UK more vulnerable than other advanced economies to increased demand for natural gas, analysts say
Natural gas prices have risen sharply around the world. Global demand surges as economies return to post-Covid-19 lockdowns, while supply has been hit by a combination of factors, including unusual weather events and restraint by US producers, while Russia completes its pipeline to Western Europe. Not running at capacity.
UK natural-gas prices have risen more than five-fold in the past year to €73.10 per megawatt-hour Wednesday, equivalent to $84.83, according to S&P Global Platts. This is slightly less than the price in the Netherlands – the benchmark for continental Europe – but more than four times the price in the US.
But the UK is more vulnerable than just short of gas, analysts say. After a major storage facility closed in 2017, the UK can now hold a week’s worth of natural-gas stocks. This compares to three months in Germany, according to industry body Gas Infrastructure Europe.
Excessive reliance on renewable energy, primarily wind, and low coal use have made the country heavily dependent on imported natural gas for electricity generation when the wind does not blow. Economists at Dutch bank ING Grope NV wrote in a note this week that a surge in energy prices leaves the UK “a victim of its own progress on reducing emissions”.
The storage crunch comes after the UK government’s decision in 2013 not to subsidize loss-making gas-storage facilities. Production from North Sea gas fields was declining, making the country more dependent on imports, as well as the transition from coal-fired electricity to renewable energy.
In a meeting with the then climate change minister, energy-company lobbyists urged the government to subsidize storage. “When the wind doesn’t blow, you need to be able to back up your system,” said Mike Foster, chief executive of trade group Energy and Utilities Alliance.
After a consultation, the government said no. “They thought the risk was not big enough,” Mr Foster said.
Former head of oil markets Neil Atkinson said that as of 2020, the UK relied on wind for 24% of its electricity generation mix, but did not have a backup plan if supply fell to 2% later this year. The International Energy Agency, which advises industrialized countries on energy. Meanwhile, a series of local accidents depleted other sources of energy.
A fire disrupted the flow of electricity through a subsea power cable connecting Britain and France. Some nuclear plants in Britain were offline during maintenance. In late summer, it had less wind than usual, resulting in the turbines sitting idle.
UK gas policy is based on the belief that the market will produce a strong supply. But the government has intervened, curtailing fracking projects and capping domestic energy prices to protect consumers from high bills.
“The UK government has overseen policy failures,” Mr Atkinson said.
A British government spokesman said domestic storage has little effect on the price of gas and the UK benefits from “access to gas reserves in British territorial waters and safe sources from reliable import partners.” As a result, the country does not have to depend on natural gas storage, the government said.
British customers will pay more for energy next month, when the markets regulator announced it would raise the price cap on gas and electricity prices. Some smaller consumer-energy providers have fallen into disuse after failing to hedge against a rise in wholesale prices.
The UK government recently subsidized a US fertilizer company to reopen a plant that was temporarily closed due to rising gas costs. The company provided more than half of Britain’s supply of carbon dioxide, a fertilizer byproduct that is important in food processing.
Currently, around 40% of the UK’s electricity needs are met from renewable sources of energy, including biomass. According to government data for the first quarter of the year, fossil fuels, mainly gas, account for about 40%. The remaining UK coal plants are due to close by October 2024.
“The energy system is not a light switch,” said Daniel Yergin, a writer and vice president at the consulting firm IHS Markit..
“When you go too fast, you hit bumps.”
Duncan Sinclair, an energy expert at consulting firm Baringa, said the additional gas storage would have little effect on prices given the scale of global demand. “Generally speaking, the story of decarbonizing has been successful,” in the UK, he said.
From the 1970s, natural-gas fields around the UK provided a hedge against supply fluctuations. The gas can be pumped if required. But local production declined, meeting half of UK gas demand in 2019, down from two-thirds in 2009, according to the government.
British officials and energy regulators decided the market could face a setback as the country still produces gas at home and imports it from multiple sources. These include pipeline connections with Norway, Belgium and the Netherlands, as well as purchases of liquefied natural gas from the US and Qatar.
Gas-storage companies make money by buying gas when it is cheap, storing and selling it when prices rise in the winter. With gas prices relatively stable, gas storage in the UK had been making losses for many years. Following the government’s 2013 decision, the rough storage facility, which was located at sea off the east coast of the UK and provided 70% of the UK’s gas storage, closed in 2017. The government says the closure of the storage facility could prevent a costly investment. given to consumers.
However, this year’s diverse mix of supplies has proved unreliable. Delays in maintenance and new projects in the North Sea gas fields have affected domestic production. UK gas production fell 28% in the first eight months of the year from the same period in 2020, according to consulting firm Wood McKenzie.
UK gas stores are more than 90% full, but the country’s total storage space is far less than in other major European economies. France, the Netherlands, Italy and Germany could house between a quarter and 37 per cent of their annual gas needs, according to analysts at bank HSBC plc. The UK can store just 2%. According to the International Energy Agency, its 10 terawatt-hour capacity compares to 117 for France and 920 for the US.
Adding to the plight, most liquefied natural gas flowing into the UK does so on flexible contracts that allow foreign suppliers to divert cargo if they can benefit from sending gas elsewhere.
Mr Sinclair said, building gas storage would now serve little purpose. By the time the facilities go online in four or five years, the focus will have shifted to storing hydrogen.