UK blames Europe for gas shortages

The Government will today seek to deflect criticism of its energy policy by blaming soaring UK gas prices and the threat of supply shortages this winter on "serious malfunctions" in the European energy market.

UK spot prices rose by more than 50 per cent yesterday to 120p a therm. Production problems in two North Sea gas fields and cold weather were among the reasons cited by traders.

But Malcolm Wicks, the UK energy minister, will tell a conference in London that lack of reform in Europe is the main culprit for keeping gas and electricity prices unnecessarily high across the EU. A report last week from the European Commission called on member states to "quickly and fully" implement EU directives to liberalise their energy markets.

Mr Wicks will say he intends to put the commission's findings at the top of his agenda when he chairs an EU energy ministers council in Brussels next week. "I'll be looking for a full and frank discussion about how the EU can move the single-energy market forward on behalf of all its consumers and its vital industries," he will say.

Centrica, the owner of the British Gas brand and by far the UK's biggest gas supplier, joined in the calls for a more liberal European market. It pointed out that while the spot price yesterday hit 120p in the UK and just over 100p in Zeebrugge - the other end of the gas interconnector between Belgium and the UK - in the Netherlands it was only 40p.

Centrica blamed the wide variations on the fact that the gas transmission networks in continental Europe were owned by the same companies that sold gas, with the result that capacity was tied up in advance making it impossible to ship gas freely around Europe and into the UK. As evidence of this, Centrica said the interconnector from Zeebrugge was only 50 per cent full yesterday, even though UK spot prices were the highest in Europe.

The company along with the commission, wants the gas transmission networks in Germany, France and the Netherlands to be separated from the big incumbent operators who supply gas to create a competitive and transparent market and more realistic prices.

Additional terminal and pipeline capacity is being built to increase shipments to the UK now that we have become a net importer of gas, but much of this will not be ready for another 18 months to two years.

There are growing fears that the UK will run short of gas this winter, forcing supplies to industry to be rationed to ensure there is enough for the domestic market. National Grid, which owns the UK's gas transmission system, calculates that the country's 2,000 biggest gas users would have to cut consumption by 30 per cent for a six-week period if there was a "one in ten" winter - the kind Britain experiences once in every decade.

Last week, the Government ordered two independent studies into the ability of industry to cut demand by such a large amount and the impact that would have on the UK economy. One of these studies is being carried out by ILEX Energy Consulting. Another report by the company warns that because of the way the market works, the UK cannot rely on large gas storage facilities being built to ensure security of supply. The Rough gas storage facility, which is owned by Centrica, can hold three billion cubic metres or around 3 per cent of annual UK demand. But the report, commissioned by the UK Offshore Operators Association, says that potential investment in a similar-sized facility is uncertain.

It blames the "storage paradox" - when gas prices are low, nobody wants storage capacity and when they are high nobody can afford to build it.