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UK's Gateway storage scrapped as DECC drops subsidy plan

04 Sep 2013 17:26:35 | esgm

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The planned development of Gateway Storage's natural gas storage facility has been abandoned after the UK government announced it will not introduce subsidies to encourage further storage.

Calls for incentives to encourage further storage in the UK were made after a prolonged winter led existing sites to become significantly depleted by the end of March.

However, after a series of delays in coming to a decision, the UK's Department of Energy and Climate Change (DECC) has concluded that such incentives will not be necessary because the market will function adequately to provide the supply required.

"The DECC's decision, while not unexpected, is very disappointing nonetheless," said George Grant, chairman of Gateway Storage. "It in essence means that no proposed material projects will be able to progress in the foreseeable future. Projects under construction will fall away as there is now no incentive for us."

The Gateway site received planning consent in 2008 but the company delayed investment, pointing to the difficult financial climate.

The facility - which would have been based in the East Irish Sea approximately 25km southwest of Barrow-in-Furness - had a nameplate capacity of 1.52 billion cubic metres.

Grant said that while Gateway will now turn away from the project's development, the facility is sufficiently mature that should the DECC later choose to introduce incentives, its development could be reconsidered.

Interventions abandoned

The introduction of incentives was expected to have cost around £750m (€885m) over 10 years.

"Independent analysis, commissioned by ministers, shows the UK gas market continuing to function well in attracting gas from a range of sources to meet current and future demand, with gas storage providing only a small proportion of UK total supply," the DECC said.

"The analysis concluded that the costs of intervention would far outweigh any benefit to security of supply, meaning that government and consumers would be subsidising investment that large energy companies could pay for themselves," it added.

The decision could result in a number of proposed storage projects being abandoned. Along with Gateway's facility, Centrica's long-range Baird project is among those that could be scrapped.

Centrica did not comment on what impact it expects the decision to have on its proposed projects, but admitted it was disappointed by the move.

"We are obviously disappointed by today's announcement and the government's decision not to introduce measures to promote more seasonal gas storage," said Simon Wills, managing director of Centrica Storage. "However, we welcome the clarity that this decision has given us and we will now be considering the effect of this decision on the future of our storage projects."

Clarity given

While some storage operators were disappointed by the DECC's decision, other market sources said that now the issue has been resolved it will allow projects that are economically viable to move forward.

"It is not so much a question of the money required [to introduce measures] but a question of political principle. If government chose to provide subsidies for gas storage now it could be the start of a highly disruptive trend in a liberalised gas market," said independent energy consultant Patrick Heather. "This is the right decision. In the event of price spikes and supply disruptions, the gas market will cope when it has to. Ultimately, the decision could be positive for the industry. At least now that clarity has been given, you may potentially see some projects go to the next stage sooner than they otherwise would have."

One such project is King Street Energy's (KSE) proposed fast-cycle storage facility.

Despite having already secured the necessary funding, the company had been deferring a final investment decision on the project before DECC made its intentions clear (see ESGM 2 September).

"While the DECC's decision is not good for seasonal storage in terms of our project, the fact that long-range facilities are unlikely to progress will likely benefit our project, as it is fast cycle," Mark O'Brien, managing director of KSE told ICIS.

"The lack of incentives does not hamper fast-cycle storage, as they were only being considered as additional upsides [for our project]," he added.

The King Street will have a daily delivery rate of between 20-30 million cubic metres/day (mcm) and a maximum capacity of 348mcm. Jack Elliott

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