Category Archives: Energy

Publications about the energy sector

Market research – gas storage

GPontin Ltd is delighted to have supported Moffatt Associates and their clients – the Gas Security Group (GSG) – in delivering its recent research in the energy market, focused on gas and energy security..
As part of this project Gpontin Ltd implemented and conducted an online survey and analysis to assist Moffatt Associates in delivering a project for multiple clients in less than three weeks.

The intelligence gathered will be used by the Gas Security Group to further their campaign for Government action to reduce the threat of gas shortages and mitigate the impact on energy price volatility.

About Moffatt Associates

In 1988, Clive Moffatt established Moffatt Associates (MA) to provide public and commercial clients with innovative business solutions based on extensive experience and original research.
As markets have evolved, MA has been at the forefront of many developments acting as catalyst to help policy makers and businesses anticipate and adapt to change.

Gas Security Group

The Gas Security Group (GSG) was established in 2017, following the closure of the Rough gas storage facility and the continuing decline of domestic gas production in Western Europe. The GSG was formed to campaign for an urgent re-assessment by the Government of UK gas security and a review of what measures could be taken to improve flexibility of gas supplies and reduce industry’s exposure to gas supply disruptions and increased energy price volatility.

GSG members include the British Ceramic Confederation, Confederation of Paper Industries, Major Energy Users Council and the GMB, representing a large cross-section of major energy users and employee organisations.

The companies represented by the ceramic and paper industry associations alone employ a total of 76,000 people and generate an annual turnover of £14 billion and over £600 million in exports. Altogether, the major private and public- sector energy users represented by the Gas Security Group account for 40% of all UK industrial and commercial gas demand and 35% of UK industrial and commercial electricity demand. The GMB union has 50,000 members engaged in the energy sector, covering gas. nuclear and renewable energy.

ACE – Electricity Market Reform: Generating Results

Tariff costs, tariff types, and switching levels

Tariff rises continue to be of concern with the average dual fuel household bill rising from £1,057 in 2011 to £1,232 in 2012. These rises have been against a backdrop of low wage rate growth, employment uncertainty, and a general lack in consumer confidence, fuelling affordability concerns.

This report finds no evidence of regional pricing by the ‘big six’ companies, however, when analysing the differences between tariffs, it is found that the benefits of switching are relatively limited over time, with direct debit customers being the main beneficiaries. Looking at the rationale behind price changes, this report finds that the price reductions felt by consumers for direct debit tariffs are as a result of company’s pricing policies and not simply inflationary changes.

Energy trading, liquidity and self-supply

This report finds that over time there has been a shift towards short term, ‘spot’ trading with increased volatility and cost owing to the higher price that can be demanded on a short term transaction. These costs have then been passed onto consumers with little explanation from the energy companies or the regulator as to why increases in this kind of activity have been allowed to occur. Policy makers can no longer ignore such a shift, given the implications this has for affordability. As such, intervention is required to encourage more competitive, longer term trading on an open and transparent market.

There is also an increasingly vague view as to what the energy mix in the UK will be, creating uncertainty and holding back the investment the country needs. Whilst in theory, with the government remaining technologically neutral, competition should be encouraged. In reality it has created a situation where only the most certain of projects (those with the lowest financial, political and planning risk) progress, with all others prevented from progressing while investors continue to seek the right signals.

Consolidated Segmental Statements

This report analyses in detail the Consolidated Segmental Statements of energy companies and finds that the costs and earnings of the generation arms of companies varies more significantly than that of their energy companies supply businesses.

Economies of scale and efficiency are generally cited in favour of vertical integration in the energy sector, yet the analysis in this report calls into question whether the actual benefit is passed through the system to the consumer.

In some circumstances the results even suggest that costs move in opposite directions for the different divisions of energy companies (e.g. generation and retail/supply), demonstrating that pricing signals are not efficient and the system is not responding to them as would be expected. Part of the reason behind this may be that companies are responding to media pressures and attempting to control costs at one end of the system. This, however, fundamentally undermines price and investment signals within the market.

The analysis also calculates the ‘earnings’ premium that is applied as prices pass through the system. That is to say that if generators charge more to suppliers, suppliers in turn charge more to consumers. For every extra £1 a generator earns in profit, a supplier is also able to make an extra £0.57p, making a total increase for consumers of £1.57. Given that more than ‘base’ costs are passed onto consumers the case for vertical integration and the efficiencies it brings within the market appears uncertain.

The correlation between generators’ and suppliers’ weighted average costs shows that as the former’s average costs increase the latter’s average costs do not change significantly. This suggests two possible scenarios, the first being that the average weighted cost of generators has no bearing on suppliers’ average costs. Alternatively, supply businesses are able to hedge prices forward so effectively that they can absorb variations in generators weighted costs with little effect on their own. The second scenario is, however,  questionable given the shift towards short term spot trading where it is more difficult to  offset cost volatility.

