[Premium] UK Peak Supply Needs Attention: Operators

The UK peak gas supply situation is looking weak and relying on the market will not guarantee gas turns up at an affordable price, delegates heard at the Flame conference May 16. But there are no signs yet that the government will intervene, as commodity markets are the best way to solve the problem, according to the British energy market regulator Ofgem, also on the panel.

This view is shared by, or originates from, the Department for Business, Energy and Industrial Strategy (Beis) and some delegates after the session said there was no institutional memory to inform regulatory decision-making.

Interconnector UK CEO Sean Waring, speaking at Flame for the last time, said the line had played a "pivotal role" in the winter, especially during the late February/early March 2018 cold snap termed the 'Beast from the East', when it met 16% of UK demand on March 2 and when prices hit very high levels. Nevertheless, its future is uncertain: the long-term contracts that underpinned the building of it will expire after 20 years at the end of this September; and subsequent capacity sales are only for one year, meaning its future beyond September 2019 is uncertain.

Despite the market need for Interconnector UK (IUK), the operator had had to overcome regulatory issues that prohibited capacity sales for most of the year and instead devise seasonal contracts that met with European regulatory approval. Most of the preferred contracts are seasonal, Waring said who steps down as IUK chief next month. He did not see Brexit as a threat, more a way for the company to offer bespoke services as the two markets diverged. "Interconnectors are in the front line of our trading relationship," he said. "It is time to develop something more suitable."

During the cold snap in early March, it was coal and wind that saved the day, each contributing about one-quarter to power generation; without that, there would not have been enough gas to meet heating and industrial demand, said Stag Energy CEO George Grant. It was a lucky thing that there was strong wind and the spell was shortlived, he said. March 2 was the seventh coldest day in the 58 years of records kept by British transmission system operator, National Grid. The cold snap also occurred towards the end of the week, when industrial demand is lower, which made system balancing easier than had it occurred early in the week. Gas traded on the day at £5/therm as the operator kept the system in balance.

Stag Energy has the Gateway storage project in the UK sector of the Irish Sea. However, the very thin difference between summer and winter prices has not made this fly. Short term price signals do not match with infrastructure investor needs, he said. And while the UK has a lot of capacity in the shape of LNG import terminals and pipelines from Norway, the Netherlands, Belgium and the North Sea, the gas has to be there on the day: in LNG storage, or in the pipe. Assets does not mean gas is there, he said. "The government must assess the future physical and pricing security and take the necessary actions to ensure appropriate infrastructure is maintained and available," he said.

Speaking for Ofgem's wholesale markets division, Natasha Zoe Smith said she had not seen evidence that a capacity market is needed for the gas market in Britain, and that it would not be a good outcome for consumers. Grant however said that there was a need to act: "There has been no final investment decision for storage since about 2007 and one plant [the giant Rough field] has shut down."

Smith said that the UK had managed in the past when the situation was similarly stretched; however, as former Austrian regulator Walter Boltz said from the floor, in the European Union there is now a requirement for member states to supply gas to struggling neighbours: when the UK leaves next year, this is not necessarily the case, so the Balgzand-Bacton Line (linking England and Holland) and Interconnector UK (England and Belgium) could dry up as suppliers hold the gas at home, and restrict the flow of gas to a non-EU member. 

Smith said Ofgem was not concerned about UK security of supply post-Brexit in the short and medium term: "I don’t see that Brexit means we need to change the trading arrangements."

Grant reminded her that in 2006 Ofgem investigated the market to find out why gas did not flow to the UK despite the price signals indicating that it should. The investigation found that continental suppliers had public service obligations to limit the flow of gas, in the event of tight gas supplies for their own customers. Having more storage in the UK would provide cushion, were the same thing to happen in the future.