Ministers are making a big bet that energy prices will ease further after failing to reach an agreement to increase the UK’s gas storage capacity by next winter, according the government’s top advisor on infrastructure.
Sir John Armitt (chair of the National Infrastructure Commission) said that the UK must move towards renewables but that gas storage was necessary to “boost resilience”.
After talks between Centrica and the government, Centrica owns Rough. Rough is the country’s largest storage facility. collapsed over a dispute about the state subsidy level.
The site, located off the Yorkshire coast was partially reopened last October at the request of the government to ensure that there would be no disruption in supply. After Russia’s main supplier turned off the gas supply in retaliation to western support for Ukraine, energy prices rose.
After being effectively mothballed five-years ago, Rough now operates at a fifth its former capacity. Analysts in energy have warned that the UK’s failure to increase its gas storage will make it vulnerable to rising global energy prices.
Armitt stated that “allowing Rough to drop off the table once again may be acceptable if you’re certain that the recent gas price spike won’t happen again and that other sources of supply will be secure.” Given the UK’s continued dependence on gas, this is a risky move.
Armitt warned that any delay could increase the cost of expansion. He stated, “Let’s not forget that if we do not reach a deal with Rough, it will be more expensive the next time.”
Britain boasts some of the largest LNG handling capacities in Europe, which allows it to convert the liquefied fuel into gas. There are two pipelines connecting to the continent, as well as several links with Norway’s vast North Sea gasfields. Tom MarzecManser, ICIS’ head of gas analytics, stated that the UK could benefit from increased storage because it cannot always rely upon gas imports, particularly in very cold weather.
Some UK and Norwegian production was affected by cold weather in 2018, which led to higher spot prices.
Marzec-Manser stated, “That’s when you need gas at your door.” “While it’s impossible to discount the fact that the kit won’t fail so, while it’s great that we have two pipes connecting Britain with north-west Europe and the links with Norway that are both connected to Britain, having gas reserves at your doorstep is prudent. You never know when the infrastructure might go down.”
Contrary to Japan, which imports gas under long-term contracts, Britain and other European countries are now exposed to volatile wholesale prices. This is because of the liberalisation of gas markets in 1990s.
According to ICIS data, wholesale gas prices in the UK have fallen and now average 132p/therm. This is a significant drop from August’s record of 598p/therm.
They are volatile, and they are still higher than they were before Covid-19, when they traded between 40p and 60p per therm. In the 20 years before 2021, there had been only one instance when gas prices in the UK exceeded 100p per therm.
Centrica is responsible for the future expansion of the site’s capacities. We will continue to collaborate with gas storage operators to explore options that could further increase our supply security.