Gas Security of Supply

David Cox, Managing Director, Gas Forum

Gas to Power Forum London 20-21 November 2014

Importance of gas - EU

Key messages

• EU gas demand forecast to increase

• EU indigenous production forecast to decline

• EU significant and increasing net importer of gas

2

EU Gas Markets by Size

• Largest gas consumption in UK, Italy, and Germany.

• France, Spain and Netherlands also significant gas markets

• Not necessarily related to domestic production

• Netherlands and UK largest gas producers in EU

• Annual consumption significantly above production

EU aggregate annual indigenous

production (ENTSOG forecast)

4

Importance of gas - UK

• Long term role of gas both for domestic heating and power generation

• Increased share of renewable generation (mainly offshore

wind), but inflexible and intermittent

• Residential demand is less uncertain as the uptake of heat

pumps etc is difficult to predict

• Depletion of UKCS supplies, but new volumes of unconventional gas

5

UK Gas demand – flat lining or

decline?

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Annual Demand Peak Demand

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1,200

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00

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De

man

d (

TWh

/yr)

Gone Green

Slow Progression

No Progression

Low Carbon Life

Historic

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Pe

ak G

as D

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and

(G

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)

Gone Green

Slow Progression

No Progression

Low Carbon Life

0%

20%

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100%

Imp

ort

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pe

nd

en

cy

UKCS Norway

Shale Biomethane

CBM Continent

LNG Import Generic

Import Dependency

History Future

UK Annual Gas Supply

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0%

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80%

100%

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Imp

ort

Dep

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ncy

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M/Y

History Future

Gone Green Slow Progression

• Steep decline of

conventional indigenous

production

• Norway and LNG fill the gap

0%

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100%

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History Future

How does the UK fare? – we have

plenty of gas import capacity

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• Diverse and high volumes of import capacity capability. Current

import capacity of around 150bcm/yr

• UKCS will continue to make a contribution for 20+ years

• New supplies from unconventional gas

• Storage capacity is relatively low but increasing

Future peak day import capacity

What is security of supply?

There are at least three broad senses of security of supply:

1. To ensure physical supplies to some group(s) of customers in

the event of some ‘shock’ to the gas market.

2. To ensure that appropriate ‘market signals’ and incentives

exist in the event of a ‘shock’, broadly that there are no

‘market failures’.

3. To reduce the likelihood of a ‘shock’ to the gas market

occurring and/or the impact of any such ‘shock’.

A ‘shock’ is some combination of gas supply disruption and gas

demand conditions. In this sense ‘shock’ could for example refer

to a prolonged period of cold weather.

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How does the UK fare? Market arrangements

• UK gas market is one of the most competitive in the world

• Large number of participants with in excess of 100 shippers

actively operational

• NBP is liquid with high churn rate of @15 and 40% of gas traded in Europe

• Ofgem introduced new Gas Emergency Arrangements from

Oct 2015 which will keep the market open for longer in the

event of a system stress

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How does the UK fare? Minimising impact of shocks

• Elements of both physical and price impacts of supply shocks

• Is the UK market sufficiently ‘insulated’ from price shocks?

• Key defence mechanisms against price shocks involve access to ‘domestic swing’ to alleviate the period of the

shock e.g. Storage and Demand-side response

• Most recent ‘shock’ occurred in March 2013 when the UK-Belgium Interconnector was shut down and system prices jumped to £1.20 therm (slide 12)

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Price shock - 22 March 2013

12

• IUK flows were disrupted due to a

technical problem for 8 hours

starting at 7.30am

• Immediate price response with a

20% increase

• Rapid response from other supply

sources, particularly Rough storage

which went into negative inventory

• Reinstatement of IUK mean system

went long and the TSO actioned

system sells

• Market responded well at the end

of a cold winter, however, if IUK

was off for longer impacts would

have been far greater

EU Storage capability – currently

nearly full

13

UK Use of storage

14

UK storage facilities – little hope of

new storage being built

15

• In September 2013, following a review of the need to intervene in

the gas market to support new storage, UK Government concluded:

o “Ministers considered several options for intervention including: placing obligations on gas companies to secure supplies; holding more gas in storage during winter; and providing subsidy for new storage facilities.”

o “However, the analysis showed that this would not be cost effective for the UK economy, with the cost of building new, subsidised storage, or withholding gas from the market, outweighing potential benefits to consumers.”

• This positions chimes with that recently set out by CEER in its

consultation “CEER Vision on the Regulatory Arrangements for the

Gas Storage Market”

o “Storage plays an important role in delivering security of supply for European consumers. CEER considers that well-functioning markets are best placed to value and deliver security of supply and that effective competition between different

sources of flexibility should deliver the most economic and efficient solution.”

UK Government position on

storage (1)

16

UK Government position on

storage (2)

• However, CEER does recognise that in certain cases, intervention

can be justified, but only in response to a “market failure”, noting

that:

o “Any intervention should have transparent rules around usage and the impact on market functioning should be understood and minimised. In addition, any

intervention must have an exit strategy and not prohibit the development of efficient wholesale markets.”

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Demand side response

• UK has implemented changes to the cash-out and customer

compensation arrangements in the run-up to and during a Gas

Deficit Emergency

• The new arrangements will be effective from 1st October 2015 and

the sharpening of shipper incentives are intended to encourage

improved DSR

• At this time there does not seem to be a great appetite for

customers to provide DSR services

• Industry is working on a ‘central DSR solution’ which will place the

TSO at the centre of the arrangements, however, again there is a

lack of certainty around volumes which might be offered by large

customers

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Future challenges (1)

• Declining indigenous reserves

o UKCS is declining, although forecast rate of decline is softening

o What volumes will be supplied from unconventional sources and

when?

• Carbon agenda

o Increasing role for gas-fired generation, but on a more

intermittent basis requiring greater flexibility in gas supply

• Increasing exposure to global market

o Greater volatility and globally driven prices?

o Future of oil-indexing – recent collapse in oil price?

o Impact of global unconventional gas resources

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Future challenges (2)

• Political focus on market outcomes

o EU driving change to market integration

oUK dissatisfied with levels of competition (Competition Review)

oMore government intervention...

• Increased financial regulation

o Impacts on liquidity

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Conclusions

• EU has been import dependent for decades o UK now also import dependent

• EU has significant levels of gas storage capacity o UK relatively low levels of storage

• EU implementing a plan of market liberalisation and interconnection o UK already liberalised and surplus import capacity

• EU concerned over security of supply, particularly in light of Ukraine

crisis

• In EU some ‘interesting’ solutions proposed eg single buyer for EU?

• UK less exposed, but made changes to emergency arrangements

• UK is physically secure, although we should not be complacent and

events happen!

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