International price comparisons and the effect of energy taxation

The UK is more or less exactly matching the IEA median for electricity prices, and has one of the lowest incidences of taxation on energy. As such, overall electricity prices in the UK may not be as overpriced as is feared. It also potentially indicates, that the UK is not proactive enough in reallocating resources from markets which are inefficiently accounting for the effects of climate change, pollution, and volatile prices, thus preventing movement towards a more stable and sustainable long term solution.

This report also compared the effects of taxation on the price of electricity and found that on average for every 1p increase per kWh in electricity taxes that occurs, there is also an increase of 0.53p in the electricity price. It should be noted, however, that this performance is significantly helped by Denmark, The Netherlands and Germany, where tax increases result in falls in electricity prices.
This compares with a rise of 7.4p per kWh in electricity prices for every 1p per kWh of extra taxes the UK government levies. This is also significantly more than any other country in the data sample below, with the next on the list (Ireland) experiencing an additional 4.3p per kWh rise for every extra 1p per kWh of taxation. The reason behind the UK’s poor performance in this area is likely to be that companies are ‘over insulating’ themselves against tax and policy changes, highlighting that long term policy certainty is key.

The evidence suggests that as the level of tax increases, so more investment takes place, the level and pace of research and development speeds up, and there is a lowering of long term costs, reducing the effect on electricity bills above and beyond the incidence of the tax.

The price of electricity in the UK on the ‘open’ market, i.e. not including tax, is one of the highest amongst the countries analysed. This is likely to be due to a lack of strategic planning as no one company considers investment in the UK as a whole at the macroeconomic level. As such, any investment outcome from the sector will favour individual companies’ investment strategies and not one that is efficient for the UK as  a whole.

Policy – competition, EMR, CfD, capacity, price and consumers

This report suggests a way forward which attempts to balance the needs identified within the EMR framework, including:
The need for a policy which will secure a reasonable baseload and invest in solutions which can ‘store’ energy.
The need to address capacity issues without radically reforming policy again and therefore increasingly delay and uncertainty which is a major problem for investors.
Ways to improve and implement effective competition in the generation market  by creating a secure base that lowers costs and allows technologies to compete  where appropriate.
The need for increased transparency within the market, allowing the retail side to access and buy from a number of sources.

This report proposes that five Generation Investment Vehicles (GIVs) with a combined value of £8bn are created to ensure that in the short to medium term project finance is secured. In order to secure medium to long term investment to ‘lock’ long term cleaner energy into the UK’s generation system, this report also proposes that three Tidal GIVs (TGIVs) with a combined value of £21bn be created.

These vehicles could be used to finance for any type and combination of projects,  for example:
Six CCGT plants at an approximate cost of £3bn (providing approx. 7,500MW).
Eight waste to energy plants at an approximate cost of £4bn (providing approx. 575MW).
£21bn of funds towards the building of tidal/lagoon assets (providing approx. 2,000MW to 3,000MW).
A £1bn fund for community projects, where money would be raised via crowd  sourced funding.

The three £7bn TGIVs for example could finance:
The roll out of either smaller tidal schemes or more economically the construction of a Severn Barrage (with a target price of 16% below the current £25bn estimated cost) to lock in lower cost long term electricity not only for this generation but also the next few.

Introducing a secure supply has to be accompanied by increased transparency and ultimately improved competition within that part of the market where competition for variable electricity demand takes place.

This paper proposes a Priority Auction Mechanism (PAM) where:
A new structure of two open market traded exchanges where government has to purchase 50% of the capacity put forward in the first round, 75% in the second round, and all remaining capacity then having to compete OTC.
The first round of purchasing will be on contracts longer than 24 months, while the second will see providers enjoy contracts of longer than 12 months’ duration. This will have the dual impact of providing certainty of revenue for generators and encourage future investment whilst also encouraging a transparent and efficient pricing mechanism for the electricity market.

Company website:

ACE – Green Investment Bank

This paper is the fifth in ACE’s infrastructure investment series and explores in more detail the current market conditions, challenges and rationale behind the Green Investment Bank. It concludes that whilst the Green Investment Bank is a step in the right direction, there are some issues which if left unchecked, could undermine confidence in its ability to facilitate green investment.

Key findings

  • The Green Investment Bank is a step in the right direction, but finance conditions continue to raise concerns about scale and speed of implementation
  • The GIB needs to improve transparency and information sharing for investment to take place
  • Perceptions surrounding the GIB and the subsidisation of green projects needs to evolve if investor confidence is to be gained
  • The current plan for granting the Green Investment Bank’s borrowing powers should be reinforced further
  • The GIB should continue to expand and identify other areas where it could facilitate investment

Company website:

ACE – Infrastructure: a case for funding 2010

This report from ACE aims to review and analyse a range of material that is openly available (such as economic papers, cost benefit analysis and case study evidence) in an attempt to ascertain what effect infrastructure investment has on the economy. This paper will not however go into the mechanisms that would fund such projects but attempt to demonstrate the scale of potential the contributions the construction and infrastructure sector could make.

The economic rationale behind investment decisions has not been as important as it is during this economic cycle given the recent recession, tightening credit conditions and proposed public sector cuts. Projects need to demonstrate that they will improve the future growth prospects of the UK.

