According to Clive Moffatt * the recent decision to reject the exploration of shale gas in Lancashire and the announcement from Centrica to reduce the operating capacity of the UK’s largest gas storage facility for technical reasons have highlighted the need for Government to take urgent action to help unlock new investment in gas storage to reduce the risk of shortages and minimise energy price volatility.
The UK’s consumption of gas relative to total energy consumption is one of the highest in the EU – nearly 40% – but the level of gas storage relative to demand (5bcm of operational capacity) is one of the lowest – less than 15 days based on average winter demand. However, in September 2013, Michael Fallon, the then Minister of Energy concluded that “the UK gas supply was resilient with supplies outstripping demand” and this was cited as the main reason why no public support was needed.
The UK does indeed have ample import capacity viz Norwegian pipelines, EU interconnection and LNG terminals and in the medium to longer term a strong price rise can pull more gas into the UK. But the UK’s vulnerability is in the shorter term (eg 4-6 weeks). 75% of the UK’s gas storage capacity is contained in Centrica’s Rough facility which is nearing the end of its design life. Furthermore, Rough is geared up to meet medium term seasonal variations in demand and is relatively inflexible in the short term. For example, the gas price spikes of March 2013 reflected a period of deliverability scarcity over 4-6 weeks until higher prices fortunately attracted additional LNG imports.
The UK is becoming increasingly vulnerable to these short term variations in demand and supply. First, the UK’s dependency on imports is rising rapidly – National Grid estimate that imports could rise to 90% of demand by 2030. A successful shale gas programme would help reduce import dependency but no matter how much it contributes the production of shale gas is continuous and does not respond to short term fluctuations in demand. More “fracking” is not the answer to the gas security problem. Second, short term fluctuations in UK power demand for gas is increasing as intermittent renewable capacity rises – DECC estimate that an additional 30GW of new flexible gas generation will be required by 2030.
This problem has been on the political agenda for several years. In October 2011, the ECC Select Committee concluded that “The UK needs to significantly increase its gas storage capacity. The Government must develop a strategy for achieving this” and an appropriate security target consistent with EU standards would be 5bcm of existing storage with an additional 5bcm of new flexible storage. Some 10bcm of new projects have already received planning consent. The problem is the lack of demand certainty over the longer term. For example, in 2005 DECC listed 5bcm of additional storage capacity (10 projects) to come on line in 2010 but only 0.35bcm was actually delivered.
So what should the Government do to unlock new investment? – Imposing an obligation on suppliers and shippers to hold a certain proportion of their gas in store ahead of every Winter (ie a PSO – Public Service Obligation) would be the simplest and most cost-effective solution because it is market-based. It sets down a long term security standard and then leaves it to suppliers and storage operators to devise a workable solution that delivers the level and frequency of supply from gas storage that the market requires and is prepared to pay for. The PSO approach does not require central procurement with the Government and/or Ofgem picking winners and losers and underpinning the revenue of storage operators. Furthermore, the costs to consumers would be minimal.
UK energy intensive users support the case for greater UK gas storage and the PSO. According to Dr Laura Cohen, Chief Executive of the British Ceramic Confederation: “More UK gas storage underpinned by a gas security obligation on suppliers (PSO) is likely to provide the level of price and supply security that our industry requires. Gas held in UK storage will reduce exposure to market disruption and international price volatility. Furthermore, supplier PSOs are already the market norm in many European countries. We accept that this will result in an “insurance” premium for all consumers. We have quantified this and it is acceptable to our members. It is better than exposing our industry to the risks of supply disruption and international price spikes”
Her position is supported by a ComRes survey undertaken on behalf of: EEF The Manufacturers’ Organisation, Energy Intensive Users’ Group, Chemical Industries Association & Stag Energy. The survey revealed overwhelming support from energy intensive industries in favour of a support mechanism levy on their bills in order to secure gas supplies. The total cost of 5bcm of new storage would be in the region of £4bn. This, it should be noted, is a fraction of the total required electricity infrastructure cost estimated by National Grid for the next decade. Calculations by the British Ceramic Confederation allowing for a 30 year life, cost of capital, finance and gas indicate an additional cost to all consumers of 1p / therm. This is before factoring in the significant benefits of reduced energy price volatility and greater security of energy supply.
Successive governments have created such an interventionist environment that has eroded market confidence in energy infrastructure investment that it is very difficult for new power generation or gas storage to move forward until clear regulatory principles are established. New gas storage assets take almost ten years to develop and construct meaning that action is required now to address market requirements around 2025. Gas will become the predominant source of both heat and power by 2030 and action is required now to put in place necessary measures to manage the risks associated with increases in both the level of import dependency and the volume of intermittent renewable energy generation. A commitment from the Government to review again the need to unlock new investment in gas storage in the September Energy Statement would be a valuable next step.
* Clive Moffatt is a leading independent energy market analyst, and a member of Taylor Keogh’s associate team. Email: email@example.com