Financially it doesn’t make sense for private companies to run long-term storage facilities ©PA Images
Financially it doesn’t make sense for private companies to run long-term storage facilities ©PA Images

Expect more gas price volatility, firms warned

16 March 2018

The UK is more likely to see short periods of gas price volatility, a global energy expert has said.

Michael Bradshaw, professor of global energy at Warwick Business School, said volatility like a spike in gas prices earlier this week would continue to be the norm unless the government intervened in the gas market.

Speaking to SM, he dismissed concerns that the UK could run out of gas and said the market acted as expected. “What I suspect is happening is traders can see the increased demand for gas in the next few days, at a time when supply levels are low and the market is going to be tight, and the market responded accordingly,” he said.

“The market has done exactly what it was expected to do: a shortage delivers a price, that price results in the gas flowing.”

He added: “We have a privatised, liberalised gas market, all the assets and the gas are in the hands of private companies and the market determines the price of gas and that determines where the gas flows from.”

Last week gas prices spiked after weather reports predicted another cold snap this weekend, similar to the weather a few weeks ago that caused the National Grid to issue a warning.

Bradshaw said there was a collection of issues affecting the flexibility of supply in the UK: the depletion of supplies from the UK continental shelf, a lack of storage, ageing infrastructure and a shortage of supply from Europe, which is facing similar cold weather to the UK.

“It’s the challenge of managing seasonality. When you look at our sources of stability, we’ve got a very small amount of medium range storage left but that fills and empties regularly over a period of three or four days,” he said. When the price was high over the last cold snap these stores emptied and are unlikely to have been refilled.

Financially, however, it doesn’t make sense for private companies to run long-term storage facilities like the one that closed in Rough last year. “The government position has been there’s no case to intervene to encourage more gas storage to be built. The problem is the business model relies on gas being cheap in the summer and expensive in the winter, but the spread in the price is low now, so you can’t make money from gas storage,” said Bradshaw.

“The industry position is the government needs to do more and revisit this question of storage. The consequence of not doing that is increased volatility, which is what we see.”

Another element of flexibility the UK relies on are the gas interconnectors to Europe. In theory the interconnectors allow the UK to rely on gas storage facilities in Europe. “But in the context of Brexit, that’s probably not a smart thing to be doing,” said Bradshaw. He added there is a school of thought that suggests the price of gas in the UK will need to be higher than in Europe post Brexit to ensure the gas flows in the right direction.

Most gas shortages however are caused by infrastructure problems, not a lack of supply. Martin Rawlings, from the CIPS Energy and Water Special Knowledge Group, said his organisation has been warning the government about these potential problems for some time. “Challenges have been triggered by some technical difficulties at the Dutch gas terminals, an outage at a gas processing plant in Norway and Centrica’s decision to close the largest offshore gas storage facility, which was a main source of supply.”

With another spike in demand expected this weekend, businesses and consumers may have to look at trimming their demand, he said. “Gas-fired power stations will be first in line, followed by large manufacturing businesses and lastly the consumer.

“Let’s hope that businesses have looked carefully at their agreements and plans to reduce their use of this precious commodity before ordinary people are left out in the cold,” he said.

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