Is the UK heading for another winter of energy discontent?

published 8 October 2007

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Will we have enough gas to last the winter?

Ofgem, the energy regulator thinks so. Chairman Sir John Mogg said last week he was "much more confident" of the UK gas supply situation this year because the Langeled and BBL pipelines from Norway and the Netherlands will come on stream before the end 2006.

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But Malcolm Wicks, the energy minister, and British Gas owner Centrica aren't so sure. Mr Wicks warned earlier this month that this year would be just as bad as last, while the energy group is also less confident about prospects, according to The Guardian.

So who's right?

Energy watchdog Ofgem reckons that there will be plenty of gas available in the UK this winter, because two new pipelines will be on stream by the end of the year.

But gas supplier Centrica is less upbeat. "Doubts are still there. Yes, the new infrastructure will be there, but will the Europeans deliver gas through their infrastructure when it is needed?" a company spokesman told the Guardian.

Now of course, Centrica has a vested interest in this market. British Gas is the most expensive gas supplier in the country, and it's keen to get those customers who are scared of even higher prices to lock in their gas bills at current rates.

But at the same time, the company also runs the Langeled import terminal in Yorkshire, so it understands the way the market works. One of the main problems in the past has been that companies in continental Europe have chosen to keep gas supplies for their own customers despite the price for gas being higher in the UK.

Why would they do this? It doesn't seem like a rational decision at first sight, but look a bit deeper and it makes perfect sense. The UK has a de-regulated energy industry so you can buy your gas and electricity from any provider who's able to sell it. This is usually a good thing, because basic economics dictates that competition between suppliers will drive down prices which it has up until recently.

But the trouble is that the UK is the only liberalized energy market in Europe. The monopoly suppliers in other countries live in constant fear of having their monopoly status taken away from them. So they're not keen to draw the attention of their governments and that's exactly what's likely to happen if they start selling gas originally destined for, say French customers, to the British, simply because the UK is willing to pay more.

Still, never mind. If gas gets too expensive, we can always turn to alternative sources of fuel. But there's just one snag with that they're getting a lot more expensive too.

We mentioned palm oil briefly last week, with the news that utility group RWE is thinking of converting one of its Kent-based oil-fired power stations into one that runs on palm oil.

The vegetable oil is in demand for far more than just electricity generation. Palm oil can also be converted to diesel, which becomes much more economical as crude oil prices soar. The price of palm oil has leaped by 15% in the past year and reached a two-year high this month.

Hedge fund manager Michael Coleman tells Bloomberg that the price of palm oil in Kuala Lumpar may gain another 20% in the next six months as biodiesel continues to gain in popularity.

The EU wants just under 6% of all fuel for cars and trucks to come from renewable sources by 2010. This is set to drive growth in vegetable oil fuel production, which is expected to triple by 2008.

But just as we are fretting about running out of crude oil, there are sustainability issues with palm oil too. It's growing use may threaten Southeast Asian rainforests, which would have the green lobby up in arms. Domenic Carratu of Rabobank Groep tells Bloomberg: "Biodiesel aims to be environmentally friendly, but this would not be the case if the feedstock were only grown at the expense of virgin rainforest."

For all the various sources of energy we have, it's becoming obvious that finding a solution to our future needs is by no means going to be straightforward. The current issue of MoneyWeek looks at how other fossil fuels can help us manage the shift from crude oil to more renewable forms of energy. Subscribers can download the latest issue by clicking here: Latest Issue

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Turning to the stock markets

The FTSE 100 closed slightly higher on Friday, despite subdued trading ahead of the Bank Holiday Weekend. The blue-chip index was 9 points higher, ending the day at 5,876. Among the risers were steelmaker Corus, up 1.5% on bid hopes, and Xstrata, whose recent acquisition of Falconbridge saw the miner gain support. The day's biggest losses were made by tin can maker Rexam after negative brokers' recommendations. For a full market report, see: London market close

Elsewhere in Europe, the Paris Cac-40 closed 1 point lower on Friday, at 5,111, but gained on Monday to close at 5,148. In Frankfurt, the Dax-30 closed 2 points lower at 5,811 on Friday, but had risen to 5,854 by the end of Monday's session.

On Wall Street, stocks closed higher on Monday as the reduced threat from hurricane Ernesto sent the price of crude lower and improved sentiment. The Dow Jones ended the day 67 points higher, at 11,352, whilst the S&P 500 and Nasdaq were 6 points higher at 1,301 and 20 points higher 2,160 respectively.

Gains in the US spread to Asian markets, with the Nikkei 225 ending Monday's session 127 points higher at 15,890.

The price of crude oil had fallen back below $71 this morning, last trading at $70.72 in New York. In London, Brent spot was trading at $70.01.

And in London this morning, copper miner Antofagasta announced a rise of 78% in first-half net income, as record copper prices offset rising costs and decreased production. In other news, Chancellor Gordon Brown said that getting world trade talks back on track - and tackling resurgent protectionism - must be the IMF's top priority in the face of an uncertain Autumn for the global economy.

And our two recommended articles for today...

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.