Claire Perry Urged to Bring Forward Plans to Reduce Risk of Gas Shortages and Energy Price Spikes

The Gas Security Group (GSG) has written to Claire Perry MP, Minister for Energy at BEIS, calling on the Government to publish the findings of its current gas security review and make specific recommendations to reduce the threat of gas shortages and price spikes.

The GSG is asking Government to make specific policy recommendations to include possible measures (a) to underpin existing and new investment in gas storage and (b) implement a cost-effective mechanism for Demand Side Reduction (DSR) at times of system stress.


The GSG, a consortium of industry organisations, Trades Unions and storage operators/developers, led the call for a formal inquiry into gas security immediately following the closure of Centrica’s Rough gas storage facility in 2017 and several months before the “Beast from the East” crisis on 1 March 2018. The GSG also gave evidence to the BEIS Select Committee’s inquiry into gas storage on 31 October 2018.

On 28 February 2019, Claire Perry responded to a number of queries raised by Rachel Reeves MP (Chair, BEIS Select Committee) commenting that the internal review was progressing and that the Government would be prepared (if requested) to share with the Select Committee the findings of its inquiry this Autumn.

By this time, it will have been 18 months since BEIS began its internal review. The GSG believes there is an urgent need for the Government to draw together the various strands of this inquiry and publish in Q3 of this year a coherent set of conclusions and policy recommendations to which stakeholders and the Select Committee can respond.

Clive Moffatt, Chair of the GSG said: “Our worry is that, judging from some of the comments and analysis in the Minister’s letter, there are some supposed facts and assumptions about the operation of the gas market, which we would argue are not supported by current evidence and we would like to flag our concerns now so that we can discuss them further as the BEIS’s work progresses.

Industry concerns are focused primarily on two issues; namely the assumptions/conclusions that Government appears to be making in connection with (a) the estimated public welfare benefits of supporting additional UK gas storage and (b) the role of gas storage in mitigating the impact of gas and related electricity price volatility.”

The Minister’s letter makes reference to the Redpoint analysis (Redpoint Energy – July 2013) which showed that the direct capital costs of new storage outweigh the benefits to consumers of reduced probability of gas supply disruptions. But this assumed that all additional storage costs related to say a Public Service Storage (PSO) obligation would be passed on by suppliers and shippers. More importantly, the Redpoint analysis excluded an assessment of the significant negative welfare impact of spikes in both wholesale and retail energy prices. Furthermore, since 2013, the UK’s vulnerability to short term supply disruptions has increased significantly with the rise in import dependency and the loss of the Rough gas storage facility.

Clive Moffatt added: “We accept that seasonal price differentials in recent years have not been sufficient to incentivise investment in new gas storage. We also acknowledge that the consumer will have to bear some of the cost of any market intervention (eg PSO) to support new investment.

However, from the standpoint of consumers, the current seasonal price differentials do not reflect the welfare value – ie the insurance premium that consumers would be prepared to pay to have more gas storage – to help mitigate both the threat of supply emergencies and related short- term energy price volatility.

In short, the GSG believes that the Redpoint analysis of 2013 needs to be re-visited as part of this current BEIS review.”

The Minister’s letter also states that the UK has “some of the lowest gas prices in Europe”, that gas price volatility has fallen dramatically and is not linked to availability of gas storage and that “industrial consumers hedge price risks by buying gas in the forward market”.

However, evidence suggests (Source: Eurostat) that the UK ranks 12th out of 25 other EU countries when comparing gas prices (less tax) and 9th when comparing gas prices across the EU from 2015 to 2018.

On the issue of gas price volatility, the data (Source: ESGM and NBP day-ahead prices) shows that UK gas price volatility was very low up to 2016 (34%) when Rough was suspended but has risen significantly since then (67% from July 2016 to November 2018).

Finally, regarding hedging the GSG’s recent (August 2018) survey of major energy users showed that 50% of major gas users purchase gas on a day-ahead basis and those, that are able to hedge, find that forward price contracts reflect short term price fluctuations and these price spikes are a major threat to profit margins.

The view of the GSG is that additional UK gas storage, when compared with LNG and pipe line supplies, is the most cost-effective and reliable source of short-term gas flexibility.

However, even with a demand incentive such as a PSO, new storage facilities will take years to build. Therefore, in the short term the GSG believes strongly that a more effective DSR mechanism would be an important extra marginal source of short- term supply flexibility, as it is in the electricity market where DSR can participate in the Capacity Market.

Because of the lack of forward notice, the inability of users to contract directly with National Grid and lack of financial incentive, the current DSR mechanism (launched in 2015) to allow industry to voluntary reduce demand after a Gas Deficit Warning (GDW) but before an actual emergency is not working.

The GSG is confident that industry would be more likely to respond to a DSR offering if National Grid were to take a more pro-active role in balancing the gas market and administer a regular, annual DSR auction whereby the National Grid (based on an annual estimate of a “feasible” DSR contribution to UK flexibility of supply) contracts with end-users directly (on payment of an initial option price).

According to Clive Moffatt, “The GSG has taken a lead on this issue and prepared outline proposals, which have formed the basis of what have been positive discussions so far with National Grid, Ofgem and BEIS. The GSG is looking forward to continuing to work with BEIS, National Grid and Ofgem to devise and market-test a revised template for a cost-effective DSR mechanism for industrial gas users, with a view to finalising proposals for formal market consultation in Q3 2019.”

For more information please contact Clive Moffatt on 07831 571776 or at clivem@moffatt-associates.com

NOTES TO EDITORS

GAS SECURITY GROUP

The Gas Security Group (GSG) was established in November 2017, following the closure of the Rough gas storage facility (which accounted for ~75% of all UK gas storage) and the continuing decline of domestic gas production in Western Europe.

The GSG was formed to campaign for an urgent re-assessment by the Government of UK gas security and a review of what measures could be taken to improve flexibility of gas supplies and reduce industry’s exposure to gas supply disruptions and increased energy price volatility.

GSG members include the British Ceramic Confederation, Confederation of Paper Industries, Major Energy Users Council and the GMB, representing a large cross-section of major energy users and employee organisations. The companies represented by the ceramic and paper industry associations alone employ a total of 76,000 people and generate an annual turnover of £14 billion and over £600 million in exports.

Altogether, the major private and public- sector energy users represented by the Gas Security Group account for 40% of all UK industrial and commercial gas demand and 35% of UK industrial and commercial electricity demand. The GMB union has 50,000 members engaged in the energy sector, covering gas, nuclear and renewable energy.

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