UK Government faces up to gas security [NGW Magazine]
The UK has not suddenly found itself without any seasonal storage: the operator of Rough, Centrica, first aired its plans to close down the 3.5bn m³ plant some years ago and notified the government of its intentions. Repairs would have been costly, and possibly only temporary. The wells had failed and the compressors had been worked hard. The government monitored the situation as Rough’s performance worsened over the years but did not respond.
But now, as the UK prepares for the second winter without Rough, and after a nerve-racking few days last year when within-day prices shot up and the transmission system operator National Grid issued a gas deficit warning, industry and major energy consumers have successfully pressured the government to hold a public inquiry.
Laisser-faire, or dirigisme
British industry has two principle points of view: some think the market needs to be allowed to work, and they say that so far it has: high prices generate investments and warn shippers of the consequences of failing to book security. Others talk about the importance of security of supply and price for UK Plc, whose interests must come first.
National Grid believes the market is working well. In its latest winter outlook, it said it expects there will be enough gas from a variety of sources to meet demand this winter. The strength of the UK gas supply lies in its diversity, it says, and the UK can receive its gas from offshore fields in the North Sea and Norway. Gas is also brought in from Belgium and the Netherlands via two interconnector pipes and imported in the form of LNG. Supplies from the UK Continental Shelf and from Norway are expected to be high, similar to last year, it says. Storage, LNG and interconnectors are important components in the supply mix, providing flexibility to the market.
All these observations may be true but some – especially those relating to interconnectors and North Sea flexibility – are becoming less valid.
Uncertainty about the market’s ability to provide at an affordable price led to the creation in November 2017 of the Gas Security Group (GSG). It has been working to draw the UK’s gas storage situation to the government’s attention. The GSG was set up and is chaired by Clive Moffatt, an independent energy policy consultant.
Its members include major industrial energy users and employee organisations. GSG members account for 40% of all UK industrial and commercial gas demand. The GSG has also liaised closely with other stakeholders such as Interconnector UK and British energy regulator Ofgem.
The GSG has since last year been campaigning to highlight the increased risk off gas shortages ad price spikes aggravated by the closure of Rough and the low level of UK gas storage relative to demand. In March the government department for Business, Energy and Industrial Strategy (Beis) agreed to an internal review of the situation and the GSG reiterated its concerns to MPs at a House of Commons Select Committee hearing October 31.
The GSG has argued that the government needs to adopt a wider and more realistic definition of gas security that embraces price as well as physical security and it has enjoyed some success. Moffatt says that at an APPG Ceramic industry meeting early November energy minister Claire Perry said that the impact of gas supply disruptions on gas and electricity prices had to be taken into account. If she has taken this issue on board then it would be something of a U-turn because as the former head of regulation at Centrica Storage, Roddy Monroe, told the select committee, Beis had not considered that aspect of gas supply shortages.
With Rough gone, other flexibility is needed more, such as interconnectors and LNG terminals; but the GSG is concerned that having the capacity does not mean the gas will be there when needed. Higher prices on the continent could draw the gas out of storage in the UK as well. So a public service obligation would also be needed, so that UK consumers took precedence and were protected from price spikes.
This is something that the GSG has considered, but it has not yet presented a working model to Beis. There are a number of questions surrounding PSOs for storage, including: the aggregate level of the obligation and its duration and its operation throughout the year and the impact of additional storage costs on gas bills.
“We are not yet at the point of defining the rules of a PSO,” Moffatt told NGW. “Our first task has been to persuade government that there is a problem that needs to be addressed. But we believe that a PSO would be a cost-effective way of increasing short-term supply flexibility and mitigating the impact of price spikes. One advantage of a PSO mechanism is that it would be easy to implement within the bounds of existing legislation.”
Another tool in the box is demand-side response (DSR). He says: “National Grid has a DSR scheme in place but there has been no participation. GSG and its members are keen to try and make it work. There is a scope for some industries to bid in a price at which they would reduce gas consumption at times of system stress as happens in the electricity capacity market.
“But as a general rule continuous production processes make it very hard for some major users, such as the ceramic sector, to predict some time in advance when they will be able to turn down for a fee without suffering even bigger financial losses,” Moffatt says. NGW reported last March that no end-users turned their gas off in response to the gas shortage, although some were asked to.
