Gas shortage warning as Government fails to act on storage

[clv101]

We have had a run of mild winters, any return of tradditional winter weather could be problematic.

That's the key point. For the last few years, a cold winter and 2-3 weeks of really cold (average temp <0) would have spelled disaster. Thankfully we've had a string of warmer than average winters.

I say thankfully, but actually I think we'd be in better shape now had, say, 2005/06 been a 1 in 30 cold winter.

[Keepz]

we'd be in better shape now had, say, 2005/06 been a 1 in 30 cold winter.

What exactly do you think Government and/or the market could, would or should have done since then if it had been?

[skeptik]

What exactly do you think Government and/or the market could, would or should have done since then if it had been?

Energy security cannot be left to the market. It's a subject the market is not interested in. Guaranteed security/continuity of supply is a cost, not an opportunity for profit. The market doesnt care less whether you freeze to death or not. Maximum profit comes from a situation of scarcity and tightness of supply, as can be seen by examining recent results from the multinational Oil co's such as Shell and Exxon. They've never had it so good.

Ensuring energy security is entirely a job for Govt. New Labour's faith in the ability of the markets to provide energy security is wholly misplaced.

... on a personal level my parents (on my insistence) now have 6 years supply of butane stacked up in their garage. Hopefully enough to get them through any temporary supply disruption. It sold it to them on the basis of it being a good investment. Prices have doubled since they last bought any, and are predicted to double again in the next year or so.

This article in the FT which I forwarded to my mother was the clincher, otherwise they would not have been inclined to spend the money.
http://www.ft.com/cms/s/0/fee620d2-528c ... 07658.html

[Keepz]

What exactly do you think Government and/or the market could, would or should have done since then if it had been?

Energy security cannot be left to the market. It's a subject the market is not interested in. Guaranteed security/continuity of supply is a cost, not an opportunity for profit. The market doesnt care less whether you freeze to death or not. Maximum profit comes from a situation of scarcity and tightness of supply, as can be seen by examining recent results from the multinational Oil co's such as Shell and Exxon. They've never had it so good.

Ensuring energy security is entirely a job for Govt. New Labour's faith in the ability of the markets to provide energy security is wholly misplaced.

Yes, providing security of supply costs money for suppliers. But so does a failure to provide for it - energy suppliers (I'm talking gas here, which is what this thread is about) have a very strong commercial incentive to meet their customers' demand. They pay financial penalties, which can be very steep, if they don't put into the gas transmission system, every day, the same amount of gas as their customers take out of it (the same applies in electricity). That's what has encouraged billions of quids' worth of investment in new supply capability, such as the new pipelines, new LNG import infrastructure, new gas storage capacity which has been delivered and continues to be delivered, by the market, in this country.

Do you seriously think this Government, any Government, could have found such money and delivered such huge infrastructure projects in a comparable time?

So the energy supply industry has every incentive to balance the costs and the benefits of security of supply. Government would have to do the same - unless you think the objective should be guaranteed security, no matter what, under any circumstances, at any cost? Plenty of large consumers clearly don't think that, that's why they are prepared to accept lower-price, interruptible contracts. And I suspect not a few domestic consumers would be prepared to accept that sort of deal as well, if they had the choice - which they don't. Domestic gas consumers enjoy a very, very high standard of security of supply, for which they pay handsomely.

[RenewableCandy]

Keepz I could see all this working hansomely if yer typical Domestic customer (let's call him Sid) actually knew what the terms of the deal were, and indeed what their rights were in the case of a breach.

As an analogy, do people get refunds if their electricity is cut off? (We live just a feew miles from Drax, so we're probably not the people to ask about power cuts ).

[Totally_Baffled]

Wasn't it the winter of 2005 (may of been 2004) where we were about a week of cold weather from 3 day weeks due to a lack of gas storage?

It not so much market failure, but almost a market time lag. After all extra storage is expensive if you dont use it (mild winters).

Looks like we are trying to run the natural gas supply chain like food, just in time.

However food demand is nowhere near a volatile, and if you run out of your favourite food you can always eat something else!

Not so with gas!

You have to ask the question why all the other major European countries have more storage than us?

Why is it we insist on OIL firms have at least 2 - 3 months oil in storage, but not gas?

Dont get it...

[skeptik]

That's what has encouraged billions of quids' worth of investment in new supply capability, such as the new pipelines, new LNG import infrastructure, new gas storage capacity which has been delivered and continues to be delivered, by the market, in this country.

