Press Release

How do short term warnings of gas supply shortages, and a 50 per cent spike in same day delivery costs, sit with the general acceptance across the energy sector and government that gas will – and should be – the next big source of supply for power generation ?

Natural gas is readily available – and new discoveries around from East Africa to the Eastern Mediterranean suggest that the issue is how to sequence developments, rather than how to cope with a shortfall. Conventional supplies of natural gas will be followed in some countries over the next decade by supplies of locally produced shale gas. Eastern Europe, Ukraine, China, India and many other countries are in different ways following what has already happened in the US. The developments won’t be instant – in some cases infrastructure is required to bring in water and to take out power – but the process is starting and shale gas will be a serious contributor to supply outside the US before 2020.

But some authorities appear not to understand how the gas market is evolving and the risks which need to be managed. Gas is moving quite rapidly from long-term contracts to a position in which more supplies are bought and sold on the spot market. Spot markets are inherently volatile and there is a powerful case for more gas storage to provide a cushion against that volatility.

The fact that gas is becoming more readily available over time will never eliminate the risk of price spikes. In Asia in recent weeks spot cargoes for delivery in 4 to 8 weeks time have risen to a record price of $19.40 per million BTU. A long, cold winter in Europe could equally cause a spike in prices here – though of course to rather lower levels than in the Asian market. This week’s spike is caused by a combination of the temporary closure of one supply line and fears about a demand surge. These things happen, but they need to be anticipated and planned for. Extra gas cannot always be brought on-stream instantly and domestic and industrial consumers could find themselves paying exorbitant short-term prices to keep the lights on. UK consumers are particularly at risk because storage here is so low.

An interesting paper from George Grant, chairman of the storage business Gateway, sets out the position very clearly.

 

These are the levels of storage held by four of the leading European economies. Annual demand (bcm)

Country Annual demand Days of reserves
Germany 87 110
Italy 81 86
France 50 95
Germany 100 19


Mr Grant’s paper builds on the excellent work done in this area by the independent energy consultant Peter Hughes.

In the UK, the only serious storage which exists is in the Rough field, owned by Centrica. That creates another level of risk because, when it comes to security, nothing is more important than diversity. Rough not only has a capacity limit of around 3bcm – which is more than 70 per cent of the national total – it is also constrained by its inability to discharge more than a single flow of gas at any one time. If anything goes wrong there is no back-up. The low UK level perhaps dates back to the time when all the gas used was domestically produced – in contrast to the other countries listed all of which have to import most of their requirements.

The UK Department of Energy and Climate Change has moved at a pace of an ageing snail in dealing with this issue. In fact, the issue is very simple. The energy producers should be mandated to hold supplies which amount to say 50 to 70 days of demand, with that total increased as consumption rises.

Various potential new storage facilities exist but of course their development is held up because there is no such mandate. The logic is to put the requirement in place and then establish an open competitive process to identify a small number of facilities which can be developed for long term use. The solution will not be instant because the facilities will take time to construct, but if DECC continues to dither the process will never begin.

Of course there is a cost , but that cost is minor compared to the costs of a new nuclear power station or the cost of doing nothing, leaving consumers vulnerable to spikes, such as those produced by the weather and exploited by large scale suppliers such as Gazprom.

We need more gas-powered plants to provide low cost electricity. But a prudent policy must include a higher margin of storage to ensure that energy security is also protected.


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