This weekend it was reported that in recent weeks the UK government walked away from its discussions with Centrica over increasing capacity at the Rough gas storage facility, off the coast of Yorkshire. Centrica wants revenue guarantees from the government before it undertakes the £150m of work necessary to increase it to full capacity; the Financial Times reported that a government source has accused Centrica of being “too greedy”.
This appears foolhardy. The UK is, we are told, uniquely vulnerable to volatility in the price of gas because, firstly, we are one of Europe’s largest consumers of it (40 per cent of our energy comes from gas, compared with the 34 per cent European average) and secondly, we have comparatively little storage capacity (less than 1 per cent of our annual usage, versus about 25 per cent for the rest of Europe). Although the UK was significantly less dependent on Russia for gas than nations such as Germany, other countries have reduced their dependency through increased storage capacity, which means they can stock up on gas when demand, and prices, are low, and use up stored gas when producers are asking more.
The UK, however, takes a “just in time” attitude to energy supply: it depends more heavily on Liquefied Natural Gas (LNG), which fulfilled about 17 per cent of demand in 2021 and is delivered on ships to huge terminals in Kent and Pembrokeshire. Unlike pipeline gas, LNG is not traded on exchanges, but its price includes delivery to a specific port, and one of the reasons energy prices have been so high this winter is that the gas supply from Russia to Europe, which was piped in, was replaced by LNG from further afield. Limited capacity at ports meant ships had to queue. “There were periods where they just couldn’t get that gas onshore,” says Jacob Mandel, senior associate, global energy markets at Aurora Energy Research. “There was no way to get the energy into European networks.” So prices crept upwards.
With that in mind, this winter’s energy crisis, in which prices were pushed to record highs by the war in Ukraine, makes the closure of the Rough storage facility in 2017 look embarrassingly short-sighted. Boris Johnson, launching his energy security strategy in April 2022, criticised the “short-term thinking” behind the decision and said the UK had “drifted into dependence on foreign sources”.
Rough, a former gas field, can hold about nine days’ national supply when it is at maximum capacity. The field, which is a natural gas reservoir 10km long and 3km wide, is surrounded by impervious stone, but was shut after Centrica said it had “come to the end of its design life” and that refurbishing the wells and platforms that allowed the company to extract its gas would not be economical. Last October, as prices soared, it was partially reopened at the behest of the government: even operating at only 20 per cent of its previous capacity it added 50 per cent to the UK’s gas storage volume.
Now Centrica wants financial guarantees from the government to do the work that’s needed to increase its volume further. On current predictions, it seems clear the government should pay. Analysis by Cornwall Insight has suggested that, without the protection of the government’s Energy Price Guarantee, which ends in April, average annual bills for a dual-fuel household will come to £3,338.07 by the second quarter of next year.
However, while Rough is the largest storage facility in the UK, it is small compared with European equivalents. “Rough is not a massive site by itself,” says Mandel. “It’s not big enough to hold a big share of the UK’s gas needs.” Refurbishment would also take a long time. “It wouldn’t be able to come entirely back online within the year, it would take a couple of years of gradually building the capacity.” That means that even if the government offered Centrica the guarantees it wants to bring the site up to capacity, it wouldn’t be ready in time for next winter.
Mandel says the main reason to have a decent amount of storage is to protect against a serious emergency, “one where, for example, the pipelines connecting the UK to the rest of Europe were completely knocked out, or there’s some big issue with Norwegian [production]”.
Somayeh Taheri, the chief executive of the renewable energy exchange UrbanChain, agrees that a lack of storage is usually not an issue, at least until “harsh moments, like the Beast from East in 2018”, appear to suddenly increase demand, which happens every few years. She adds that having more storage tends to reduce speculation from energy traders, and therefore volatility in prices. “It’s about them knowing that we have enough energy, so they can’t play with us.”
The good news for the UK’s energy security is that LNG should be easier to obtain next winter: the government of Qatar, a big exporter of LNG, has announced plans to invest millions of pounds in the South Hook terminal in Milford Haven, Pembrokeshire, which can currently process about 20 per cent of the UK’s annual gas demand. This investment will increase its capacity by a quarter. Qatar is also partnering with ExxonMobil to invest $10bn in a new terminal in the US, which is expected to export shale gas to the UK.
With that in mind, and because resurrecting Rough or building new storage would take so long, Mandel says the government might instead need to resurrect the Energy Price Guarantee scheme next winter.
It’s an expensive option: the government has predicted that the guarantee cost £25bn in its first six months, and will cost another £13bn this year (although economists have pointed out that thanks to lower than expected gas prices, the actual figure could be lower). But Mandel says that coupled with measures intended to reduce demand, it might be the only option to keep prices down next year. “There was a voluntary reaction [from industry] to prices in the UK,” he says. “The way that industry responded to these price increases shows that the market can still function to an extent. And it shows that there is flexibility where we really didn’t know if there would be before.”
But these are short-term measures designed for an emergency situation. The government’s energy strategy, published in June last year, has been widely criticised for missing opportunities to reduce the UK’s reliance on other countries by providing energy domestically through renewables. So instead of wringing our hands about our lack of gas storage, the onus should really be on the government to find other ways to increase the UK’s energy security. Increased storage, yes, for those “dunkelflaute” days when no wind and no sun means fossil fuels like gas are still needed – but also a determined focus on renewables. “Storage is an important factor, but it can be part of the whole picture that needs to be managed,” says Taheri.