UK unlikely to incentivise creation of new gas storage

The article below was carried in the 29 November, 2018 edition of Interfax’s Natural Gas Daily publication. The Interfax Gas Analytics service provides daily, weekly and monthly analysis of natural gas and LNG markets. 
By Peter Stewart, Interfax Chief Energy Analyst, Managing Director Interfax Europe Ltd
The UK government shows no sign of incentivising the creation of more gas storage capacity, despite calls to provide financial support for new projects after Centrica’s ageing Rough facility was shut down in 2017.
A UK parliamentary committee published evidence on 31 October on whether the country needed new storage capacity. It included submissions from consultants, transmission system operator (TSO) National Grid, energy-intensive industries, gas storage operators and the Department of Business, Energy and Industrial Strategy (BEIS).
The BEIS insisted that system flexibility is crucial. Dan Monzani, the department’s director for energy security, networks and markets, told the committee that market signals had successfully encouraged investment in LNG infrastructure, interconnectors and storage capacity over the past 20 years. “It is dangerous for government to choose what the best way of doing that is,” he said.
The UK has one of the smallest gas storage capacities of any European country, amounting to just 2% of annual demand compared with around 25-35% in major continental gas consumers. The UK uses around 78 billion cubic metres of gas per year but is able to store only 1.5 bcm.
Centrica decided to close Rough, which could hold 3.3 bcm, in July 2017 because the 32-year old facility was uneconomic and had become unsafe. EDF took a similar decision to close its Hole House storage facility a year later. Rough accounted for around 70% of the UK’s storage capacity.
Meanwhile, the private sector has proposed more than 15 gas storage projects in the UK over the past decade but almost all of them have been scrapped or are struggling to raise funds that would allow them to go ahead.
Uncertainty over the future availability of continental gas supplies during winter has risen in recent months because of the cap on output at the Netherlands’ Groningen field, the risk of a hard Brexit and political tensions over Qatar and Russia. The UK nearly ran out of gas when the ‘Beast from the East’ cold snap struck in March 2018. The sudden drop in temperatures caused a temporary spike in prices at the NBP hub, from around 60 p/th to over 270 p/th.
The UK depends on gas to produce half of its electricity, while 80% of its homes use the fuel for heating and cooking. Imports have risen as domestic production has dropped, leaving the UK dependent on pipeline and LNG imports. The country imports gas through the Langeled pipeline from Norway and via the Interconnector UK and BBL pipelines, which connect to the Netherlands and Belgium respectively. The UK also imports LNG and has taken two cargoes from Russia so far this year, in addition to deliveries from other suppliers.
The UK’s underinvestment in gas storage has been criticised not only because it has made the country more vulnerable but also because it reduces the flexibility to supply the continent through gas interconnectors. However, the UK has argued for many years that energy security is better served by diversifying supply rather than building storage – although a government select committee recommended in 2010 that the country should double its storage capacity from the 5 bcm that was then available.
The current winter/summer spread between prices at the NBP does not support the building of new storage facilities. A spread of 22-24 p/th would be required to fully support the construction of new capacity in underground salt caverns or depleted gas fields, but the spread is currently less than half that.
In its Winter Outlook for 2018, National Grid said the UK’s demand for gas this winter will be lower than it was last winter because of increased generation from renewables and greater use of coal in the power sector, which it predicts will be cheaper to burn than gas. The TSO predicted winter demand of 46.6 bcm and a 1-in-20-year chance that peak day demand will hit 472 million cubic metres.