Shepherd and Wedderburn LLP
  January 4, 2006 - Scotland

The Benefits of Gas ‘Swing’
  by Jim Saunders

In the 1930s Duke Ellington wrote what was to become a jazz standard. The song was called "It don't mean a thing (if it ain't got that swing)". What is the connection with gas supply you may well ask? To explain, contracts to supply gas contain ‘swing’ - the term for the supply margin given to a buyer over their peak demand. Not surprisingly, the buyer wants as much swing as possible from the seller, to give them flexibility, while the seller wants to minimise swing so they can predict demand. Due to the need now for the UK to import most of its gas, sellers have the stronger bargaining position and can resist a buyer's demand for large swing margins. The seller's pole position is reflected in the current high wholesale price for gas. Prices have soared because liberalisation of gas supply in the rest of Europe has been slow. The UK gas market regulator (Ofgem) in June stated: "…. Lack of competition in Europe means higher prices for British and European consumers…". This was backed up just this month by the European Commission. Not so long ago in power generation the phrase "dash for gas" was a reference to the use of cheap gas to fuel small to medium-sized generating stations. The current "dash for gas" for suppliers in the UK context is to look for a broad portfolio of supplies, from gas storage to liquified natural gas. National Grid (formerly Transco) is charged under the UK Network Code to keep gas supply and demand in balance and it needs to be aware of how much "swing" the market can contract. If there is not enough contracted swing, this could have far-reaching consequences, making this winter a lot colder than anticipated.


Footnotes:
James Saunders is an partner specialising in energy with commercial law firm Shepherd and Wedderburn. +44 (0)131 473 5288