Centrica withdraws from UK gas storage plans

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2 October 2013, Gas

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The decision, which the government says will save an estimated GBP750m over 10 years, is based on evidence that there is (and will be) enough gas supply storage, which is currently estimated at some 15 to 21 days' worth of demand.

Historically the UK has needed less storage capacity than its neighbors thanks to indigenous gas reserves in the North Sea. If all other things remain equal, current storage will suffice, as it was used to provide just 7% of the UK's total supply in 2012. And the operational evidence is that current storage levels have proven sufficient - demonstrated in December 2012 and March 2013, when temperatures plunged. Despite claims in March by the Crown Estate that the UK only had six hours of storage gas left to meet demand, both the government and National Grid judge the UK's gas supply to be resilient because of the diversity of gas supply and the rarity of the severe temperature drops recorded in March.

The government's decision is based on the assumption that extra storage is in fact not needed, and if it is that the market will provide it without government help. Whether or not extra storage is needed, the market's reaction is clear in Centrica's decision to withdraw from its new gas storage project off the coast of Baird, Norfolk and to put a project on hold in East Yorkshire.

Other gas storage has recently been built, such as in Aldbrough, Yorkshire in November 2012 by SSE and Statoil UK; meanwhile the Stublach, Cheshire storage project by Storengy (GDF Suez) remains on track for partial commissioning in winter 2013. As documented in Datamonitor's European Gas Assets Database update for October 2013 (EN00061-002), there is 300mcm of working capacity at Aldbrough, and the Stublach project will have 400mcm on completion in 2018.

Gas storage is just one of the sources of supply that the UK has - pipeline gas, domestic supply, and shipped LNG also make up the gas supply mix. In total, the government estimates that there is capacity for 700mcm/day to be delivered - twice that of the maximum daily required amount from the severe 2012-13 winter. So if a cold frost descends for a prolonged period, prices will rise, as they should, providing the essential market signal that the spread between summer and winter gas prices merits more investment, or at least attracts LNG imports away from Asia.

The gas industry was hoping for something akin to the contracts for difference for low carbon electricity generation to be applied to gas storage; however, in the government's opinion the costs of a gas storage subsidy outweigh the benefits. The biggest challenge to this view will come from another government measure aiming to ensure security of supply, with the planned electricity capacity market commencing in 2014. This will see investment in the flexible gas-fired generation plant needed to back up wind power capacity when the wind stops blowing. The gas for these power plants will need to come from somewhere, and if storage sites do not increase in capacity this will put pressure on the other sources of gas supply and on prices.

Source: MarketLine

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