ICIS VIEW: UK gas storage support is not the answer

LONDON (ICIS)–The UK House of Commons energy select committee has announced it will “examine issues around UK gas security and gas storage”.

An evidence session on 31 October will investigate the decision to close the Rough storage facility while looking at how current supply margins are evaluated.

Importantly, the hearing wants to examine whether the government should invest in future storage facilities and “whether the costs should be borne by the taxpayer or, ultimately, businesses and consumers”.

The Gas Security Group (GSG) – a lobby made up primarily of large industrial gas users – welcomed the decision and will provide evidence at the session. Other witnesses include the Gas Storage Operators Group and system operator National Grid.

It will be vital that the committee views each source of supply and demand flexibility – Norway, other pipeline imports, LNG, CCGT plants, industrial demand response – in terms of its relative merits.

In balance

The extreme weather events of the Beast from the East and subsequent gas defecit warning (GDW) have been used as proof that the market in its present form can be exposed to supply shortages, or that the price needed to balance supply and demand is too high. But, in the end, households were not affected and no business saw its supply cut completely

As energy regulator Ofgem put it: “The market reacted to the gas deficit warning and the system operator’s balancing actions, such that by the end of the day the gas system was in balance.”

Prices were eye-wateringly high, but that is what was required during an exceedingly rare weather event that plunged temperatures and wreaked havoc on infrastructure. To back up this point, spot prices at nearby hubs with storage capacity dwarfing Britain rose to similar highs.

And less than three months earlier in Italy, where the government imposes storage quotas on shippers, prices had shot up after a gas system emergency was triggered.

Storage is not a cure-all.

The British gas market benefits from a diverse range of suppliers and a liquid spot market. And there are a host of issues over ageing infrastructure and increasingly erratic demand due to the growth of renewable generation – both of which should benefit the economics of storage without governmental support.

The government’s energy department BEIS has largely stuck to this message since the GDW and has consistently shot down any requests to prop up the UK’s storage industry. Now, seven months after the GDW and years after Rough’s fate was essentially sealed , will they waver?

The main political issue around gas storage provision is ‘who pays?’ It is either the public through taxes or expressed in end-user’s bills. The GSG said that 60% of its members were willing to pay more for extra security. But two-thirds of a lobby group does not equate to a mandate.

Any government support for storage would do the opposite for other flexibility providers – Norwegian pipeline gas, Interconnectors to mainland Europe and LNG terminals.

Potentially cheaper providers of gas could be turned away in favour of what would in comparison be an uneconomic solution.