The return upon infrastructure investment was found to vary significantly not only between projects, but also across countries. Theory suggests that achieving a positive economic effect from investment relies on the current level of provision in respect to that of the optimal (equilibrium level), maintaining the long run competitiveness of the economy, investor certainty, access to capital, accounting for externalities and market failure, and creating a conducive regulatory environment.

Company website:

Moffatt Associates – Energy Viewpoints

Moffatt Associates devised a research format for monitoring trends in energy market prices and canvassing market views on future market developments and the implications of public policy actions at both the EU and national level.

The “Energy Viewpoints Bulletin” is distributed free of charge electronically and is now read by over 2000 market participants every quarter.

This regular, quarterly survey, sponsored by APX and produced in association with EFET, summarises expectations about future energy market prices, based on responses from a research panel of 80 market participants covering most of Europe. This panel is a representative sample of regulators, generators, suppliers, traders and analysts.

Every quarter, MA canvasses views on wholesale market developments in power, gas and CO2. In addition, we select a special topic for investigation each quarter and we invite contributions from leading market participants. The survey itself takes the form of a detailed telephone questionnaire and is conducted on a strictly confidential and non-attributable basis.

Company website:

Moffatt Associates – EU Wholesale Markets Study

To execute this study Moffatt Associates conducted what is probably one of the most extensive surveys of energy market participants ever undertaken.

The aims of the study were to identify and evaluate key factors impacting on the liquidity and efficiency or EU wholesale electricity and gas markets. Between mid-January and early May 2008, MA devised and conducted a major market research programme. Given the diverse and varied nature of wholesale energy markets, MA decided to employ a two-stage research methodology involving (a) the use of face-to-face discussions to identify and weight the relative importance of key commercial and policy issues impacting on the operation of wholesale energy markets, and (b) following this with a more detailed survey across a wider market sample to obtain quantitative and qualitative feedback on a range of specific issues arising from the face-to-face discussions.

This involved:

In-depth interviews and discussions with (20) senior executives representing all relevant EU stakeholder associations
Nine focus groups held in Brussels, Milan, Madrid, Copenhagen, London and Vienna, involving a total of 113 market participants
An online questionnaire to illicit quantitative responses – a total of 150 market participants completed the questionnaire

Company website:

Monitoring Business Energy Costs and Efficiency

Moffatt Associates devised a set of research questions and methodology to explore and evaluate trends in business energy costs, actions taken by companies to increase energy efficiency and the views of industry on the likely business implications of EU and UK energy policy. This was the first time that any serious attempt had been made to analyse the impact of rising energy costs on UK business.

Since 2005, Moffatt Associates has researched and built a UK business contact database covering 500 major energy users and 1000 SME’s. Every year we track trends by carrying out 200 in-depth interviews with senior energy management managers across a representative sample of public and private sector organisations.

This survey is widely used by the UK Government, Ofgem and industry as the benchmark reference for how industry is managing energy efficiency and carbon emissions reductions. Our UK business users survey is publicised widely and is the most comprehensive survey of its kind in the EU.

The survey is currently sponsored by RWE npower in association with the Major Energy Users Council (MEUC) and the UK Federation of Small Business (FSB).

Company website:

Moffatt Associates – Ownership Unbundling and Market Transparency

In 2007 DG TREN commissioned Moffatt Associates to conduct a detailed market research programme to assess the likely impact of the Commission’s proposals relating to TSO unbundling and improved wholesale market transparency.

Objectives of this study were as follows:

  • A. Ownership Unbundling
    Impact on non-discriminatory access on tariff levels and price information transparency
  • Subsequent impact on the increase in competition in both generation and supply
  • Required conditions and propensity for unbundled TSOs to (a) increase levels of investments in improving the quality of the network, (b) increase investment in cross-border capacity, (c) work with other TSOs to create regional networks, and operate in such a way that would reduce or eliminate the need for new pan – European regulator and reduce or eliminate the need for heavy national regulation relating to network tariffs and investment incentives
  • Potential benefits to the incumbent of selling network assets – in terms of either returning funds to shareholders and/or channeling new investment into higher margin non-regulated generation and supply businesses locally and/or in other territories in the EU and elsewhere

B. Market Transparency

  • Relative importance and significance of different data in terms of its value in promoting liquidity and competition in different regional markets
  • Type, timing and sourcing of data required in both gas and power by regional market – i.e. including exchange, TSO and OTC data
    Whether it would be better to opt for high mandatory minimum standards across the whole of the EU from day one or opt for variable benchmarks and a regional incremental approach with Nordpool and the UK leading the way
  • Whether most benefit could be secured in the short term by opting to prioritise transparency in power rather than gas

In a period of less than 5 weeks, Moffatt Associates were able to complete a total of 56 in-depth interviews with key participants in the EU energy market including:

  • Stakeholder associations
  • Energy market regulators
  • TSO network operators
  • Financial investors
  • Energy exchanges
  • Dominant incumbents
  • Market traders
  • Market analysts

Our conclusions were included in the EU Commission’s Background Paper accompanying the 3rd Package Directives