Unfortunately where that gas is going to come from has not until fairly recently been given a lot of thought. That's what I mean by a failure of govt in energy security. I don't think 'Build it and the gas will come' is going to work for much longer. The trend seems to be towards everything getting locked up in long term supply contracts. The Chinese are out there buying up the world. Even the Russians want to buy everything that Libya can produce. Apart from that, one day the world will hit peak gas. Then what? Ever increasing reliance on natural gas out to 2050 as envisaged by Govt white papers only a couple of years ago? Doesn't seem likely now.

Do you seriously think this Government, any Government, could have found such money and delivered such huge infrastructure projects in a comparable time?

£100 billion was found by the Govt at the drop of a hat to nationalize one dodgy bank, Northern Rock. Personally I consider the energy security of the country to far more important. Huge infrastructure projects are built by engineering companies who have the expertise in delivering huge infrastructure projects, whether the client is a government department or a gas supply company.

So the energy supply industry has every incentive to balance the costs and the benefits of security of supply. Government would have to do the same - unless you think the objective should be guaranteed security, no matter what, under any circumstances, at any cost?

Pretty much, Yes. Without long term energy security UK plc goes down the drain. Much more important I think than wasting billions on a nuclear detterent or bailing out dodgy banks.

[snow hope]

Great discussion and well made points from Sceptic, Chris and TB.

God help us if we get a very cold winter.....

I agree completely that to rely on the markets for our energy security is complete nonsense. As it is for water supply and rail services etc. Some things should be run by the Govt. for the good of the people / country. I mean what else are the Govt. good for? not a lot these days to be honest....... I mean just look at their energy planning, transport planning, etc. Very poor in reality.

Keepz, I always listen to what you are saying, but I am afraid in my eyes you are losing this discussion.

[biffvernon]

Wasn't it the winter of 2005 (may of been 2004) where we were about a week of cold weather from 3 day weeks due to a lack of gas storage?

Actually it was the last few days of 2005. Minus 9 on the 29th December in my garden. If it hadn't been Christmas week and much of industry on holiday the lights would have gone out. But as Chris said, we're a little more secure now.

[Keepz]

Keepz I could see all this working hansomely if yer typical Domestic customer (let's call him Sid) actually knew what the terms of the deal were, and indeed what their rights were in the case of a breach.

As an analogy, do people get refunds if their electricity is cut off? (We live just a feew miles from Drax, so we're probably not the people to ask about power cuts ).

Don't know about electricity, to be honest, but in the case of gas yes, domestic consumers do get compensated if their gas supply is cut off (for larger consumers it depends on the terms of their contract). Not that it happens very often and it's invariably due to local technical failures on the gas pipeline network rather than shortages of actual gas.

It's interesting to note that there is anecdotal evidence of householders hiding from or trying to turn away the gas engineer who comes to reconnect them, because they'd rather carry on collecting the compensation money; demonstrating that some people at least don't agree that it is worth paying any price for secure and continuous gas supply.

[Keepz]

That's what has encouraged billions of quids' worth of investment in new supply capability, such as the new pipelines, new LNG import infrastructure, new gas storage capacity which has been delivered and continues to be delivered, by the market, in this country.

Unfortunately where that gas is going to come from has not until fairly recently been given a lot of thought. That's what I mean by a failure of govt in energy security. I don't think 'Build it and the gas will come' is going to work for much longer.

Well, but the new infrastructure isn't being built on that basis. It's being built by people who export to the UK, eg the Norwegians built the pipeline from Norway at the same time as they are expanding production from the Norwegian gas fields, and the Qataris are building the new LNG import facility at Milford Haven at the same time as they are finishing building a new liquefaction plant in Qatar, so presumably they do intend to use the capacity and have got a pretty good idea where the gas is going to come from.

The trend seems to be towards everything getting locked up in long term supply contracts. The Chinese are out there buying up the world. Even the Russians want to buy everything that Libya can produce. Apart from that, one day the world will hit peak gas. Then what? Ever increasing reliance on natural gas out to 2050 as envisaged by Govt white papers only a couple of years ago? Doesn't seem likely now.

Other examples: the Algerians are on record as saying they want to move more towards shorter term contracts, which actually makes much more sense from a producer's point of view; particularly if you accept the powerswitch thesis that gas prices are only going to go up and up, why would a gas producer want to lock themselves into a long term contract - unless at a price so high that they can be sure they'll be better off over the whole term than selling on the spot market?

Do you seriously think this Government, any Government, could have found such money and delivered such huge infrastructure projects in a comparable time?

£100 billion was found by the Govt at the drop of a hat to nationalize one dodgy bank, Northern Rock. Personally I consider the energy security of the country to far more important. Huge infrastructure projects are built by engineering companies who have the expertise in delivering huge infrastructure projects, whether the client is a government department or a gas supply company.

