The natural gas market and recommendations for a VdBF supply strategy

Abstract

The UK gas market is one of the most volatile for a traded commodity in the world, price swings of up to 80% per month and for the same volume prices can differ by up to 20% within days or weeks. Because of this, the right contract at the right price has to be made at the right moment. The weather and The lnterconnector, a huge pipeline between UK and continental Europe, are the main reasons for short-term volatility. Fixed price contracts are fashionable when prices are low. lndexed Price contracts follow the market and are chosen when prices are high and they are consequently more risky. Baseload deals are a trade off where you can fix the price of a proportion of your consumption (you get a better price than in a fixed price contract) and the rest will be indexed. Three types of contract can be set depending on your consumption: A domestic contract is for any property using less than 2,500 therms p.a., this is the case of the small supplies for VdBF canteens. Firm contracts guarantees continuous gas supply to the site and are for those consuming more than 2,500 therms p.a. Finally lnterruptible supplies are cheaper because they do not include the capacity reservation element in the transport cost but the consumer has to use more than 200,000 therms p.a. and need an alternativa fuel source in case of interruption. Purfleet, with a consumption of 19.8M cm p.a., will be able to be supplied by a supplier from outside the UK in 2003. Ashford and Worksop will have to wait until 2008. Lower prices will be expected dueto new entries in the UK gas market. Gaz de France, through acquisition, has already occupied a position in the UK market, offering competitive prices. VdBF has decided to be supplied by them after a tendering process and a cost analysis of all its competitors. lt is composed for 62 industrial suppliers. Economies of scale are difficult to achieve because of the narrow margins that suppliers have. VdBF has to identify the most competitive suppliers and maximise the competition between them. The best way to do it is through a tendering process. Finally VdBF should monitor the fluctuations in the SPOT market to be able to choose the right contract for the right period. A VdBF energy team should be made, before that moment the use of consultants is necessary. In the future consultancy for gas may become redundant or more necessary (if they develop on-line purchasing systems). Gas consultancy is a matter of trust. To create this trust atmosphere between consultants and VdBF and to provide good value for money some criteria have to be met by consultants. The Climate Change Levy is a tax on the use of energy by business, effective from April 1st 2001. Potentially this could add £347K p.a. to the VdBF gas bill. This can be reduced by 80% by meeting energy reduction targets.