This article was first published in the Telegraph on 4 February 2010.
Bad news for energy consumers continues to come thick and fast. Bills have more than doubled in the last six years, and could rise a further 25% in the next decade according to a wide-ranging report published yesterday by Ofgem. But even more worrying was the watchdog’s analysis of Britain’s energy security – or lack of it. Without decisive action, warns Ofgem, there could soon be times when energy is not just expensive but unavailable at any price.
The last time Britain suffered a winter this bitter, the phrase ‘energy security’ meant having a full coal scuttle. Now it’s all about natural gas. Forty years ago, few houses had central heating, and those that did ran on imported oil. Today, following the North Sea bonanza of the 1970s and 80s, gas heats almost every home and generates over 40 per cent of our electricity, making Britain the world’s fifth largest consumer. Only the US, Canada, Russia and Iran guzzle more.
But these days Britain’s gas supply is apparently on thin ice. Until the beginning of this year, National Grid had only once been forced to issue a Gas Balancing Alert – warning the market that supply might not meet demand and urging suppliers to pump harder. Since then it has issued another four.
The first came early in the big freeze, when demand was running 30% higher than a normal winter day. A fault at Troll, one of the main Norwegian gas fields, caused imports through the Langeled pipeline to drop sharply and the wholesale gas price to jump from 30p to 60p per therm. Eventually more gas started to flow and the danger passed, but not before electricity generators had switched from gas to coal-fired power stations, and industrial customers with interruptible supply contracts had been cut off, disrupting businesses around the country.
“The market worked”, said a National Grid spokesman, keen to play down the story, “it all sounds more exciting than it really is”. But two days later it happened again, as demand hit a record high of 454 million cubic metres and the Norwegian supply failed a second time, causing a loss of 70mcm. Almost 100 major industrial customers were cut off, and a quarter were still without supplies the following day, when demand set another record high of 468mcm. By that weekend Gas Balancing Alerts were beginning to look like Groundhog Day, and the following Monday, yet another was issued when Shell stopped production at Ormen Lange, another big Norwegian field, ironically because of bad weather. “This shows that if there’s any stress on the system we’re very, very vulnerable”, says John Hall, chairman of EnergyQuote, an energy trading company.
None of this would have happened a few years ago, when North Sea production meant Britain was more than self-sufficient in gas. But after a thirty year boom, UK output finally peaked in 2000 and started to fall – slumping more than a third by 2008. In 2004 Britain became a net importer for the first time, and National Grid expects we will have to import three quarters of our gas by 2015. That makes Britain increasingly vulnerable to any future supply interruptions like those last month, or when Russia next cuts off Ukraine in their long-running dispute over gas prices.
The government insists Britain’s energy security is enhanced by having a range of sources of imported gas: pipelines from Belgium, the Netherlands and Norway, along with three new Liquefied Natural Gas (LNG) terminals in Wales and Kent, where tankers can deliver gas from as far afield as Qatar and Trinidad & Tobago. But having the infrastructure does not guarantee the gas will come to Britain. According to John Hall, countries like France and Germany that have long-term contracts with major suppliers such as Norway are far better placed than Britain, which tends to buy most of its gas on the open market. “We have the import facilities but we don’t have the contracts to safeguard supplies when things go wrong” says Mr Hall. “Britain is at the end of the line. It comes after everyone else as far as Norway is concerned”.
Britain’s rising import dependency makes it increasingly vital to have substantial amounts of gas in storage to draw down in a crisis, and the Tories jumped on the spate of Alerts in January to charge the government with negligence over the issue. Britain has 4.3 billion cubic metres of storage capacity, which amounts to less than 5% of annual consumption, compared to more than 20% in Germany and almost 25% in France. With British storage already depleted by winter demand, Shadow Environment Secretary Greg Clark said remaining stores would last only 8 days at current levels of consumption. In fact storage levels have fallen far lower during previous crises – down to less than three days’ supply last February, when Russia last cut off supplies to Ukraine.
Energy Secretary Ed Miliband accused the Tories of using meaningless statistics, and in one sense he’s right, but not necessarily in a good way. Expressing storage in terms of days’ supply actually overstates the safety margin, because the gas could never be withdrawn that quickly. Three quarters of Britain’s gas storage is held at Rough, a depleted gas field off the Yorkshire coast operated by Centrica, where suppliers can deposit gas during the summer when prices are low, and withdraw it for sale in the winter when prices are higher. During the recent Alerts, Rough was delivering gas at its maximum rate – 45 million cubic metres per day – which represents just 10 percent of current demand.
The vulnerability of having so much of our limited storage in a single field was highlighted three years ago, when a fire on the Rough operating platform closed the facility for six months. The closure came just two months after an earlier Ukraine crisis, and had the two coincided the consequences could have been severe. “We were incredibly lucky with the timing”, says Professor Jonathan Stern, Director of Gas Research at the Oxford Institute of Energy Studies.
The government acknowledges the need for more gas storage but has so far failed to get any built – although it recently approved the construction of a new facility at Northwich in Cheshire that will expand storage by just 0.25% of annual consumption. A number of commercial proposals exist that would take British storage capacity much nearer to continental levels, but the industry complains bitterly about planning and tax rules, and about the role of the Crown Estate, which owns the seabed around Britain. One senior industry insider accuses the government agency of demanding extortionate rents that make planned storage projects uneconomic, and wants its remit changed to take account of the country’s energy security. “That the government has failed to change the Crown Estate’s mandate beggars belief”, he says.
Luckily the recent Alerts came at a time when the world is awash with gas, the result of new LNG production capacity in the Middle East, new ‘non-conventional’ sources of gas in the United States, and the recession, which has depressed demand in Europe by some 10%. The International Energy Agency expects this glut to continue until around 2015, but many analysts predict the market will then tighten sharply. “Around the middle of the decade we expect a perfect storm of falling domestic gas production, economic recovery and tightness in the global LNG market” says Professor Stern, “and we might not get very much warning. It could flip in a matter of weeks”.
Britain’s vulnerability to interruptions in the gas supply could be worsened by our response to the so-called ‘energy gap’ resulting from the closure of ageing coal and nuclear power stations over the next decade. In total the closures amount to some 20 gigawatts (GW), or about one third of peak electricity demand. The government hopes – as do I – that much of the gap will be filled by renewables, and last month announced the companies that have won the right to build offshore windfarms under its ambitious plans to develop 32GW offshore by 2020. But given the government’s record on renewables so far, many fear the targets will not be met. If so, the ‘energy gap’ is likely to be filled by new gas fired power stations.
Figures from New Power, an industry journal, show that 15GW of new gas fired stations are either under construction or have received planning permission, with a further 15GW in the wings. Editor Dominic Maclaine says “there is a new dash for gas in power generation”. That is likely to raise the proportion of electricity generated from gas even further, and increase Britain’s vulnerability in the case of supply disruptions. In that case, without a major increase in storage capacity, future gas supply crises could also leave us in the dark.
Yesterday Ofgem finally acknowledged what has been obvious for years: liberalized markets cannot deliver energy security in the era of carbon reduction and competition over dwindling resources. Its recommendations are well made, in particular for a minimum carbon price. The government must take energy markets by the scruff of the neck – and quickly.