Despite three gas directives at the European Union level, different countries take a different approach to storage, seeing it not as a trading tool for managing peak demand or over-supply but as a mainstay of the industrial sector in particular during winter. The cost of storage in some countries can be rolled up in the transmission fee, a cross-subsidy that allows gas to be injected. That said, German utilities are closing some of their facilities when faced with the cost of an upgrade.
A former Interconnector UK pipeline head Sean Waring, now an independent consultant, says that there have to be price spikes: they are a signal to the market that it needs to invest. But on the continent, where storage is often part of a gas transmission system operator’s (TSO) toolkit, he says that these signals are often muffled. “TSOs have operational balancing agreements with neighbouring gas grids and they can swap gas around.” This creates the illusion that all is working smoothly, but it covers up shortfalls for which the shipper is not penalised. The UK has taken a different approach: storage is separate from the pipeline operator.
Industrial users may be disconnected if the worst comes to the worst but the market must supply the gas to households, schools, hospitals and so on; and take their chances with industrial customers. That means suppliers may have to book storage, as an insurance scheme. But one major consumer told GSG that its supplier has added a new clause allowing them to pass on any additional gas costs to balance its gas positions with actual consumption on any day that a gas emergency called.
However, new storage is at least five and possibly ten years away. So price signals are only part of the story, Waring says.
He says the market has done extremely well and that the government so far has been vindicated in not throwing consumers’ money at big assets that are not needed. “It is not just a storage question: really it is, whether the UK has access to arrangements that will deliver gas at an affordable price.” If the government is concerned about affordable gas, it should not be a question of which technology to use,” he says, “if we can demonstrate that gas in Dutch storage and the Balgzand-Bacton Line (BBL) is as good as gas under the ground in Cheshire.”
As the Interconnector UK and the BBL are regulated differently from continental pipelines, neither has a guaranteed rate of return; so there are questions about how much longer they will continue for, and at what capacity, once their present capacity bookings expire. Other infrastructure too will be paid off next decade, including the Isle of Grain, the South Hook and the Dragon LNG import terminals.
Other predictable developments Waring identifies include the further reduction in UK production; and reliability as the province grows older; and less electricity switching capability as coal and nuclear plants come off the system. “Peak capacity is still needed but the use is falling, so who pays to keep them working?”
Policy makers will and should monitor this position and ensure as an industry that security is maintained and do this with a long time horizon, he says. “I think Beis and its predecessors have done a reasonable job at maintaining a consistent approach and keeping ministers’ fingers and public money out of it. However I do think we are at a changing point and a pretty serious review is needed in gas security of supply. The gas market demand, while in decline on an annual basis, still demands high peaks so the review should question how do we maintain the peak capacity that we need without the annual average demand needed to support flexible assets that are merchant.”
WHAT’S IN AN ACRONYM: GSG OR GCG?
The UK’s industry and consumer group GSG is not to be confused with the longerestablished EU Gas Coordination Group (GCG). The latter - mainly of national energy officials but also including EU regulator and industry groups – has met since 2012 on a semi-regular basis to monitor the adequacy of security of gas supply measures at national and EU-wide levels. It has met between twice and five times a year. For instance, the GCG discussed implications of the Dec.2017 fatal and accidental explosion at Baumgarten at a scheduled February 20 meeting. But it can be convened on an ad-hoc basis when there is a sufficiently serious gas supply crisis anywhere in the EU. Its creation was in response to the events of early 2009 when, for three weeks during January, Gazprom halted all flows through Ukraine to the EU and Turkey over its dispute with Kiev. During that emergency, a precursor to GCG met more than once. One of its successes, albeit largely achieved through close cooperation with system operator RWE, was the reversal of flows through the Czech Republic to enable gas to be moved from Germany into beleaguered Slovakia. This subsequently raised the relevance of flow reversal and flexibility on the EU’s agenda, along with the imperative of enabling each EU state – including remote ones like Finland – to diversify gas sourcing. The GCG has continued to discuss issues arising from Gazprom and Ukrainian Naftogaz’s strained relationship at its meetings since.
— Mark Smedley