What does the future hold for UK gas supply?

The gas crunch in the UK continues, with the current cold weather pushing demand up and very low storage continuing to be a concern. An article yesterday in the FT explains the situation very well (note, you can go via Google to avoid the paywall):

When a power cut at the Nyhamna gas processing plant in Norway hit production this month, prices in the UK soared 50 per cent in one day. The plant feeds the 1,200km Langeled pipeline that exports gas from the vast Ormen Lange field to Britain.

The loss in output was shortlived but for many in the UK it was indicative of a more worrying trend: an increasing exposure to new supply risks as North Sea production declines and competition for imports of liquefied natural gas increases.

Coming at a time when ageing coal-fired plants are being retired and new nuclear power faces delays, it raises questions over energy security, as the industry undergoes its biggest changes since privatisation in the 1980s. Alistair Buchanan, chief executive of Ofgem, the electricity regulator, warned of higher energy bills last month ahead of a “horrendous” gas supply crunch.

These are all issues I've written about recently on this blog, here and here. Just to summarise, these are the key problems that affect the UK at present or in the near future:

• Gas production from our own fields is falling, often by around 10% a year.
• Gas supplies from Norway (18-22% of UK winter demand) are subject to interruption, such as the storm-induced power cut mentioned above, and a technical problem in 2010.
• Gas supplies from Europe by pipeline are subject to political problems, such as past disputes between Russia and Ukraine. They can also be affected by cold weather in Europe increasing demand there.
• LNG imports have fallen dramatically since Fukushima, as Japan is outbidding the UK for gas.
• Several of the UK's coal power stations will shut down for good in twelve days, with more to follow in the coming year. Some of our nuclear plants are also nearing the end of their lives.

The situation right now is that UK gas storage is at its lowest level for this time of year since 2010, and we may yet go lower than that, setting a new record. The difference is that our own gas production now is 37% lower now than it was then, comparing Q3 2012 with Q3 2010.

So while we may scrape though the tail end of this winter without any major panics on gas supply (though it's not over till the fat lady sings...), the low level of storage and limitations on supply mean that we are going to have to pay for a lot more gas imports over the coming months to refill the stores ready for next winter. So, we are virtually guaranteed to see higher domestic gas prices this year, and because about a third of our electricity is generated from burning gas, we will see prices rise there too, especially due to the shift of generation from coal to gas that will happen shortly.

If you've not already insulated and draught-proofed your home, now might be a good time to start...

Mike

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Winter 2011/12 gas supply in the UK

I know it's strange to be thinking about winter when it's April and over 20C, but there's some interesting bits of news out recently.

First, there's a story from Reuters, saying:

Gas for Monday fell ... but prices for next winter and beyond rose on expectations that Japan will gobble up more of the internationally traded fuel when Britain needs it most.

"Banks are buying the back, thinking winter will be tighter with LNG diverted to Japan," one European gas analyst at a utility said, adding that a German government meeting to discuss the future of nuclear power in Europe's largest economy was supporting UK gas price in the far future.

There's several factors at play here:

1. The disaster in Japan means that they are importing a lot more LNG than they normally do, burning it to generate electricity. Given recent reports that it's going to take nine months to bring the Fukushima reactors to a cold shutdown, and the fact that the six reactors at that site are now offline for good, these elevated LNG imports are going to continue for some time to come.
2. Although Germany doesn't have many gas fired power stations right now, they are pretty quick to build, and as it's going off nuclear in a big way, there could be some new demand coming over the next couple of years for gas.
3. Libya used to export gas to Europe, via Italy. Clearly it isn't any more...
4. High oil prices drag gas prices higher, due to links in the energy markets.
5. According to statistics from DECC, UK gas production from the North Sea is falling at 8-9% a year.

Although problems tend not to arise until winter comes, it's interesting to note that wholesale gas prices (which you can look up here) in the past couple of weeks have been around 2p/kWh, compared to around 1.1p/kWh a year ago, so the above factors are clearly having an impact - expect more gas bill increases in the pipeline (pun fully intended ;-) ).

The other bit of news is that the National Grid published its 2011 Summer Outlook this week. Page eight starts a section on fuel prices, and says:

Recent developments in Japan, Libya and Australia show how volatile energy markets can be and how unforeseen events can impact energy prices on a global basis. As the UK now imports more than half of its primary energy, notably through gas and oil, these events feed through to UK energy prices and can change the short term view.

Good to see that at least some people realise that a tsunami in Japan, a civil war in Libya and floods (affecting coal mines) in Australia all have an impact on what we pay for energy here... Their Figure F1 shows what's happened to prices of electricity, coal, oil, gas and carbon over the past year, though I find the future predictions a tad optimistic:

Looking at the relative increases of gas and coal, it's not surprising that more coal is now being burned for electricity generation, especially as the carbon price hasn't increased over the period.

But finally, to come back to the main point of this post, page 17 of the National Grid's outlook report has an interesting graph showing where our gas comes from:

UKCS means UK Continental Shelf, i.e. the gas that comes from the North Sea and other offshore areas. As you can see, it's only going one way - there was a blimp from 2009-10, but that's because 2008-9 was a record drop, as DECC itself acknowledges.

So what can you do about it? Well, you can insulate your walls and loft, install solar water heating and look for non-gas forms of space heating (links are all to what we've done to our own house).

Mike

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