But those engineering companies are already fully occupied building projects for the gas supply companies - those that are not building electricity generating stations, that is. You are clearly aware of more examples of Government-financed projects delivering to time and to budget than I am ...

So the energy supply industry has every incentive to balance the costs and the benefits of security of supply. Government would have to do the same - unless you think the objective should be guaranteed security, no matter what, under any circumstances, at any cost?

Pretty much, Yes. Without long term energy security UK plc goes down the drain. Much more important I think than wasting billions on a nuclear detterent or bailing out dodgy banks.

"Pretty much" but not totally then? You'd accept that if the position was that we were facing an 0.00002% probability of a 5% shortfall for two days this winter, it wouldn't be worth spending £3,000,000,000 to reduce that to an 0.00001% probability of a 3% shortfall for one day? So we are agreed that it is a question of balancing costs and benefits - it is just that you feel the market doesn't value security of supply highly enough?

You seem to see "the market" as consisting only of a supply side for whom providing energy security represents a cost. I've tried to demonstrate that in fact there are mechanisms in place to ensure that energy insecurity also represents a cost to suppliers so that they are incentivised to ensure that the supply is there. If you really think it is in the suppliers' interest to keep supply short, how do you account for the fact that the gas supply industry has spent a single penny on new gas supply infrastructure, let alone billions of pounds? Shouldn't they rather be saving that money or even using it to block up the pipes?

And of course the market also has a demand side, to which security of supply is a benefit. In the case of domestic consumers, they have no option but to pay the price for a very high standard of supply security - they will be the very last to be cut off when all others are gone.

In the case of larger industrial consumers, they have the opportunity to decide for themselves how much they value security of supply and therefore what they think it is worth paying for it, by choosing whether to buy forward, take out long term contracts, rely on buying on the day, invest in their own stocks, switch away from gas altogether etc etc. This balance will be different in each case. Now what business is it of the Government's to decide that actually they must all have the same standard of security, and that more of the taxpayers' money should be spent on providing it for them than they would want to pay for it themselves?

[Keepz]

I agree completely that to rely on the markets for our energy security is complete nonsense. As it is for water supply and rail services etc. Some things should be run by the Govt. for the good of the people / country. I mean what else are the Govt. good for? not a lot these days to be honest....... I mean just look at their energy planning, transport planning, etc. Very poor in reality.

But if you think the Government is so useless (with which I would agree), why do you think it would be good if they were to take on the responsibility themselves for building pipelines, developing storage capacity, negotiating supply contracts?

Here's an analogy. Suppose Mrs Snowhope or one of the little Snowhopes needed brain surgery. I am sure it would be of the utmost importance to you that it was done to the highest possible standards. Would you then say, this is so important that I must take on the responsibility and do it myself?

No, you would seek out a professional brain surgeon to do it (nb if you actually are a professional brain surgeon, change the analogy to open heart surgery). You might try to make sure that she had a very strong incentive to do it well - for example, by offering her a handsome reward if the operation were successful, and/or threatening her with physical violence if it were not. But you would not stand at the operating table to tell her exactly what she should be doing and ready to take over yourself if it seems to you that there is a possibility that it might not be going well.

That's what the Government is doing with energy supply - ensuring that industry professionals who know what they are doing are properly motivated to deliver it to the standards that their customers want and are prepared to pay for. And the fact is that no customer in the UK was forcibly disconnected due to supply shortages even in the winter of 2005 -2006, unlike on the Continent.

[Steve Houseman]

not a response to any of the posts here , but I read this ages ago , posted on hpc, and maybe from tod ,
but gives a view of the future that seems believable , altho the ending is implausibly upbeat

http://www.housepricecrash.co.uk/forum/ ... ntry914633

apologies if already posted .

cheers,

Steve

[Totally_Baffled]

Keepz.

I dont dispute that PRIVATE companies should do the work, as you say they are the experts! Governments smeg up big projects so there is no way they should run them!

However - the government could of given incentives EARLIER to build MORE storage BEFORE we get to a situation where gas supplies maybe too tight! (maybe even paid for it outright - I think it would be worth the cash)

It also seems insane to me to export gas in the summer (to storage on the continent) and then them hoarding the same gas so the price sky rockets when we re-import it.

If we had the storage this would not be an issue and would save UK plc and her utility companies a shed load of cash!

Storage would also insulate us against supply not responding to price. Those nasty nationalised gas companies in Europe are not releasing supplies in cold winters despite high prices. Essentially this is what happened in 2005.

I realise the politicians are trying to work this out - but surely it will take years where as more storage would be faster and cheaper, and provide security of supply?