2015 outlook: Politics and regulation to reshape British gas market

The political and regulatory environment is likely to have far reaching effects on the British gas market in 2015 with an election looming that promises to bring the industry under intense scrutiny.

Leader of opposition Labour party Ed Miliband’s pledge to freeze consumer energy bills if they win the general election on 7 May 2015, raises the potential of a severe squeeze on suppliers trading in the wholesale market.

While the policy has been widely derided by the industry, the opposition party saw a strong boost in the polls. Should the freeze be implemented for 20 months as Miliband pledged, this could see utilities losing vast sums of money if prices rise and they are unable to pass this on to consumers.

The party has promised in-depth reform of the sector, although the effects of this on the gas market are hard to quantify with much of the details about the policy unclear as of yet.

The political furore that ensued following the announcement saw embattled regulator Ofgem refer the entire industry to the newly established Competition and Markets Authority. An in-depth probe is now under way with the results due by December 2015.

Its brief currently does not extend to wholesale gas markets, which displays more positive competitive attributes and liquidity than the wholesale power market. However many have expressed doubts that gas markets will escape scrutiny due to the deeply interwoven nature of the two markets.

Upstream woes

However, upstream, the relationship between the gas market and Westminister is less combative, with politicians highly aware of the negative economic fallout from the severe decline in global oil prices.

Chancellor George Osborne announced a raft of tax cuts and subsidies for oil and gas production and exploration, but industry figures have warned that more needs to be done to support gas production in the notoriously high cost North Sea.

British gas production is set to rise in 2015 due to the start-up of Total’s Laggan-Tormore and GDF Suez’s Cygnus fields. However future developments are under threat as much of gas is in fields alongside oil, with the economics of extraction looking increasingly unfavourable as crude oil trades over 40% below the price it was trading in July this year.

This will put increasing pressure on the newly established Oil and Gas Authority, charged with regulating the upstream oil and gas industry in Britain, with a mandate of reducing costs. The new regulator will be given more powers across 2015 with full inauguration due for the start of 2016.

Ofgem reforms

Downstream regulator Ofgem is in the final stages of bringing British protocol in line with common EU procedure, through raft of changes the Uniform Network code.

The British gas day will begin at 05:00 London time from 1 October 2015, bringing it into line with mainland Europe’s gas days in order to comply with EU legislation aimed at integrating European markets

Furthermore shippers with long-term capacity booked on British interconnectors could face losing it if they underuse the pipelines from 30 September 2015 onwards, under new rules.

A number of other changes, including the splitting of the Bacton entry point between Interconnector and North Sea supply sources are under consideration, with Britain expected to be fully compliant by the end of the year. Albert Evans