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News 27 November 2018

Gas Storage in the UK leveling the playing field

The BEIS (Business, Energy and Industrial Strategy) Select Committee listened to oral evidence on gas storage from the industry.

beis

The discussions started by looking at last years events – why the aging Rough gas storage was allowed to close. The discussion went on saying the business case supporting new investment into storage was weak because the revenue stream - namely the seasonal spread - is only half the level that would be required to support new gas storage, therefore public support would be required.

Before even the BEIS Select Committee had the time to publish their conclusion, Greg Clark made it clear in his 15th November speech on the future of the energy market that the “future (was) zero subsidies”. The government approach to gas storage, Clark said, was as a successful example of non-intervention to let the market deliver.

Meanwhile, other opinions can be heard, some sceptical that the market does deliver or some considering we are entering unchartered territory:

  • Wood Mackenzie ”The UK's need for gas storage: a persistent and growing challenge”
  • UKERC: “while passing the N-1 test currently satisfies the statuary requirements, it creates a sense of false security”
  • Timera-Energy: “The loss of working gas volume is likely to mean that supply shocks (e.g. major infrastructure outages) have a sharper and more prolonged price impact.”
  • Gas Security Group “UK urged to 'rethink and reverse' gas storage plans”

Storengy UK welcome the inquiry by the BEIS Select Committee. Following the oral evidence session, we are pleased to share our thoughts and some additional facts.

Storengy considers that Gas storage in GB should be able to operate without government intervention, and develop new capacity as required by the market, competing with other sources of flexible gas. However, we observe that this is not the case, with capacity being withdrawn from the market (Rough, Hornsea, Aldbrough, Hole House over the last years), no FID (final investment decision) taken for more than a decade and existing operators struggling. In addition to the low level of the seasonal spreads throughout Europe, the GB market environment is undermining gas storage activities.

A tax regime putting GB gas storage at disadvantage to other GB and European flexible gas assets

  • Far from being subsidised, Gas storage operators in GB face an absurd and punitive level of business rates that has no equivalent anywhere in Europe. No other business in GB has to bear a similar tax burden equal to or greater than all their other operating costs.
  • Among the flexible gas sources competing with storages (LNG Terminal, UK and Norwegian production, Interconnectors), none is taxed at such an extortionate level. Therefore, business rates are totally distorting the playing field to the detriment of gas storage.
  • At the time of deciding to build a potential storage asset – a commitment in the hundreds of millions of pounds – investors have no visibility on the rateable value that will be applied by the VOA once their asset becomes operational. For the few assets that went ahead at the turn of the century, their business tax bill today represents an annual cost of 6 p/th of storage capacity – more than half the value of the seasonal spreads.

Missing money resulting from inadequate balancing regulation

  • In addition to the flexible gas sources competing with storages (LNG Terminal, UK and Norwegian production, Interconnectors), the National Transmission System’s Linepack is increasingly being used to balance the network.
  • · It is widely acknowledged that natural monopoly regulation must allow any competitive supplier to help reduce system cost. Modern storage assets embedded in the network are an excellent tool to provide flexibility. However, the design of the balancing regime is taking more and more of the short-term optimisation business away from the competitive market.
  • This is the result of a series of incentives on market participants.
    • Flexibility for both Distribution Networks and transmission connected sites is currently priced at zero. There is no cost to flex gas flows within-day. This has therefore created an opportunity to arbitrage the gas system flexibility with the electricity market hourly balancing prices (and is also the reason why gas holders have disappeared from our skylines).
    • The system operator incentive to minimise its purchase and sell actions on the gas market is pre-empting the role of commercial users to balance the system.
  • These incentives sometimes create an artificially short network as was seen on the 1st March 2018 when linepack was depleted just before the wave of cold weather known as the “Beast from the East”.
  • Electricity market rules dismissive of gas issues whilst relying heavily on Gas-to-Power

  • The signals and incentives from the electricity market not only create opportunities for arbitrages to procure the “free” flexibility of the gas system. Several rules also require minimising the electricity consumption at times of peak demand (Triads, Capacity Market Time of Use). These affect the operations of flexible gas assets that need electricity to deliver gas, precisely when the electricity and gas systems need it most.
  • As mentioned by Greg Clark in his November speech, electricity prices for large businesses are 15% lower in Germany than in the UK. Because the British industry receives little exemption from the various taxes, levies, charges added to the commodity, large consumers in the UK end up less competitive compared to their continental peers. Electricity represents a very large part of storage operating cost after the business rates, and UK operators are at a disadvantage.
  • Uncertainty on the future market environment

  • The Gas Charging Review due to be effective from October 2019 is further damaging the environment for storage in GB. It is yet unclear what Ofgem will decide, but as it stands, all the Modification Proposals on the table would add an additional cost burden to move gas in and out of the storage. 
  • At Storengy UK, we believe these points must urgently be addressed to restore the level playing field in the gas market. Any talk of public subsidies is simply misplaced, when the most pressing market issues should be fixed in the first place in order for existing assets to operate normally and for investors to look more confidently at new projects.

Benoit Enault