UK intervention in natural gas storage should be minimal – market

Author: Jack Elliott

2013/04/23

The UK Department of Energy and Climate Change (DECC) should refrain from implementing measures to encourage further natural gas storage that would be disruptive to the British gas market, participants polled by ICIS have said.

DECC is considering 10 possible interventions proposed in British energy regulator Ofgem's Gas Security of Supply report, published in November. The interventions are designed to make building new storage facilities more viable.

But analysts and traders have said that if passed, the proposed measures could be disruptive, adding that there is not enough necessity in Britain at present to justify them.

"What we have learned from this winter is that the industry will provide. When the right signals are there, the UK receives additional LNG, along with plenty of production from Norway. The system is working, and the government shouldn't meddle," said energy market consultant Patrick Heather.

A number of storage operators have put the development of their facilities on hold as they await the unveiling of the government's plans.

If DECC does not put in place measures that will make the development of the facilities more economical, it will be impossible for some potential developers to move forward with final investment decisions on the projects.

Storage obligation

"To push forward the development of storage there needs to be market intervention in the form of either storage obligation - which can be expensive and a barrier to entry for smaller players, and not helpful for liquidity, or subsidy collection from the end user which would push up end users' bills in a time of austerity," said Nick Campbell, analyst at Inspired Energy.

A leaked document obtained by ICIS last February showed that of Ofgem's 10 proposed measures, DECC is likely to focus on four, of which one is supplier obligation (see ESGM 28 February 2013).

The measure would place an obligation on suppliers to hold a minimum level of stocks to meet a defined security of supply standard.

A similar requirement already present in France has proven highly disruptive to the successful allocation of storage. French operator Storengy has been unsuccessful in selling all its capacity for the past three years running (see ESGM 27 March 2013).

"I think implementing regulation such as storage obligation is short-sighted energy policy," a trader active on the NBP said. "Storage operators want to fix their problem by saying it's a national problem, which is kind of self-serving.

"Most of the problems in the UK are caused by a lack of LNG and, in 2015 and 2016, a lot of supply will come online. The UK could benefit from more storage, but that is obvious. The problem is that the benefits do not outweigh the costs at the moment," he added.

Storage operators with projects in the pipeline have pointed to events this winter as an indicator that Britain would benefit from more storage capacity.

"At the end of this winter, there was no LNG at any of the import terminals, gas storage capacity was almost exhausted and import pipelines were running at close to capacity. The market delivered just but if there had been a major import pipeline outage for any period of time we would have been in trouble," said George Grant, chairman of Britain's Gateway Storage Co.

DECC is set to decide on the measures - if any - it will introduce later in spring, a department spokesperson said. Jack Elliott