Trouble in store as snow and cold weather hits gas supplies

Britain's supplies are at the mercy of the weather and volatile markets unless it increases its meagre storage capacity, says Tom Bawden

The fragility of Britain's gas supplies has been laid bare in the past week after the unseasonal cold snap ran reserves so low that a water pump failure at an import pipeline on Friday saw wholesale prices surge 50 per cent to a record in one morning. The pipeline was fixed the same day, but not before energy analysts had begun warning that industry and maybe even households could soon see their gas supplies rationed.

The gas crisis centres around the woefully low storage capacity in this country, a legacy of the once-abundant North Sea reserves that as recently as 2000 supplied 100 per cent of domestic consumption in a steady flow which left little requirement for stockpiling facilities.

Consequently, there isn't a culture of gas storage, with just 20 days of capacity in Britain, compared with 103 days in France, 92 in Germany and 70 in Italy, countries which have traditionally imported much of their gas. But the North Sea's rapidly diminishing stocks mean the UK now satisfies less than 40 per cent of its demand from domestic supplies. Although supplies can also flow from Europe through two interconnector pipelines, and via liquefied natural gas shipments, the lack of storage means it takes relatively little extra demand before suppliers such as Centrica's British Gas, Edf and SSE, are put at the mercy of the volatile "spot" market.

The fledgling LNG market, led by exports from Qatar, has mushroomed in the past three years. New terminals such as National Grid's giant Isle of Grain facility, which is capable of supplying a fifth of the UK's annual gas demand, were designed to cushion the country from the impact of dwindling North Sea reserves.

Britain's consumption of LNG – which is created by liquefying the gas at minus 160c, shrinking it to 1/600th of its original size for transport – rocketed from virtually nothing in 2007 to about a third of total gas use by 2011.

But LNG prices shot up as demand in Asia and South America surged after the Fukushima disaster in 2011 prompted Japan to switch from atomic energy into gas. Tankers from the Gulf switched destinations and as a result, the UK dramatically reduced its consumption of the commodity to just 5 per cent last year.

Experts say the need for storage has become greater than ever since Fukushima highlighted the risk of relying on LNG imports. "We need extra storage, otherwise we're going to be too reliant on the market price," says Mike Foster, of gas storage association the Energy and Utilities Alliance.

"We're competing against countries who will pay more for LNG on tankers sitting there waiting for instructions on where to dock. Sometimes tankers can even be diverted on route as happened after the Japanese tsunami," he adds.

The Government also acknowledged the potential benefit of expanding storage capacity yesterday. It is considering a "security of supply" amendment to the Energy Bill to force the big-six energy suppliers to hold a minimum level of gas in storage.

A Department for Energy & Climate Change spokesman said: “The Government is considering whether intervention in the market in needed to encourage additional gas storage build”.

Experts said such a security of supply clause could kick-start a much-needed programme to build new storage infrastructure that could cost more than £2bn. Britain presently has enough capacity to store 4.6 billion cubic metres (bcm) of gas, which, at an annual consumption rate of 79bcm, is equivalent to 20 days' supply. Nearly three quarters of the capacity is at Centrica's Rough facility in an old North Sea field off the coast of Yorkshire.

The rest is stored in a handful of facilities, most of them in Yorkshire and Cheshire, run by SSE, Scottish Power and Edf. Underground caverns that have been created by the extraction of oil, gas and salt are popular storage facilities because they are vast and have already been hollowed out.

Andrew Hammond, of the energy consultancy Utilyx, argues UK capacity "should at least be doubled, if not more", implying at least another 20 days.

Some 16bcm worth of new storage facilities are at various stages of planning, enough to quadruple existing capacity, but not a single one has given the final go-ahead, amid the huge uncertainty about demand.

"This [potential security of supply amendment] could be the trigger for the investment that's needed. People won't invest now because there has been no signal from the government. If there is now a signal, the market will deliver what's required," Mr Foster said.

Perhaps the legacy of this cold snap will be a change in the UK's storage culture.