Guess who helped cause the energy price hike?

On 20 June 2017 Centrica, the operator of the Rough gas storage facility, announced its intention to permanently close the facility.  Who signed it off in government? Liz Truss!

According to The Yorkshire Post:

“Liz Truss’ involvement in shutting down the Rough gas storage facility and plummeting the UK into close to zero storage stocks shows the blatant disregard from this government to protect our energy supply and keep bills down.”

The warnings were clear in 2017 but she and other ministers ignored them

What you need to know

• The Rough gas storage facility, which represents more than 70 per cent of the UK’s current gas storage capacity, will be permanently closed.
• A lack of incentive mechanisms, together with unfavourable market dynamics, mean that investment in new gas storage facilities to fill the gap is unlikely in the near future.
• It is inevitable that the closure will have some impact on the gas market, including an increased chance of price spikes at times of peak demand.

The Rough gas storage facility

The Rough gas storage facility is the largest gas storage facility in the UK, representing more than 70 per cent of the UK’s current gas storage capacity.  It is used by capacity holders to store gas in the summer and deliver that gas to meet peak demand in the winter – the facility has the capacity to meet approximately 10 per cent of the UK’s peak day demand.

The facility itself is an offshore depleted gas field, which was converted into a gas storage facility in 1985.  The decision to permanently close the facility has been made on the basis that the wells and facilities are at the end of their design life and can no longer be operated safely.  The costs of refurbishment or rebuilding the facility and replacing the wells would not be economic.

Centrica has said that the facility will close once it has produced all the recoverable cushion gas from the facility, over the next four to five years.

Other gas storage in the UK

Compared to continental Europe, the UK has very low levels of gas storage capacity.  There are currently nine storage facilities (see Figure 1) serving the UK gas market, including Rough.  However, as noted above, Rough is by far the largest, having a capacity that is greater than the other eight facilities combined.  Rough’s other notable feature is the fact that it is the only long-range storage (LRS) facility – all the other facilities are medium-range storage (MRS).  

While the distinction between LRS and MRS is a somewhat grey area, in general LRS facilities are used to provide additional seasonal gas supply.  Gas shippers inject gas throughout the summer when the gas price is expected to be lower, and withdraw it in the winter when gas prices are expected to be higher.  MRS facilities, on the other hand, typically cycle between injection and withdrawal many times in the course of a winter, and can even cycle during a gas day.  MRS facilities have faster withdrawal and refill rates than LRS facilities, allowing gas suppliers to respond to changing market conditions from day to day.  However, arguably, MRS facilities cannot match the sheer volume of gas that is able to be stored at LRS facilities such as Rough, in close physical proximity to the gas market.

Figure 1 – Gas storage facilities in the UK (Source: National Grid)

Lack of investment in new gas storage facilities

Historically, the limited need for gas storage capacity in the UK was driven by the UK having its own sources of gas supply from the North Sea.  However, as the levels of production in the North Sea decline, the UK is increasingly reliant on gas imports.  The UK imports natural gas by pipeline from Norway, Belgium and the Netherlands and by ship in the form of LNG.  The UK has been a net importer of gas since 2004, with net imports of gas in 2015 accounting for just over 40 per cent of supply.

It has been noted by various industry experts that, in the absence of a buffer in the form of a sufficient amount of gas storage, the UK is vulnerable to high spikes in the price of gas at times of high demand.

However, there has been very little investment in new gas storage facilities.  One of the challenges for investors in new UK gas storage projects has been an uncertainty surrounding long-term stable revenues.  The competitive and liberalised nature of the UK gas market is such that potential customers of gas storage facilities will generally only enter into short-term contracts for gas storage services, reflecting the short-term nature of their gas supply contracts with gas supply customers.  In addition, investment in new gas storage facilities is more attractive when seasonal price spreads are wide, but the seasonal price spread (not just in the UK but across Europe) has been narrow in recent years, further disincentivising investment.  The UK winter-summer price spread is currently around 5 pence per therm, down from 50 pence per therm 10 years ago.

The UK’s increasing dependence on gas imports led the Government to launch in late 2011 a review of the UK’s gas security of supply arrangements.  The review, involving Ofgem (the gas and electricity markets regulator) examined various potential regulatory interventions in the gas market.  One of the possible interventions considered was a gas storage obligation.  However, this was firmly rejected by the Government in September 2013, with an announcement that the Government would not intervene to incentivise further gas storage, based on a cost-benefit analysis study by independent consultants, which concluded that the costs of intervening largely outweigh the possible costs of low storage levels in the event of a gas deficit. 

