This year has started remarkably well in Europe — from an energy perspective at least.
After cold, still December days caused fears of blackouts, this year’s mild, gusty arrival has helped wind generation set new records and prompted roughly a halving in the gas price over the past month. Consumers and businesses have cut gas usage. On the continent, the warm winter, so far, has enabled opportunistic refilling of gas storage facilities, almost unheard of in January, with record back-up levels providing comfort not just for this winter, but for next.
This is good news — but it’s notable that the UK isn’t fully taking part. The Rough offshore gas storage facility, partially reopened with great fanfare last October after its 2017 closure by owner Centrica, has been steadily withdrawing gas this year. At about 54 per cent full, on National Grid numbers, it is far from the 80 per cent-plus levels on the continent. And European storage capacity, on average, is about 25 per cent of annual consumption compared with less than 1 per cent for the UK, a situation that could easily have left the country short had the weather been harsher this winter.
Despite the hoo-ha around Rough’s revival, which even at only a fifth of its former capacity immediately became the UK’s largest gas storage site, the country still hasn’t decided what it is doing about gas storage — and doesn’t seem in any particular hurry to make that call.
The reason that Rough isn’t being refilled is that the facility is being operated on a merchant basis by Centrica, rather than strategically. Whereas governments on the continent mandate storage, Centrica is looking for moments when futures prices mean that any gas it injects into Rough can be sold forward to lock in a decent return straightaway. It managed to do that last year, with Rough full to about 60 per cent of its reduced capacity at the beginning of December. But recent prices don’t cover operating costs plus the required return, said Investec’s Martin Young.
No one thinks storage operated on this basis will provide security of supply. Indeed, part of the reason for Rough’s closure was that the difference between prices in summer and winter shrank as the global LNG market developed, undermining the model. And sure, the UK didn’t have the same reliance on Russian piped gas as did other countries such as Germany. But the country’s basic bet that international markets would always provide the necessary supplies at a reasonable price, looks questionable if not reckless after the past year.
Centrica wants a cap and floor-pricing mechanism, similar to that provided for interconnectors to the continent, to underpin up to £2bn in investment to ensure the wells can withstand the high pressure needed to reopen Rough fully. This is a well-known regulatory model, the costs of which would be pretty minimal over perhaps 20 years.
Yet discussions have stalled, according to people familiar with the details. For Rough to provide much more security next winter, engineering work should already be under way.
In fairness, the government’s energy to-do list is daunting, from better targeting household and business relief in the near-term to the total redesign of the market. But it could be, argues former government adviser Adam Bell now at consultancy Stonehaven, that the government is questioning how long natural gas storage will be relevant for the economy and whether having (hopefully) navigated this winter, the chance of another genuine supply crunch is low.
That would be the wrong call. China’s reopening will mean more competition for liquefied natural gas — the country’s imports fell by an unprecedented 22 per cent last year. And longer-term, “there is no question that you need the storage,” said Marco Alverà, former boss of Italian gas infrastructure group Snam and chief executive of Tree Energy Solutions. “You’ll need more storage. In a system more and more dependent on offshore wind, you need to have green [energy] stored.”
Centrica wants to develop Rough into a hydrogen storage facility, given its proximity to the low-carbon cluster in north-east England. Switching from natural gas to hydrogen is operationally challenging: support to reopen Rough now should specify the need for that change in the future, and give the government some say over when and how it happens.
But in terms of energy security, bills and the green transition in the UK, a little more Rough should mean a smoother ride.
