EU Referendum


Energy: the years of neglect


20/09/2021




Alok Sharma, Minister of State in the Cabinet Office and the UK's COP26 stool pigeon, was on the Marr Show yesterday, reiterating the government's devious line on the gas crisis, telling people that they should not be concerned about the risks of gas supply. "We do not see risks of supplies right now", he said.

This, of course, is a glorious red herring, classic misdirection from a government that has nothing to gain from telling the truth, even if it knew how to. The situation is far beyond its control, and all it can do is hope that things don't get worse.

But even if the situation does deteriorate further, a shut-down of domestic gas supplies - which is what is being implied – is not on the cards. That would give rise to an uncontrolled pressure drop in the distribution system, with the risk of air entry, creating an explosive mix. That could be even more disastrous than Johnson's government.

Thus, long before we reach this critical point, the system operators will be taking a series of actions to conserve bulk supplies and keep domestic consumers supplied. This would involve shutting down high volume industrial users and limiting the amount of gas released for electricity generation.

The net effect, as Ambrose Evans-Pritchard in the Telegraph rightly points out, could be the return of a 1970s-style three-day week, with a rolling programme of planned power cuts being instigated to protect the system from a catastrophic cascade failure.

As to the proximate cause of this crisis, informed opinion seems to agree that it was the UK's decision not to encourage investment in Britain's gas storage facilities, leaving us with the lowest level of strategic reserves of any country in Europe (see chart above), and almost uniquely vulnerable to any large-scale perturbations in the supply of gas.

The role of gas storage is well known. With Britain anticipated to move from self-sufficiency to a net importer, the House of Commons Trade and Industry Committee in 2005 observed that the government could ensure that there were no regulatory or economic barriers to maximising gas supplies and storage facilities, and improving the functioning of the gas market.

In 2009, a committee was hearing that while the United Kingdom was not very dependent directly on Russia, Europe was. If Europe did not secure the supplies from Russia, the knock-on effects for the UK, particularly with the new regime in place, would be significant. Thus, the UK needed to get gas storage capacity up to a level that would enable us to have the flexibility to provide a greater degree of security.

Against government reluctance to intervene, another committee in 2011 observed that the government needed to explain and justify why it believed a strategic reserve was needed to ensure a secure supply of electricity, but did not consider it necessary to intervene in the gas market to ensure more gas storage was delivered.

The UK, it said, "needs to significantly increase its gas storage capacity. The Government must develop a strategy for achieving this. Doing nothing - or continuing to give inconsistent signals to the market about which approach it will choose - could result in no storage being built. This would diminish energy security".

This, however, was not to be. Despite it being acknowledged that gas would be the major fuel for heat use well into the 2030s, in September 2013, David Cameron's coalition government, in the person of Secretary of State for Energy and Climate Change Edward Davey, decided not to intervene in the market to boost storage capacity.

Davey told parliament in a written statement that his department saw no clear case for intervention in the gas market, following analysis of three intervention options. "Our analysis shows that, although such interventions could enhance our gas security, under most scenarios they would not do so cost-effectively", he said.

In the accompanying framework, the authors suggested:
Interventions supporting new storage facilities would be unlikely to deliver security of supply benefits until the 2020s. By this time developments in global gas markets, such as the prospects for increased production from new gas sources such as shale gas, could improve an already large and geographically dispersed resource. When considering the extra interventions we have modelled, none gives a clear net benefit, while all carry significant risks of disproportionate impacts on consumer bills, costs to industry and unintended consequences.
Already, though, there were hints of the crisis to come. George Grant, chairman of Britain's Gateway Storage Co, pointed out that, at the end of the previous winter, there had been no LNG at any of the import terminals, gas storage capacity had been almost exhausted and import pipelines had been running at close to capacity. "The market delivered just but if there had been a major import pipeline outage for any period of time we would have been in trouble", he said.

Coincidentally, Davey – now leader of the Liberal-Democrats – was also on the Marr show yesterday. And although he was intensively quizzed about his raft of new policies, Andrew Marr didn't think to challenge him on his past performance as an energy minister.

