Gas galore - how the UK plans to weather the winter

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The Independent Online

Wholesale gas prices fell sharply yesterday after a report from the National Grid forecast that there would be sufficient supplies to meet domestic demand this winter even if Britain suffered the kind of cold snap it only experiences once in every 50 years.

Forward gas contracts for December fell to 63 pence a therm - 25 per cent below the high reached in April - while spot prices fell to just 19p a therm - down by more than a third on their level at the beginning of this month.

The decline in prices stems from increasing confidence that the country will have plenty of gas this winter because of the large amount of new import capacity being made available. Four new projects are due to come on stream which, between them, will be capable of supplying more that 150 million cubic metres of gas a day - a third of the country's record daily demand.

In addition, British Gas's Rough storage facility in the North Sea, which has been out of action since February because of a fire, is virtually full once again. Rough accounts for 80 per cent of Britain's gas storage capacity and is able to supply about 10 per cent of demand for 100 days.

Despite the upbeat assessment by the Grid, the energy regulator Ofgem struck a cautious note, warning that there was a big difference between import capacity being available and actually being used. "The uncertainties have substantially reduced and we can be more confident," said Alistair Buchanan, Ofgem's chief executive. "However, the key question remains whether the existing and new links with continental Europe and Norway will be fully utilised and how cold the winter is going to be."

His caution is understandable. Last winter, Britain's principal source of imported gas, the interconnector between Zeebrugge in Belgium and Bacton on the east coast, was less than half full on many days, even though UK gas prices were substantially higher than those on the Continent. This led to accusations that supplies were deliberately being held back in order to force prices up.

Ofgem said it remained largely in the dark about about how much gas could flow into the UK this winter from mainland Europe, stressing that there was still very little information about gas demand, supply and storage on the Continent, despite efforts by the European Commission to make the market more transparent and open.

But, in theory at least, Britain should be in a much stronger position to meet demand this winter and in future years as indigenous gas production from the North Sea continues to dwindle. This is important, not just to heat homes, offices and factories but also to provide electricity - 35 per cent of the fuel burnt in British power stations is gas.

In total some £10bn is being spent on new gas import facilities. The four projects scheduled to come on stream this winter are:

* The Langeled pipeline from Norway, which can deliver 48 million cubic metres a day and is expected to be operational next month;

* A new interconnector pipeline between Holland and Britain, scheduled to enter service in December, with an initial capacity of 27mcm a day, rising to 42mcm from March 2007;

* An upgrade of the existing interconnector from Belgium, due for completion next month, increasing its capacity from 48 to 68mcm;

* A new LNG facility on Teesside, due to be ready next January, with a capacity of 11mcm.

All of this new capacity is in addition to the 240mcm of gas supply available currently from the North Sea. Put together with Rough it ought to be more than sufficient, even if demand this winter reaches the record level it hit in 2002-03, when a daily average of 449mcm was consumed.

To bring further comfort to those who still believe Britain could be in danger of running out of gas, the Grid believes that demand this winter will be 5mcm a day lower on average than last year because of wholesale price rises. Although the wholesale cost of gas has fallen by around a quarter in the past six months, most big consumers have already bought their winter supplies in advance, meaning that prices will still be higher this year than last.

Apart from whether the new pipelines will be utilised, the other big unknown is the weather. Yesterday the Met Office revised its long-range forecast, saying it was now possible that the winter could be colder than it previously suggested.

In the event of a very cold winter, the ability of the Grid and the electricity generation industry to keep the lights on and the central heating systems working will depend on industry volunteering to cut consumption and sell its gas back to the network, as happened last year.

A 1-in-50 winter, said the Grid, would require a "significant demand-side response" from industry sufficient to free up an additional 30mcm a day for a period of 40 days. It will also rely upon there being no unusually high levels of plant breakdown among electricity generators.

The Association of Electricity Producers, which represents virtually all of the country's generators, said yesterday that its members were taking no chances with security of supply this winter. Although plant margin - the surplus of generating capacity over likely demand - is currently 22 per cent, additional measures are being taken. David Porter, the association's chief executive, said: "Coal-fired stations are increasing their coal reserves and gas-fired stations with the technical capability to switch fuel are buying distillate to guard against possible gas shortages."

Companies were also arranging flu injections for staff and setting up shift cover in the event of a severe winter that put pressure on the staffing of power stations.

The $64,000 question is why the fall in wholesale prices brought about by all this new capacity has not yet translated into lower domestic bills. Household gas prices have risen some 60 per cent this year alone, and yesterday there were reports that Scottish & Southern, which has so far held out against tariff increases, was about to succumb and put up its prices.

Ofgem is sensitive to the fact that lower wholesale costs have not been followed by cheaper domestic gas and electricity, but says that the gas householders are paying for now was bought months ago when prices were much higher. However, a spokesman added that if it spotted any anti-competitive behaviour, then it had the power to fine suppliers 10 per cent of their turnover.

"If we see a sustained drop in wholesale prices and there is no corresponding decline in bills for domestic customers, we would look very closely at why this is happening," he added. "We have seen companies compete keenly as prices have gone up and we want to see them continue to compete against each other when wholesale prices fall."