The free market: our fair-weather friend

The Cold weather gripping the nation has more profound implications for the energy industry than has so far been acknowledged. Not only are there real doubts about the ability of the National Grid to keep the lights burning, but there are important questions about the ability of a free market in both gas and electricity to cope with the pressures which a cold winter places on the system.

What has been overlooked so far is that this is our first conventional (ie cold) winter since the electricity industry was privatised and since the commercial gas market was opened up to full competition. Over the past five or six years we have been blessed with unseasonally mild winters. The warmer the winter the less demand there is for gas and electricity. The less the demand, the easier it is for supplies to be maintained.

In the past few days we have been given a worrying insight into the potential for a dramatic shortfall in energy supply which could yield gas and power cuts across the country. The National Grid came perilously close to breakdown last winter. It may not be able to cope with a sustained period of severe cold weather this year.

Last week the Grid was vehemently denying that it was in danger of being unable to meet demand. In asserting so forthrightly that the system can cope, the Grid was displaying a confidence which is rare to find in the energy industry at the moment. British Gas has been warning for some time that we could face shortages this winter, and has been doing its best to ensure a greater state of readiness than it uncovered last time. Electricity users and producers have also been voicing their concerns. With a finite amount of gas available each day but demand spiralling upwards courtesy of the cold weather, the tensions are clearly identified.

At the heart of the problem are the gas-fired power stations which generate a significant proportion of the country's electricity. They are supplied with gas on interruptible contracts. The benefit of these contracts is that the gas is priced at a reduced tariff. The cost is that the supply can be cut off at four hours' notice when demand for gas across the nation increases sharply.

During the cold snap a number of gas-fired power stations have already had their supply interrupted. So far those interruptions have been phased in a way which has yielded no disruption. Thankfully the cold period has come at a time when the nation is still winding down from the Christmas and New Year holidays. Also, the cut-offs which have been enforced so far have only been south of Birmingham. Imagine nationwide interruptions at a time when industry is operating at full tilt.

The last time we had a genuinely cold winter there were fewer gas- fired power stations. Less gas was consumed and less electricity generated. At the same time British Gas had much greater control over the interruptible supply market. It now accounts for less than 50 per cent of that market, which means it has less control and less certainty that instructions for supply to be interrupted will be complied with.

There have clearly been significant structural changes in the energy market since the last really cold winter. Those changes make it much more difficult to maintain supply during a period when British Gas is forecasting a 6 per cent increase in demand.

To illustrate the potential problems which could arise, consider the options available to the owner of a gas-fired power station on an interruptible supply contract. At times of high demand for gas, when the power station has not been forcibly interrupted, it can choose to stop generating electricity and sell the gas it would otherwise have used into the open market to exploit the high prices brought about by a surge in demand. That reduces the amount of electricity being generated, thus forcing electricity pool prices higher to entice generators to come on-stream. When prices are sufficiently high, the gas-fired station can then start using its gas to generate electricity again. This is the free market at work. Unfortunately, the free market has no responsibility for keeping the lights burning.

The worry is that we have created a system of fair weather competition in the gas and electricity industries which is unable to cope with the extreme cold. The problem is that we don't know the answer and won't do so until it is subjected to an even more severe test than provided by conditions over the past few days. For everyone's sake I hope that the system is robust enough. If it can survive the winter, that is all to the good. What must be clear come the spring, however, is that survival was due to effective market mechanisms and not the mild weather.

The non-gong mystery

OUR analysis of the businessmen's businessmen reveals that nearly 80 per cent of the top 25 captains of industry named by their peers as being the most impressive are either knighted or ennobled. Of those who remain virgin industrialists the most notable is Richard Branson. This year Mr Branson came third behind Sir David Simon and Sir Colin Marshall. He and Lord Weinstock are the only two businessmen to have been recognised as impressive in the Mori poll in each of the past 10 years.

To be acknowledged by your peers is gratifying and Mr Branson has been in the top four for the past four years. Yet despite this recognition by his fellow industrialists, which is bettered only by the admiration among the general public for his business skills, Mr Branson is stubbornly excluded from the official honours lists.

Why can this be? I am assured that it is not a question of the gongless one politely declining an honour; he has never been asked. Neither can it be a question of lack of substance; the Virgin empire is a sizeable global business. Could it be then that Virgin has been a little backward in coming forward on the political donations front? Surely not; we all know that honours are entirely unrelated to political donations. Virgin's failure to make any donations cannot therefore be a reason for Mr Branson's exclusion.

My guess is that Mr Branson is a victim of a bureaucratic misunderstanding. Once the appropriate civil servant realises that the Upper Class cabin on Virgin Atlantic's aircraft is an exercise in branding rather than a direct snub to John Major's classless society then I am sure Mr Branson's name will be afforded the appropriate and deserved appendage.

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