Back in the day, despite Davey's ruling, the industry didn't give up. In April 2016, the Gas Storage Operators Group, forming the Energy and Utilities Alliance, published a report, stressing the importance of gas as "the single most important fuel in the UK's energy mix". Noting that the UK's secure indigenous supplies of gas were "in sharp decline", it warned that "relying on the global market for imports brings with it new supply risks and price shocks as witnessed over the last few years".

Gas storage, the industry said, can ensure that gas supplies are maintained at times of major supply or demand shocks, also protecting consumers from price spikes and ultimately reducing overall gas bills. Therefore, it said, "gas storage is vital for the efficient operation of the UK energy markets". Sub-optimal levels of storage capacity would result in diminished physical and price security, the effects of which would be felt "at both societal and economic levels".

This time, however, the role of Parliament was less than stellar. It took until October 2018 for Rachel Reeves, chair of the Business, Energy and Industrial Strategy Committee, to announce an inquiry, seeking to examine "what action the Government is taking to ensure we can have confidence in the security of our gas supplies".

By then, the largest facility in Britain, the Rough storage facility – capable of meeting approximately 10 percent of the UK's peak day demand – had been closed. The country had also suffered the "Beast from the East", which had brought a prolonged spell of very cold weather. "Given our increased reliance on gas imports", Reeves said, "we will also be asking what government is doing to guard against gas shortages and the potential knock-on effects of increased energy costs for businesses and domestic consumers".

Yet, even though the British Geological Survey then strongly recommended to the committee that Britain should consider more onshore and offshore gas storage in depleted gas fields and salt caverns, warning that the country's energy security "is closely bound up with how much gas it stores", to this date, Reeves's committee doesn't seem to have produced a report.

At the time, the Survey reported annual UK gas consumption at around 103 billion cubic metres, with storage capacity of approximately 4.6 billion - only 4 percent of annual consumption and much less than many European countries. By February 2019, the storage capacity had dropped to 2.5 billion cubic metres (bcm), in the form of Liquified Natural Gas (LNG) stored at terminals (1.2 bcm) and gas stored underground (1.3 bcm) – less than 2 percent of its annual gas demand.

Thus, based on the average daily demand (209 million cubic metres/day), the UK's total gas storage capacity was equivalent to 12 days of average demand (6 days from LNG stocks, and 6 days from underground storage). The storage capacity that can be called upon to deliver over one quarter of national gas demand on a cold winter's day.

That same February, Claire Perry, minister of state for Energy and Clean Growth told Rachel Reeves:
the UK's gas system is secure and well placed to respond effectively to unexpected changes in supply and demand, benefiting, as it does, from a mature and liquid gas market and an effective regulatory regime. Our system delivers gas prices that are amongst the lowest in Europe whilst maintaining international benchmarks for security of supply. We have also stress tested our resilience over the next twenty years, and we are confident that we will retain our current high levels of security now and in the future.
Yet still the situation gets worse, while a recent report noted that, at the start of March, Britain had experienced its longest spell of low wind output in more than a decade.

For more than a week, calm weather had covered the country. Wind farm output had fallen to as low as 0.6 GW on the 3rd of March, in sharp contrast to the 18.1 GW delivered later on that month. A prolonged period of low wind has been coined in German as a Dunkelflaute - a dark wind lull.

The event at the start of March had been the longest such period that Britain has experienced in the last decade. Between the 26th of February and the 8th of March the load factor of the national wind fleet did not go above 20 percent. Its average over the 11 days was just 11 percent, less than a quarter of their average in the month either side.

It goes on. Yesterday at 7 pm, according to the National Grid, wind was supplying 1.45 GW of generated power (4.6 percent), while gas was churning out 17.54 GW (56.1 percent), against an overall demand of 31.2 GW. By ten in the evening, with demand having dropped to 26.3 GW, wind was producing a mere 0.93 GW (3.5 percent) while gas was still taking the strain, delivering 16.19 GW (61.6 percent).

But now, after years of neglect compounded by complacency spiced with bad advice, it is actually too late to do anything, except throw taxpayer's money at the problem. As Ambrose Evans-Pritchard notes, the UK is now at the mercy of global events. There are various factors which could come to our aid, but none of them can be influenced by our government. 

It is an invidious situation for Britain to find itself in, AEP says: "Downing Street can only hold its breath, and hope".

Also published on Turbulent Times.



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