Press Release

The UK Government must set a timetable for new gas storage capacity to commit to construction and ensure the country can maintain its energy security during gas supply shocks and volatility associated with intermittent wind power generation. This is the main conclusion from an independent survey of some of the UK’s largest users of gas, commissioned by a cross-section of interested parties involved in the UK gas industry, including EEF The Manufacturers’ Organisation, the Energy Intensive Users Group and the Chemical Industries Association.

The majority of the companies surveyed, representing 12.5% of UK manufacturing industry’s annual gas demand and including INEOS, Tata Steel, Outokumpu and GrowHow, also said that the UK Government should establish an enhanced storage Public Service Obligation, which requires utilities to hold in store a set proportion of their gas sales and is common throughout mainland Europe.

The survey also indicated that companies do not believe that OFGEM’s complex new gas balancing plan, designed to deliver more gas storage, will work. On the contrary, it may result in intensive process manufacturing companies prioritising mainland Europe over the UK for future investment because companies require a high security of gas supplies. The Government’s current plans still envisage the possibility of future gas supply interruption, accompanied by uncertain levels of compensation.

Steve Radley, Director of Policy at EEF The Manufacturers’ Organisation, said: “This survey highlights the importance industrial gas users place on the physical security of energy supplies and the role that storage plays in delivering it. Manufacturers see compensation as a last resort and not as solution to the growing gas security challenge. So the survey is a challenge to both the government and the regulator to address the barriers which are holding back investment in this crucial area.”

Laura Cohen, Chief Executive of the British Ceramic Confederation, a trade association covering about 100 British manufacturers and a member of the Energy Intensive Users Group said: “The ceramic industry, and indeed other sectors of the British economy, relies upon secure and affordable energy supplies. Whilst our members are constantly seeking ways to improve the energy efficiency of their operations, interruptions to gas supplies are financially catastrophic to their business.

“OFGEM’s current proposals to amend the gas market framework and indeed the Government’s own statements about more pipeline and LNG import capacity do not give our members sufficient assurances about their long-tem energy security. More physical storage capacity needs to start being built in the UK market within the next two years and there needs to be a requirement for gas suppliers to have sufficientcontingency reserves. This contributes to more stable prices and a more stableenvironment for UK manufacturing.”

Jeremy Nicholson, Director of the Energy Intensive Users Group said: “This survey highlights the importance industrial gas users place on the physical security of their energy supplies and shows how critical a factor storage would be in supporting availability of gas in a distress situation. It is vital that the government and OFGEM take the opportunity to address the barriers which are holding back investment in this crucial area. Inadequate regulatory oversight failed in the case of the financial sector and we are determined this is not allowed to happen with the country’s critical energy supplies.”

George Grant, Chairman of Gateway Storage Company, an independent storage development company, said: “Major utilities and other potential storage investors have made it clear to us that the balancing mechanism proposals do not deliver the necessary and sustained storage investment signal. This is why we now advocate that OFGEM should immediately move to developing a Public Service Obligation framework for the UK, so it can be implemented speedily if it proves necessary.” A Public Service Obligation (PSO) obliges gas suppliers to hold in store a set proportion of their gas sales and it is a tried and proven market methodology used throughout Europe.

The UK Gas Security survey was undertaken by the research company ComRes Ltd, between June and August 2011 (online interviews with gas experts in 20 high energy users). The survey report, which was also supported by the British Ceramic Confederation, the British Glass Manufacturers Confederation, the Food & Drink Federation and the Confederation of Paper Industries, has been shared with OFGEM, the Department of Energy & Climate Change and the Department of Business, Innovation & Skills and will be shared with parliamentarians and other interested parties.

For further information contact:

EEF The Manufacturer’s Organisation
Mark Swift or Roger Salomone (Head of Energy Policy)
Tel: 020 7654 1576 / 020 7654 1561

British Ceramic Confederation
Laura Cohen, Chief Executive
Tel: 01782 572845

Energy Intensive Users Group
Jeremy Nicholson, Director
Tel: 07785 280568

Gateway Gas Storage
George Grant, Chairman
Tel: 0131 550 3380

Notes to Editors:

1. There is a consensus between Government, OFGEM and industry experts that additional gas storage is needed in the UK. However this new investment is unlikely to take place without the creation of financial incentives via changes to the gas market rules. See OFGEM’s Project Discovery, Wicks Security Review, Coalition Policy Document, Poyry GB Gas Security Report, commissioned by DECC in March 2010 and published July 2010.

2. The Government (via the 2011 Energy Bill) proposes changing the gas market rules (“sharpening the balancing mechanism”) so gas suppliers will face very large financial penalties if they don’t supply their major industrial customers with gas. DECC believes that this will incentivise new storage: in the Committee Stage of the Energy Bill (Clause 79, June 16th 2011), Energy Minister Charles Hendry said “The United Kingdom does not have enough gas storage at the moment. However, we still want the market to deliver a solution. Storage is one part of that solution rather than the only part. I hope that our approach is creating a framework that will put much greater financial penalties on companies and so incentivise them to invest in whatever technology they think is most appropriate. I hope that that will deliver more investment in gas storage. Rather than being too prescriptive, it is right that we try to use a market mechanism to give the industry the ability to react as it sees best to that process.

3. At present, gas suppliers’ obligation to compensate industrial customers for failing to supply gas is minimal. The proposed change will charge suppliers for being out of balance in order to compensate customers for supply interruptions. But, as the survey and others have indicated, there are reservations concerning the Government’s proposals effectiveness primarily because: (1) it will be difficult and expensive to implement because of the difficulty of ascribing fault and (2) the actual scale of the supplier penalty and associated compensation will be unknown until after the industrial customer’s gas supply is cut off. So the paradox is that the size of an incentive designed to enhance security will only be known when it has failed.

4. Detailed implementation of the Government’s proposals is currently under consideration by OFGEM (the SCR process) and it expected that OFGEM will publish an interim report in the autumn and its final conclusion in Spring 2012.

5. A Public Service Obligation (PSO) obliges gas suppliers to hold in store a set proportion of their gas sales and is a tried and proven market methodology used across mainland Europe. The gas is then taken out of store as the winter progresses. The application of the PSO is a market solution and should not be regarded as “strategic storage” where a central authority (such as the UK or National Grid) holds their own stocks of gas and intervene directly in the market.
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