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UTILITY Week 19th June USE

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UTILITY WEEK | 19TH - 25TH JUNE 2015 | 19 Finance & Investment Analysis A s the UK increasingly relies on imported natural gas, the case becomes stronger for the government to expand gas storage capacity. Halite Energy is waiting to find out whether the UK's latest gas storage plans will get the green light from the government – but consent is no guaran- tee that the plans will go ahead, despite the strong argument that it is sorely needed. Gas storage developers are quick to point out that the UK now depends on gas from fields in the North and Irish Sea for around 40 per cent of its gas supply, but production from these fields is in decline, forcing the UK to import more liquefied natural gas from abroad. National Grid Gas predicts that by 2025, up to 80 per cent of the UK's gas needs will be met by gas imports. Chief executive of the British Ceramic Confederation, Laura Cohen, says that, with imports rising, it is becoming more challeng- ing to secure supply. She told Utility Week: "There are going to be more imports and we do need more storage and back-up. "Energy security is a basic in any modern economy," she added. "Our members are rightly nervous about UK energy security and this is not doing any favours to encourage investment in manufacturing capacity at a critical time during the [economic] recovery." Energy and Utilities Alliance chief execu- tive, Mike Foster, told Utility Week that the increased reliance on renewable power gen- eration will require the UK to have more gas available, as the cleanest of the fossil fuels, to cope with the "intermittent vagaries" of wind and solar. "Overall, the UK needs gas storage," he said. So why, when the need is so great, are many gas storage projects still unable to secure financial backing, despite gaining consent? Stag Energy's Gateway gas storage scheme in the Irish Sea is a case in point. The project received consent in 2008 from then energy secretary Ed Miliband and was due to be up and running in 2014. If completed, it would have a working gas storage capacity of 1.52 billion standard cubic metres, contrib- uting nearly 30 per cent to the UK's current gas storage capacity. However, so far, it has been unable to get off the ground. Eni Gas & Power's Deborah project in the North Sea has faced a similar fate. What hope then for Halite Energy, which is awaiting a decision by the Department of Energy and Climate Change on whether to grant consent to the 900 million cubic metre Preesall gas storage project in Lancashire? The development has faced a two-year battle to secure consent, following its initial refusal by government in April 2013. Foster believes the problem is that gov- ernment says the market should deter- mine the availability of gas storage, rather than stepping in to incentivise gas storage investment. "That market will deliver gas storage only if there are noticeable differences between winter and summer prices of gas – the price spread," he told Utility Week. "That has not been seen in the gas market for a number of years, so that's one of the reasons why peo- ple have not come forward and delivered gas storage, even though they might have permission. "We think the recent decision by the Valu- ation Office Agency to double the business rates of gas storage facilities is acting coun- ter to what the UK government says it would like to achieve as a strategic objective – hav- ing a secure supply of energy," he added. Existing projects are also suffering. SSE, which is responsible for the Hornsea and Aldbrough gas storage facilities in East Yorkshire, argues that gas storage operators are facing low operating returns because of increased costs arising from the Valuation Office Agency putting up business rates for most gas storage facilities in Britain. In March, SSE was forced to suspend a third of the natural gas withdrawal capacity at Hornsea because of "unfavourable market returns". According to Energy UK, the UK has approximately four billion cubic metres of storage capacity, delivering a quarter of national gas demand at peak times. This is considerably lower than in other European countries. "Compared with UK total demand for gas, our storage capacity is about 6 per cent," Foster said. "That compares with 28 per cent in France, 27 per cent in Germany and 35 per cent in Holland; we are considerably lower than our European counterparts." Capacity at the UK's largest depleted gas field, Rough, which is operated by Centrica Storage, has been cut sharply for a period of six months, from a maximum of 41.1TWh to between 29TWh and 32 TWh (29 per cent less than current levels). "Rough is about 40 years old and there are going to be costs associated with its upkeep," Foster said. "To lose what would be in the region of 70 per cent of our gas stor- age if Rough was not available would really bring into question the government's priori- ties around energy security." It wouldn't be the first time. In 2013, gas prices in the UK surged to a record high of 150p/therm as an interconnector failure exacerbated already stretched supplies at Rough. This sudden spike sparked a fresh debate on whether the UK has sufficient stor- age capacity. At the time, energy secretary Ed Davey insisted gas storage capacity in the UK was "not a concern" because of the diversity of supply to the country. Ofgem disagreed, stating in a report that "low levels of gas storage could result in GB consumers being more disproportionately exposed" to volatil- ity in market price movements. A string of relatively mild winters has le little need for government to revisit its pri- orities. But the industry is clear: for new pro- jects to gain consent, for consented projects to receive financial backing, and for existing projects to be protected from market volatil- ity, the government needs to change the way gas storage is delivered. "If, in tackling the trilemma, the govern- ment believes there is a strategic imperative to maintain security of supply – both price secu- rity and physical security – it needs to review the whole basis upon which gas storage is delivered," Foster said. "It must certainly review the decision it made a couple of years ago about the principle of leaving it to the markets, because clearly that isn't working." Storing up trouble The UK's gas storage capacity is insufficient to deal with the rising imports of natural gas, but without the right incentives in place, new gas storage projects are not being delivered. Lois Vallely reports.

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