written reports covering the main
developments in their areas since the Authority last met. On Sustainable
Development, the Authority noted the latest developments in the
passage of the Energy Bill and the proposed amendments tabled.
Evidence sessions would start early in January 2010 with clause-byclause analysis starting later in the month. DECC had recently confirmed
and published its approach to smart metering, with a supplier-led roll-out
and centrally organised communications. Ofgem, leading the work on the
Implementation Programme for DECC, had now appointed consultants;
briefing events had been held; and an Ofgem smart metering consumer
advisory group was being established.
9.
10.
11.
On Markets, the Authority was presented with its monthly update on
developments and forecasts for supplies and prices in the oil, gas and
electricity markets, including the position on gas storage levels to date.
GB prices for gas were currently below European values but forecasts
suggested increasing forward prices. Gas generation was above last
year’s levels due to lower gas prices with CCGT providing almost half of
generation.
From the Local Grids and RPI-X@20 Division, the Authority noted the
current position on acceptance by the main distribution companies of the
Final Proposals published as a result of DPCR5. Two companies had
accepted; one was seeking time to consult internally; and another
company was seeking a small change to correct a pension allowance
error (a point on which the Authority agreed, given the low materiality,
that the Senior Partner should be given delegated authority to resolve, in
consultation with the Chairman and Chief Executive).
On Transmission and Governance matters, the Authority was informed
that the European Commission had indicated recently that it considered
the Transmission Network Use of System charging system to be
compatible with EU law, supporting the successful defence by Ofgem of
the system, pursuant to a Judicial Review case brought by a company. A
revised gas entry substitution methodology had been suggested by
National Grid Gas. This had been carefully reviewed in the light of NGG’s
own consultations and responses to the Ofgem Impact assessment. The
core substitution methodology appeared acceptable and enabling
modification proposals were being considered. It was planned that a
paper on the latest steps on the Governance Review would come
forward, with final proposals, for the next Authority meeting.
Project Discovery
12.
The Authority considered a paper and presentation setting out the
Discovery Team’s initial thinking on a range of possible policy approaches
and packages which might be used to address the main issues identified
in the analyses of challenges and issues facing the industry. The
Authority was also briefed on the responses to the October consultation
document. The packages of proposals had been developed and assessed
under sets of criteria, as also explained and proposed, and their
individual strengths and weaknesses were identified. The packages
represented varying degrees of reform of the current arrangements.
13.
The Authority reviewed these models, and examined how each package
might address the risks identified by the scenarios being developed in
the Project. It was agreed the Project was well researched and had
raised some fundamentally important issues on how and by what means
affordable and environmentally sound medium term security of energy
supply could be ensured, identifying key choices on regulatory policy as
between the models, and the main elements of them.
14.
The Authority agreed that the analyses in this work could and should
form an important and leading part in contributing to wider public debate
on the options for action on future security of supply. The matter of
liquidity – enabling entry and growth in the energy supply market, plus
improving the scope for competition - examined at a later agenda item,
was a fundamental and linked issue in developing approaches to these
models and choices. The matter of cost and affordability of investments
would need careful consideration, as well as the crucial issue of
consumer impacts and support for these. Legal considerations may
shape or rule out some elements of the packages and needed to be
examined further.
15.
The Authority again welcomed this work, and proposed that it be further
fleshed out and the communication issues developed. There was
everything to be gained by consulting widely on and explaining Ofgem’s
emerging thinking, at an early stage in 2010, and not seeking at this
stage to narrow options. A further and early special session at which the
Authority could debate this work would be valuable.
Liquidity
16.
The Authority reviewed a paper setting out further proposals for
addressing some of the problems identified in the operation of the
wholesale market as evidenced in the Energy Supply Probe of 2008
carried out by Ofgem, and the subsequent liquidity discussion document
issued in June 2009. The emphasis of the paper, which had reviewed the
available evidence, was on improving the options for small scale
suppliers and new entrants many of whom were facing problems in
procuring wholesale energy supplies; and in turn fostering competition
and “contestability” in markets, to the benefit of present and future
consumers. Small suppliers’ contracts tended to be for relatively low
volumes of electricity, meeting the demand profiles of their customers;
trading possibilities or hedging were not generally available; several
bilateral contracts were often required for delivery, sometimes with
onerous terms.
17.
The Authority noted the links to Project Discovery, in substance and
timing, and recalled that, in its Quarterly Reports and analyses on
wholesale markets, supply margins had shown increases. Availability of
suitable energy contracts was an issue for existing small scale suppliers
and appeared to be deterring new entrants. Structural remedies had
been trailed in the June consultation document, should market initiatives
fail to offer improvements. The detail of these was considered, the
Authority agreeing that Ofgem should consult further on its views for
options to address the concerns on liquidity, on the lines proposed.
RPI-X@20
18.
The Authority considered a further paper on this topic, setting out early
thinking on some of the potential elements in the future regulation of
energy networks, following the Authority’s last discussions. These
included improved consumer and network user engagement as part of
regulatory policy development; the possibility of certain third party rights
of challenge on price control settlements; the option of introducing
tendering provisions in the regulatory toolkit for networks; and new
steps to encourage and improve third party access arrangements to help
facilitate growth in energy services.