Implications of the closure of Rough

Price Spikes

Reduced gas storage capacity on the scale of the Rough facility poses a significant risk of greater price spikes at times of peak demand for gas.  The fact that such a large LRS facility will no longer be available will clearly have an impact on the UK’s ability to soften the blow of seasonal price variations (to the extent that spreads create a need for this).  

However, the closure of Rough will also have an impact on shorter term variations.  As noted by Timera Energy in its April 2016 report on the potential closure of Rough, while Rough’s 70 per cent gas storage capacity may be missed in the future, it is the absence of Rough’s 25 per cent contribution to the UK’s daily gas storage deliverability that is more critical.  The report states that a 25 per cent fall in deliverability reduces the ability of the UK market to respond to short-term swings in the supply/demand balance (e.g. import infrastructure outages, cold snaps) over a 1-2 week horizon.  

Looking forward, one key question is whether investment in gas storage capacity is likely to increase as a consequence of the closure of Rough.  On the one hand it would seem an obvious response to invest in new gas storage to replace (at least part of) Rough, but the increased flexibility of the UK’s gas supply that has developed over recent years does not make this straightforward.  So, for example, we may see returns on investment in UK LNG receiving terminals improve, rather than the construction of new (or expansion of existing) gas storage facilities.

Security of supply

Leaving price spikes aside, the question also arises whether the closure of Rough will threaten the UK’s security of supply.  In its October 2016 Winter Outlook Report, National Grid “stress tested” a scenario where the Rough facility may not be available, and concluded that “although it is difficult to predict precisely how supply sources will respond, we believe that Norway, LNG and IUK [Interconnector UK], in addition to our baseload supply from the UKCS, are capable of making up any potential shortfall”.  

The Oxford Institute for Energy Studies noted in a May 2017 report that, while Norway and UKCS supplies might not be particularly flexible, those from Europe (which include access to European storage capacity) and LNG are.  However, the report also notes the inescapable fact that LNG deliveries are influenced by global market dynamics and significant LNG shipments may not coincide with periods of high demand.

If, against current expectations, a gas deficit does arise, there are regulatory mechanisms in place to deal with this, at least on a short-term basis.  Among these are recent changes to so-called “cash-out” arrangements, which help National Grid (as System Operator) to balance the gas system.  Ofgem recently carried out a review of these arrangements, as part of its “Significant Code Review” (Gas SCR), which was carried out in response to the Government’s concerns about security of supply, mentioned above.  

Cash-out charges are imbalance charges that gas shippers pay if they do not take the same amount of gas off the system as they put in.  Cash-out charges reflect the costs to the system operator of balancing the system and give gas shippers an incentive to match supply and demand.  

Before the review, cash-out prices were frozen during a gas deficit emergency – a period when the supply of available gas is not sufficient to meet Great British demand.  The outcomes of the Gas SCR included unfreezing cash-out prices so that they can reflect market conditions during an emergency, with no cap on prices.  These changes to cash-out arrangements came into effect on 1 October 2015.  

As part of the Gas SCR, Ofgem also determined that the gas market would benefit from the introduction of a new Demand Side Response (DSR) mechanism, whereby certain gas consumers offer to enter an agreement to reduce their demand, during the build-up to a gas emergency, in return for payment.  While the gas DSR mechanism has now been fully implemented, during winter 2016/17 the gas market did not meet the conditions required to issue a gas deficit warning, and therefore the gas DSR service was not needed to stabilise the market.

Conclusion

It seems likely that the removal of the Rough gas storage facility’s capacity from the UK market will have an impact, at least in terms of the UK’s exposure to price volatility.  The potential impact on security of supply is less clear, but one that may compel the Government to reconsider the role of gas storage in the security of supply mix; National Grid may be equipped to deal with short-term deficits, but a longer-term deficit is a different matter.

Yet again the Tory party are putting an ideology that does not work for the population over the actual population.

Those who vote for them deserve everything they get. It is the rest of us who are the innocents.

Edwina Currie has the solution though:

Edwina Currie demonstrates why we need a Revolution

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