Hot debate
Published : March 2006
Andy Waring, the man who purchases one per cent of the UK’s power annually, talks to Brian Davis about his battle for a greater cost parity with Europe
Faced with soaring gas prices UK manufacturers are forced to pay more than double what Continental counterparts pay for spot and forward wholesale gas. Andy Waring, European utilities purchasing manager for chemicals giant Ineos Chlor is at the vanguard of the energy debate. He reckons “UK industry and energy intensive users in particular are under enormous competitive disadvantage. Worse still, if we hit a major cold patch this winter or next, much of UK industry will have to shut down and the economy will be hit enormously.”
For the last 18 months Ineos Chlor and other energy intensive users have fiercely lobbied the Government to change gas import rules to create a more even playing field. As part of the Energy Intensive Users Group (EIUG), representing major chemicals, steel, ceramics, aluminium, cement and industrial gas producers, Waring has given challenging evidence to the Trade and Industry Select Committee into Fuel Prices.
Urgency for energy policy review is highlighted by two Select Committee investigations in under a year. “We’ve repeatedly warned of the serious threat to the UK gas market from distortions between the liberalised market in the UK and the non-liberalised markets on the Continent,” says Waring. Potential brown-out is a threat to all UK manufacturing as the Met Office predicts colder winters, despite a raft of new gas transmission links to the UK coming on stream.
As third largest energy user in the UK, Ineos Chlor (which took over ICI’s chlor alkali business in 2001) consumes as much electricity as the city of Liverpool. The Runcorn-based plant is the second largest chlor alkali plant in Europe, with a £250 million investment programme underway, including a new boiler plant to provide steam for the site.
Cost effective energy purchase, generation and consumption is a priority. The company buys 250 million therms of gas a year in the spot and forward markets to run two power stations on site and a combined cycle gas turbine just off site under contract. The gas is converted to electricity for production of chlorine and caustic soda. Chlorine is used for wide-ranging products including plastics, dry-cleaning agents, refrigerants and solvents.
Waring, a 43-year old mechanical engineer, has spent his whole career in the chemicals business since graduating from Oxford University in 1984. He recognises the scale of the energy supply crisis all too well, beginning as a plant engineer at ICI’s chlor alkali plant in 1985, then building and running CFC replacement plants in the UK and US. Waring then moved into operations and project management, before mapping out business and development strategy across Europe. Since 2002, he has been responsible for pan-European utilities purchasing, heading up a small team which includes an energy trader.
“Being an engineer means analysing complex systems and strategy comes as second nature,” he says. As European utilities purchasing manager, Waring is responsible for the purchase of gas, electricity, steam, industrial gases and water for Ineos Chlor, Ineos Vinyls and Ineos Enterprises. Ineos operates 10 large chemical plants and 10 manufacturing operations in the UK, Germany and Italy – so there’s plenty of room for price comparison.
Waring has to keep a close eye on volatile energy markets. “Ninety five per cent of our underlying cost is energy related. There’s a mountain of rules and regulations to contend with and they are continuously shifting.” So how big a challenge does UK industry face in the energy purchase market?
The crisis was originally triggered by a price spike in the UK gas spot market in October 2003 which raised spot prices 50 per cent in one week from 20p per therm to 30ppt (a price which is still common in Continental Europe, while UK gas spot price is around £1.70ppt.) The EIUG called for inspection of pricing issues which was taken up by OFGEM and the Financial Services Authority. One year on, neither OFGEM nor the FSA could find anything wrong with the system.
“It’s a question of whether you think big companies are trying to manipulate a liberalised energy market or whether the market rules are wrong,” says Waring. “We believe in free markets and don’t think the energy companies are trying to do anything untoward or illegal to manipulate the market. But the market doesn’t work as currently set up.”
Since then the problem has got worse. In autumn 2004, a price spike in the gas forward market triggered the first Trade and Industry Select Committee Enquiry. Subsequently the EIUG was invited to make proposals in concert with the DTI Energy Team and OFGEM, as part of the Gas Prices Working Group. Unfortunately, the Government proved intransigent because they felt they had the right market model and didn’t want to interfere with a free and open market.
The EIUG insisted the UK was at a disadvantage as it operated in a much larger gas market, subject to behaviour of European companies in closed markets. The EIUG put forward a raft of recommendations but were very disappointed that little appears to have been done. During 2005, further price spikes in spot prices and the forward gas market piled on the misery.
The Government argues that extra capacity is on the way, with major boost of capacity to the Interconnector pipeline, followed by new pipelines from The Netherlands and Norway, as well as new LNG terminals at the Isle of Grain and Milford Haven. Waring retorts: “This new capacity remains unused so far, and imports have not responded to price signals, which should theoretically limit prices in the UK to more or less those levels seen on the Continent.” What’s more, capacity is being hoarded in Europe, which denies the UK access to gas that would otherwise flow to the UK.
The Isle of Grain LNG import terminal also failed to supply any significant volume of gas to the system, and the EIUG is confounded by DTI dispensations to terminal operators BP and Sonatrach under the ‘use it or lose it’ rule. While Spain, a non-liberalised market, chartered two LNG ships to ensure security of supply that removes LNG from the market.
“Although extra capacity is coming on stream, when you need the gas to flow in, that’s the very moment it’s least likely to do so, because the gas has to come from a non-liberalised market,” complains Waring. The continental markets have incumbent gas suppliers, contracted to fulfil commitments with long-term oil-indexed contracts operating in closed markets. Though liberalisation of the European markets is scheduled before the end of this decade, there’s little enthusiasm despite the efforts of the EU Competition Commission and Brussels.
Liberalising the UK gas market made sense a decade ago when there was plentiful gas. Now North Sea gas production is declining and the UK is a net importer. “Two-way market interaction along the Interconnector is vital. Major industry customers should be given the right to bring gas through the import capacity, with an obligation on energy companies to supply gas at European prices to companies who want to move the gas into the UK.” Waring also suggests the National Grid should have a similar set of requirements to ensure gas supply security as for electricity supply.
“The Government speaks of ‘demand response’, though BP has coined the phrase ‘demand destruction!’ If the price goes up so much that it drives industry to stop production, large sections of industry will disappear forever,” he muses.
Ineos Chlor is also taking trading matters into its own hands in a bid for more flexibility. The group is setting up Ineos Chlor Energy Limited to buy and sell gas, using a similar approach to the Nordpool market in Norway and Sweden. “Instead of being a customer of an energy supplier, we will be a counter party to a number of energy companies, giving us more flexibility and faster response to changes in the market.” Ineos has also applied to become a UK gas shipper to gain same status as an energy company.
Search for alternative power resources is a priority. Ineos Italian and German plants are currently building new CHP schemes. Though the new Runcorn boiler is not part of a CHP scheme, as Waring maintains “the economics of CHP didn’t justify the additional investment.” Ineos Chlor is also investigating a variety of options including wind farms, refuse derived fuel pellets (RDF) and clean coal technology in the long-term. Though he reflects, “the UK Government is keen on promoting renewable energy, but consider how much wind farm energy we would require for a site with the capacity of the city of Liverpool.”
Ineos is also open to participation in new nuclear plants. “If the UK Government suggests a similar scheme to the Finnish or French nuclear collaboration initiatives, involving utility companies, energy intensive users and government support, we would be interested.”
The future calls for a broad mix. “I’m confident the Government will have to take action. The question is whether they will act in time or be forced to take action when it’s too late. In an ideal world, we’d have a strategic power generation portfolio of one third gas power, one third renewables and one third nuclear.”