Rough’s closure should spur change in UK gas storage sector

24 July 2017, Week 28, Issue 409

The permanent closure of Rough should act as the catalyst for the government to create an appropriate regulatory framework for gas storage, writes David Flanagan

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WHAT: Centrica’s decision to close Rough could destabilise UK gas supply and raise prices. 

WHY: The site’s closure will remove over 3 bcm of stored gas from the energy system. 

WHAT NEXT: Developers of new storage capacity want the government to develop new regulations and requirements for the sector. 

Recent confirmation that the 3.3 bcm Rough gas storage facility off the English coast is to close permanently will remove around 70% of the UK’s gas storage capacity.

The closure will be staggered, with so-called “cushion gas” being made available for withdrawal on a diminishing basis for the next two years. But after that, and given the length of time that is necessary to build new plants, the UK will inevitably see a decline in its total installed gas storage capacity.

As gas imports rise, and with Brexit raising questions about future energy interconnectivity with Continental Europe, the UK is now at a crossroads and facing serious questions about how to maintain the stability of its future gas supply. 

A basic analysis of the situation would be to suggest that the UK should build new storage to replace Rough, while it is in the process of being taken offline. But there are questions hanging over that approach, not least investor appetite to plough cash into long-lead fossil fuel infrastructure projects as renewables continue to penetrate deeper into the energy mix. 

Muted support

In order to gain some perspective on the storage sector and how things might progress, NewsBase Intelligence (NBI) spoke to George Grant, founder and CEO of Stag Energy, which has the approval for the development of the proposed 1.52 bcm Gateway gas storage plant off the northwest coast of England. 

Grant first of all stressed that while Rough’s closure was to some extent anticipated, support from the UK authorities for new storage capacity had been muted. “The age and vulnerability of the Rough gas storage facility has been recognised for a number of years,” Grant said. “In 2011, the Energy Select Committee determined that the UK needed more gas storage and required the development of an appropriate regulatory framework. Then, in 2012, the Defence Ministry concluded that it saw it as a significant weakness that a country that depends so heavily on gas has so little storage to offer resilience in the face of unexpected events.”

Despite these recommendations, though, no action was taken. “The government report on gas security in 2013 decided that no action was required. It is our hope that the closure of the Rough facility will precipitate a review of this position,” Grant said. 

Time consuming

But even if the government changes tack on the issue, rapid solutions are unlikely to emerge. 

“It takes between five and seven years to build new storage capacity,” Grant observed. “Even if a decision were taken to build today, a lead time of 12-24 months would be required to finalise designs and construction contracts, secure funding and mobilise the site. The UK is facing a very exposed position if we do not plan ahead to allow for these lead-in times,” he added.

The impending situation will mean the UK is in a far weaker position compared to its European neighbours. “The UK will have storage capacity equivalent to 2% of annual demand after Rough closes, compared with levels in mainland Europe upwards of 30%,” Grant said. “These levels simply do not provide adequate price protection for consumers.”

The Stag Energy CEO explained that the UK’s power sector was also becoming increasingly reliant on gas, and therefore had price exposure without adequate storage being built into the system. “With a higher proportion of intermittent renewable power within the UK energy mix, as well as the imminent closure of coal-fired plants, gas generation will provide the essential system back-up and gas will often set the price in the power market,” he said. “Historically, gas storage revenues were supported by the summer/winter price differential or spread. But the spread has been squeezed in recent years owing to the global abundance of LNG on the market. That is not going to change in the near future and therefore market revenue opportunities for storage have been undermined.”

Stag and other companies have identified the need for commitment to a regulatory framework to ensure sufficient UK gas storage capacity is maintained. The company recommended in submissions to a parliamentary briefing about the storage market in late 2015: “Imposing an obligation on suppliers and shippers to hold a certain proportion of their gas in store ahead of every winter, through some form of Public Service Obligation (PSO), would be the simplest and most cost-effective solution, because it is market-based.”

The company argued: “A PSO sets down a long-term security standard, then leaves it to suppliers and storage operators to devise a workable solution that delivers the level and frequency of supply from gas storage that the market requires and is prepared to pay for. The PSO approach does not require central procurement with the government and/or UK regulator OFGEM picking winners and losers and underpinning the revenue of storage operators.”

Grant added that decision-making related to new gas storage should be informed by consultation with industry participants. 

“On the demand side we see broad support from industry to maintain some minimum level of UK gas storage even if this were to result in a small cost addition on bills,” he said. 

Grant went on to note that other parts of UK industry supported his position on the importance of storage to the economy. He said Laura Cohen, a representative of the British Ceramic Confederation, had commented in the parliamentary briefing that “more UK gas storage underpinned by a gas security obligation on suppliers [PSO] is likely to provide the level of price and supply security insurance that our industry requires. Gas held in UK storage would reduce exposure to market disruption and international price volatility.”

What next

Moving forward, Stag intends to redouble its efforts to move its Gateway project from the drawing board to the development phase. 

“We have maintained engagement with the government with respect to gas security and continued to push for an appropriate industry structure,” he said. “We know the government commissioned further analysis on gas security from consultants CEPA last year, but this was in advance of the closure of Rough. We are keen to try to ensure that any such work is revisited in light of the recent announcements.”

Grant acknowledged that losses sustained by storage operators recently could act as a deterrent to new investment. But in response, he said, “The industry recognises that revenue prospects from the gas market alone are insufficient to support investment in new gas storage assets that have long-term investment and return horizons.”

Fundamentally, the closure of Rough has identified the UK’s relative weakness in terms of gas storage and supply. With potential supply fluctuation also being driven by Brexit, it appears imperative that an appropriate regulatory framework be given adequate consideration by the government. 

 

Edited by

Ryan Stevenson

Managing Editor

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