More detail required to secure essential investment in new gas infrastructure

5th December 2012

logos-TK-news-stag-v1Commenting on the Chancellor’s Autumn Statement and today’s publication of the Gas Strategy
Paper George Grant, Chairman of Stag Energy said: ” We welcome today’s announcement which goes some way to removing the Government’s ambivalence on the symbiotic role that gas must play with renewables to secure affordable electricity supplies during what will be a long-term transition to a low carbon economy.

“However the devil is in the detail. Without appropriate detail, it will be difficult if not impossible for independents such as Stag Energy to raise the level of equity and debt finance to fund the investment required and thus make the generation market, where the Big 6 dominate, more competitive.

“If independent players and new entrants are to be able to create more competition across the gas to power chain and help provide security of energy supply, there is an urgent need now for clarification on the operation of the proposed capacity market to support independent investment in new gas generation. We also urgently want the introduction of measures to support new investment in UK-based gas storage to ensure security of gas supply and to protect consumers against possible volatile movements in the future price of gas.”

Key areas where a greater level of policy certainty is required, to provide the necessary confidence in future revenues, are as follows:

CAPACITY MARKET (CM)

The gas strategy paper presents scenarios which indicate that up to 41 GW of new gas generation capacity will be needed by 2030 to underpin long term electricity supplies and provide back-up to nuclear and wind generation at times of peak demand. New entrants can play a key role in delivering this capacity and increase market competition. However, the market does not provide the signals required to fund investment in new capacity. Independents need the CM to provide a degree of revenue certainty.

In particular, CM contracts of at least 15 years are required to ensure that independents can compete with incumbents and to minimise costs to consumers. Secondly, in the proposed capacity auction existing and new plant should be treated separately to avoid unnecessary windfall gains to older less efficient plant and reduce costs to consumers. Thirdly, penalties should be based on the real time variation in declared and available capacity and not solely on energy output and times of system stress. The latter approach places an undue financial risk on generators who would be faced with unpredictable and unquantifiable outages which are beyond their control.

Finally, the Government needs to remove any remaining ambivalence surrounding the need for a CM and confirm when the first capacity auction will take place so that new investment can proceed with confidence.

UK GAS STORAGE (GS)

There is an inextricable link between electricity and gas security of supply and the Government has not given this link in the gas to power chain the attention it deserves.

The measures announced to encourage the development of shale gas could help offset the rapid decline in UK offshore production but it will not provide the flexibility of supply to support peak
generation, nor will it provide consumer protection from global gas price spikes. There is an argument that there are plentiful supplies of gas in the world and that gas prices will remain stable for the foreseeable future. However, the UK will remain heavily dependent on imports, global gas consumption is rising dramatically and there can be no guarantee that that the market will function to ensure demand is met without exposing consumers to unacceptable price risk. The UK has one of the lowest levels of gas storage relative to demand in Europe. It is our firm belief that following the ECC Select Committee recommendation[1] to double current levels of domestic gas storage would reduce gas price volatility significantly.

The market does not provide adequate seasonal price signals to attract long term investment in new UK gas storage. If the necessary insurance is to be secured, some form regulatory framework is required. Our view is that the most cost-effective route is for the Government to establish a Public Supplier Obligation (PSO) on shippers and suppliers (as is common in Northern Europe) to hold a certain proportion of annual gas requirements in UK storage, based on market share. The cost in providing protection against global gas price volatility is estimated to be approximately £6-10 per annum for domestic households and 1% of industrial gas costs and is widely supported by Energy Intensive Users and Consumer Focus.

ENDS
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Notes to Editors

Stag Energy (www.stagenergy.com) has a long history of power station and related energy infrastructure project developments in the UK and overseas. The team has been involved in the creation and delivery of more than 10,000MW of power generation projects, including the Rocksavage gas-fired power station in Cheshire, the Coryton gas-fired power station in Essex and the Spalding gas-fired power station in Lincolnshire. Stag Energy has also led the Gateway Gas Storage project which was consented by the UK Government and the local authority (Barrow-in-Furness, Cumbria) in 2008.

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