UK major parties converge on gas supply guarantees

In the run-up to the British general election campaign, gas storage became an unlikely subject of political controversy.

When the coldest winter for many years coincided with an interruption to supplies from Norway, gas suppliers were forced to exercise the option to cut back supplies for customers on interruptible contracts. The Conservatives made great play of the fact that Britain had less than a week’s gas consumption left in storage.

That particular factoid was always pretty meaningless. It is hard to believe that Britain’s entire gas supply will ever be cut off altogether, and the rate at which gas can flow out of storage can be as important as the total volume of gas available. But even so, the Conservatives tapped into a real concern that as Britain’s domestic gas production from the North Sea declines, the country is going to need a lot more storage as a buffer against supply shocks.

Now, in a policy paper smuggled out over the Easter holiday period, the Labour government has put forward its ideas about how to answer those concerns. And in a predictable twist, its potential answers are very close to the solutions put forward by the Tories.

A measure of Britain’s relatively meagre provision of gas storage can be seen from the fact that the country has sufficient capacity to provide 16 days of national consumption, compared to about 100 days in Germany and 122 days in France. Britain has had the North Sea to act as a natural storage facility, allowing supplies to be varied to match fluctuations in demand and imports. However, the North Sea’s significance is waning as its output declines. The Netherlands, which has also been a big gas producer, has three times more storage capacity relative to consumption than the UK.

In a review of energy security last year by Malcolm Wicks, the former energy minister, he suggested that the government could commission its own strategic gas storage to fill the gap.

Ministers have rejected that idea, but are looking at another proposed intervention that that it is hoped would be a way to achieve the same objective.

Under the proposal, gas companies would be given a legal obligation to guarantee supplies to customers, including small and medium-sized businesses.

It is an idea that is very similar to proposals set out by Conservatives in their energy strategy in March, reflecting the growing consensus between the two parties over energy policy.

The government has ruled out the idea of commissioning its own strategic gas storage because it has accepted the arguments of the industry that this would create uncertainty, damage investment in commercial storage, and push up gas prices.

It was a decision backed by Ian Marchant, chief executive of Scottish and Southern Energy.

“If we had strategic storage, it would be delightful, but nothing would get done by the commercial sector to build its own gas storage while the details were being worked out,” he said.

“From deciding there is a need to build storage to having it available for use can take four to 10 years. So if the government backed strategic storage, the reality is nothing would be built for four to 10 years. It is a great idea on paper, but it is very difficult to make it work.”

The government also rejects the idea that there is very much wrong with the present system. Ed Miliband, the energy secretary, argued that the limited disruption to gas supplies over the winter vindicated Britain’s free market approach.

He said: “What was shown this winter when the gas market was tested by extreme circumstances is that the existing gas system is working well.”

His department added that commercial companies were already planning to invest in 22 gas storage projects, which if they were all completed on schedule would quadruple Britain’s gas storage capacity by 2020.

Officials have run “stress test” exercises showing that even in 2025, Britain could cope with a combination of pressures, such as a cold winter and the shutting off of Russian supplies, without excessive problems.

However, the government does acknowledge that, as more gas-fired power plants are built, and North Sea supplies decline, disruption to supplies could become a growing threat.

Hence the obligation to supply, which would require gas companies to put in place arrangements to ensure the gas kept flowing, whether by commissioning their own storage, or by putting in place reliable long-term contracts.

The government sees downsides too – the obligation could push up the cost the price of gas – but overall it looks like an elegant solution to the problem that still allows plenty of scope for market mechanisms to work.

Indeed that is what the Conservative party’s energy team must have thought when, a few weeks earlier, they wrote in their policy paper:

“A Conservative government will place an obligation on suppliers to have arrangements in place to guarantee continued access to gas supplies for a period long enough to withstand a sustained interruption of external supply during the winter period of peak consumption. This supply obligation could be discharged in a number of ways: suppliers of gas to domestic and industrial customers could maintain enough gas in storage themselves to meet the obligation directly; they could contract with other owners of storage capacity to satisfy the requirement; they could demonstrate that they had long-term contracts in place with external suppliers to be able to dependably access the required level of supply during the specified period; or, suppliers could demonstrate that contracts they held with industrial users provided for sufficient demand-side response to be able to meet the supply obligation to remaining industrial and residential consumers.”

It is no wonder that Charles Hendry, the Conservative shadow energy minister, accused the government of stealing the Tory plan and putting their names at the top.

The conclusion must be that this policy, now backed by both the major parties, albeit with more tentative backing from Labour, is very likely to become law whatever happens in the election. And that whatever voters use to decide top decide between the parties, there will not be much for them to go on in the field of energy policy.

Related links:

Peak oil, food supply and energy security in the UK - FT Energy Source
Lights going out in the UK? - FT Energy Source

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