UK gas shortage: Will it happen again and what should the Government do?

06 March 2018

Some industries were forced to turn down their use of gas as the UK suffered a shortage during a cold snap. Michael Bradshaw, Professor of Global Energy, warns this will happen again if the Government does not improve the aging infrasctructure.

The National Grid, which manages the UK’s energy network, warned that it might not have enough gas to meet demand on March 1, due to plummeting temperatures and issues with supply.

It has since withdrawn the warning, saying the market response has boosted supplies, but Britain’s lack of flexible energy supply is a serious issue.

This isn’t the first time such a warning has been issued and it probably won’t be the last. Back in December a combination of a fire at the Baumgarten gas hub in Austria, coupled with technical problems in the North Sea and with the interconnector pipelines that enable imports from North West Europe and congestion on the National Transmission System (NTS) operated by National Grid, resulted in gas shortage and a short-lived spike in the UK’s gas price - the National Balancing Point. Things soon rectified themselves and it was back to business as usual.

However, this latest scare was different as a prolonged period of cold weather right across Europe resulted in a surge in gas demand, that reached a six-year high.

The UK Government is always quick to point out that we have diversified sources of gas supply. The UK’s continental shelf still supplies about half our consumption, though that is set to fall.

The bulk of the rest comes from Norway with the remainder as liquefied natural gas (LNG) largely from Qatar and North  West Europe via the two interconnectors that link to the Belgium and Dutch gas markets.

However, because more than 80 per cent of UK households use gas to heat their homes the industry has to handle a huge seasonal swing in demand. Furthermore, during the winter it has to cope with significant fluctuations in demand that require flexible supply, such as extreme weather.

Historically, the UK's flexible supply came from simply producing more from the North Sea, but that option has gone. Instead, flexibility today comes from four sources: Norwegian offshore production, gas in storage, gas in the LNG terminals - of which there are three - and gas from Europe via the interconnectors.

What gas comes from where depends on the market price - in the UK, Europe and globally - and the willingness of those that own the gas to sell it. In a market, shortages often leads to high prices.

Even before this winter the industry was warning that things could get difficult. The reason being that back in June 2017 Centrica Storage announced it was closing its long-term storage facility at Rough - a depleted gas field off the Yorkshire coast.

Where does the UK get its gas from?

Technical problems were making it increasingly costly to maintain. Even before then, the UK was short on storage, with capacity equivalent to 5.9 per cent of total consumption in 2016, compared to places like Germany, France and Italy where it covers 20 per cent of demand.

With Rough gone, the UK is left with 1.4 billion cubic metres of medium range storage - equivalent to 1.8 per cent of 2016's consumption - which fills and empties many times during the winter. However, in an emergency such as the one we have just had, it is quickly emptied and won’t refill while prices are high.

Until recently the Government did not seem phased by the closure of Rough, despite industry calls back in November to review the situation, reportedly, they are now thinking again.

With limited storage, the UK is dependent on sufficient gas being in the LNG tanks and on being able to get more gas from Norway and Continental Europe, but there are physical limits on the pipelines that carry that gas.

Furthermore, it puts additional pressure on National Grid to move gas around the system. Back in December, congestion on the NTS limited the ability of the interconnectors to supply gas.

At present, the LNG tanks are about 35 per cent full, thanks to recent deliveries from Qatar and Russia, and gas is flowing from all three terminals. But it takes two weeks for an LNG tanker to get to Milford Haven from Ras Laffan in Qatar, which is no good in emergencies such as the recent one.

With UK demand surging to more than 400 million cubic metres a day, a loss of capacity from any source of flexible supply, due to technical problems or an inability to attract sufficient gas from European markets, can lead to a supply emergency.

According to National Grid’s website, all the key elements are currently flowing gas, albeit at lower rates. But things could get very difficult if there were technical failures on what is an aging infrastructure.

Related course: MSc Management

Two final considerations, the price spikes are not a problem in themselves - although the current situation is an extreme - as they are how the market operates and what stimulates gas to flow.

In fact, global gas prices are considerably lower than they were are few years ago and large buyers are relying on long-term contracts and hedged prices. It is the small-scale buyers that rely on the short-term spot market that are at risk.

Second, the EU has introduced new policies in relation to gas security, including the so-called ‘solidarity principle’ that requires member states to help one another in an emergency.

What happens if the UK leaves the EU’s Internal Energy Market? Equally, what happens in Ireland which is dependent on the UK for its security of supply. A ‘cold shoulder from Brussels’ could be just as damaging as the ‘beast from the east'.

For a series of briefings on Brexit and UK Gas Security click here.

Michael Bradshaw teaches Forecasting for Decision Makers on the MSc Management.

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