UK rules out gas storage subsidy

The Department for Energy and Climate Change (Decc) announced today that it will not subsidise investment in new gas storage facilities, potentially closing the door on a number of proposed long-range storage projects in the UK.

Decc cited an independent study commissioned by the government to the effect that the UK market “continues to function well in attracting gas from a range of sources to meet current and future demand, with gas storage providing only a small proportion of UK total supply (7pc in 2012).” Decc estimated that the decision not to proceed with subsidies could result in taxpayer savings of £750mn over 10 years.

Installed storage capacity in the UK at present totals about 4.5bn m³ across both long and mid-range sites, compared with about 21bn m³ in Germany, where demand is broadly of a similar level.

While the UK’s North Sea production for many years meant that its more limited storage capacity was not a hindrance to meeting winter demand peaks, the rapid decline of the North Sea and the country’s increasing import dependence have made the issue more pressing.

But little progress has been made on a number of proposed long-range storage facilities, with developers blaming unfavourable market conditions for investment. Centrica — one of the most vocal — has said summer-winter spreads need to be around 25-30p/th to justify building new long-range storage, but they have been far narrower in recent years.

This year, the summer contract expired at a discount of just 7.35p/th to the first-quarter 2014 contract, despite heavily depleted storage inventories during an exceptionally cold spring. In 2012, the corresponding spread was 16.2p/th, while over the preceding two years it was 10-11p/th. The summer contract last expired at a discount of more than 25p/th to the subsequent first-quarter contract in 2009, when it expired at 25.6p/th.

Centrica said in July that its proposed 3.1bn m³ Baird facility may only be economically viable with government support. But its view was not universally shared.

Scottish utility SSE, which operates the Aldbrough mid-range facility, said it opposed government intervention that favoured new facilities while providing no support for existing ones. “Failure to adhere to this principle would distort the market, adversely impacting on existing assets and leading to unintended and undesirable outcomes”, SSE said earlier this year.

And some market participants argue that a surfeit of storage capacity in the wider northwest European market obviates the need to build new capacity in the UK. Shell’s head of business development for northwest Europe Thorsten Dinkela argued in June that most storage is greatly underutilised even during prolonged, unseasonably cold conditions, and that regulators should look to optimise capacity utilisation across Europe rather than focus narrowly on domestic supply security. Security of deliverability was far more important, he said.

The last winter underlined many of these issues. With UK stocks running low during an exceptional spring cold snap, gas was diverted from the continent to the UK — through the interconnectors linking Bacton to Belgium and the Netherlands, and through Norway’s offshore transmission system — while withdrawals from continental storage stepped up to fill in for the diversions, effectively allowing the UK to balance off continental storage.

But that configuration of flows came with significant risks. With pipeline deliveries to the UK running at near maximum capacity, NBP prompt prices began to edge higher, approaching parity with prices for spot cargoes in the LNG market. And when flows through the Interconnector were halted for several hours by an unplanned outage, prompt prices spiked above £1/th for the first time since March 2006 — when the UK’s only long-range storage facility had been taken off line following a fire.

With several developers having postponed final investment decisions until a government decision on incentives, it remains to be seen whether Decc’s announcement will curtail the number of projects that begin commercial operations.

But it may not derail the trend towards faster-cycling mid-range storage facilities, which are more responsive to short-term price fluctuations and so more economically viable than seasonal storage facilities. Some developers are already considering re-submitting their long-range storage proposals as mid-range facilities.