19.
The Authority recognised that these proposals raised a number of radical
issues with impacts on policy, its development and implementation, and
in respect of regulatory certainty. No decisions were required at this
stage, and the details of these proposals should be worked up and
considered further before consultation.
TPCR5
20.
The Authority was presented with a paper dealing with the approach to
and timing of the next Transmission Price Control (TPCR5), given that
the present transmission price controls would expire on 31 March 2012;
and that, in a recent consultation on timetable options, Ofgem had
indicated that the next review would be the first in which the RPI-X@20
new regulatory framework would be implemented.
The choice lay
between implementing TPCR5 from 2012, this requiring aligning and
progressing work in parallel with RPI-X@20; or delaying the
implementation of TPCR5 until 2013, with a suitable “roll-over” of the
present TPCR4 measures for a further year.
21.
The Authority reviewed the results of the consultation exercise - on
which views on the two approaches were divided - and considered the
risks and merits of each approach, and the action on the elements which
would be needed to enable an effective “roll over” of the TPCR4
measures. The Authority concluded, agreeing the Executive’s
recommendation, that the second option with a 12-month delay was
preferable. This approach was more likely to ensure that the new RPIX@20 framework was effectively implemented in TPCR5, capturing its
benefits, given the fundamental regulatory changes in prospect which
were designed to offer improved benefits to present and future
customers. It was agreed further that the Acting Senior Partner should
promulgate the decision document accordingly.
Corporate Strategy and Plan
22.
At this item, the Authority reviewed a new draft of the Corporate
Strategy and Plan which had carried forward the changes in content,
structure and emphasis as suggested at its October meeting. The new
approach was welcomed and the importance of the presentation of the
Plan, and its introductory section, was agreed. It was agreed that further
comments should go to the Chairman and Team as the next draft was
developed for final consideration before its planned publication, for
consultation, in the New Year.
Developing System Operator Incentives
23.
The Authority noted a trailer paper describing the present status of this
dossier, and the background and context, including the Ofgem Open
Letter setting out the objectives, process and timetable. It recalled the
need to reach final proposals on National Grid’s System Operator
incentives for gas and electricity to apply from April 2010. This would
require Authority decisions on final proposals in February 2010. The work
now in progress to that end with NGG and NGET - on forecasts and other
components - was noted, along with options for schemes and other
action should satisfactory progress not be made.
Enhanced Transmission Investment Incentives: Final Proposals
24.
The Authority noted a progress report on Ofgem’s work to develop
funding arrangements for major transmission infrastructure projects
required to support the Government’s 2020 renewable energy and
carbon emissions targets. The Authority had already agreed that some
projects should proceed on a non-competitive basis, especially where
project timescales demanded an earlier start than the date by which a
fully competitive approach could be in place. Interim funding for efficient
TO-nominated investments from April 2010 to the end of the current
transmission price control period had been agreed when the Authority
last considered matters in October 2009. The paper set out suggestions
for Final Proposals for the funding arrangements, identifying qualifying
projects.
25.
The Authority noted the progress made and agreed the approach
proposed, for announcement in January, as informed and supported by
the results of Ofgem’s consultants’ assessments of TOs’ projects and
Ofgem analyses. The proposed capex funding of agreed pre-construction
and construction activities was agreed as 5.05%, on a vanilla WACC
basis. Detailed decisions on the Final Proposals were delegated to the
Executive, and plans for further work on TO incentives was noted.
Audit Committee Report
26.
The Authority noted the report from the Audit Committee which had met
on 18 November, and the main topics which it had debated, including the
proposed MoU between Ofgem/E-Serve and DECC in respect of
substantial work being carried for the Department and the needed
funding assurances. The report covered information on the current
financial and budgetary position for Ofgem, which was sound, the
Committee having noted also that Corporate Plan priorities were on
track. Actions on risk and the risk management review were described,
as were the recommendations agreed arising from a number of Internal
Audit Reports on Ofgem’s business activities, each receiving a
“substantial assurance” rating, and with the Payroll Audit gaining “full
assurance”. No Priority 1 recommendations had been made in any of the
Audit Reports.
Other business and date of the next meeting
26.
There was no other business. The Authority agreed to hold a Special
Session at Ofgem on Tuesday 12 January, starting at 11.30. Its next
main meeting would be at Ofgem at 8.15 am on Thursday 21 January.
Those present
The Lord Mogg, KCMG
Alistair Buchanan
Dr Robin Bidwell
Prof David Fisk
Miriam Greenwood
Judith Hanratty
Sarah Harrison
David Harker
John Howard
Jim Keohane
Jayne Scott
Steve Smith
Andrew Wright
John Wybrew
(Chairman)
(Chief Executive)
Those attending
David Ashbourne
Wilf Wilde
Hannah Nixon
Ian Marlee
(all items)
(
“
)
(RPI-X@20)
(Discovery)
Giles Stevens
Ben Woodside
Duncan R Sinclair
Kersti Berge
Andy MacFaul
(
“
)
(
“
)
(
“
)
(Liquidity)
(Corporate Plan)
Michael Brocklehurst
Dr Tony Burne
(Legal Adviser to the Authority) (all items)
(Secretary to the Authority)
(all items)