High energy demand has depleted gas storage levels

Pressure mounts on UK to build gas storage

Political pressure is mounting to increase natural gas storage capacity as high winter energy demand has depleted storage levels.

British gas prices shot to near record highs several times in March on the National Balancing Point (NBP), a virtual trading location, and storage levels are down 90 per cent, threatening outages if imports cannot meet high demand.

The potential perils of that position were in evidence last week when an interconnector with Belgium broke down temporarily, pushing the system to the edge.

Conservative MP Peter Lilley said Parliament's Energy Select Committee would meet  later this week and may in the future discuss the option of creating incentives to build more storage capacity.

"In the past it wasn't so important because we had a high proportion of our gas coming from our own resources, but with offshore declining it was important to replace it by onshore," said Lilley.

Barry Gardiner, opposition Labour Party member of the committee, said he planned to discuss the issue of incentives privately with other members ahead of the meeting.

Britain's domestic gas production peaked at more than 100 billion cubic metres (bcm) in 1999-2000, enough for a significant export volume after covering all its demand.

Because of its reserves, the UK only built sufficient storage capacity for a maximum 15 days' worth of demand, compared with over 100 days in France or Germany, which have very little of their own gas.

But falling production and rising demand has left the country a net importer of natural gas since 2004.

At below 45 bcm annual production, Britain's own reserves now barely cover half its needs. Analysts say the lack of storage means the British market has to rely on imports as a backstop.

"We haven't adapted to the decline in our domestic supplies. It's been a failure to prepare for that," said Lilley.

Gardiner said investment in storage was initially not made because it was cheaper to import liquefied natural gas (LNG), but because of booming demand in Asia, LNG prices there had soared in recent years so sellers take it to Japan and South Korea instead of Britain.

"I think there's a very good case to say we should have taken a much more strategic decision back then (to invest in storage), and it would have been a sensible thing to do," he said.

Analysts and industry bodies have long argued for extra storage capacity, and the International Energy Agency (IEA) also weighed into the debate in 2010 and 2012.

"The progressive decline in domestic production, combined with potentially peak demand, will stretch the ability of current infrastructure to balance demand in the future," the IEA said in a 2010 report.

"Demand spikes could be met by the provision of further supply and storage capacity."

To address the shortage, the Department of Energy and Climate Change (DECC) said it was working with market regulator Ofgem to review its gas market structure.

"We are looking in to possible interventions we could make into the market to encourage greater gas security of supply," said DECC spokeswoman Emily Towers.

Ofgem said DECC was looking at proposals made by the regulator that would oblige suppliers to hold a minimum level of storage volume to meet a defined security of supply standard.

Many continental European governments have such rules in place, and IEA member countries already hold strategic oil stocks in order to deal with short-term supply interruptions.

Other measures could include government subsidies to give utilities an incentive to invest in more storage capacity.

"The most likely form of government intervention is customer or taxpayer subsidisation of seasonal gas storage development," consultancy Timera Energy said.

Utilities such as Scottish and Southern Energy say they would welcome such a move.

"Given the long time to construct such (storage) projects and the inherent lateness of any market signals to invest, SSE believes further government support is required to make any potential investment sufficiently attractive," SSE said.

Persuading companies to spend billions of pounds on new storage infrastructure will require a mixture of market-based incentives and government intervention, according to consultancy Frontier Economics.

"Under a semi-regulated approach, developers are more likely to invest in the type of storage preferred by policy makers," Frontier said.

Other analysts, however, warned that subsidies could harm the market.

"The UK is held up as the leading example of successful gas market liberalisation around the world," Timera said. "That reputation will be unlikely to survive heavy-handed government intervention."

Despite the need for reform, Timera said the recent price spikes were not themselves signs of a failed market.

"Temporary periods of volatility are indicative of system tightness. This volatility sends an important signal to investors to provide additional short-term deliverability."

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