Saturday, January 14, 2006

Gas Speech

I am always of two minds as to whether or not to write a speech. For the Energy Security debate on Thursday, I wrote a speech, but was unable to use it. Hence here it is.
We are looking at the issue of Security of Energy Supply. Energy Supply is critical to the country. If we don’t have enough energy it is like driving off a cliff.

The government’s policy on this has been as if they are driving along a cliff, wearing a blindfold and they throw away the steering wheel. Responsibility for the different elements of energy security has been divided between the DTI, Ofgem, National Grid and the market. The market does have a role, but government has a role that it has abdicated.

I have been working with various industry and energy specialists who comprise the Independent Energy Scrutiny Panel to review the assumptions behind government calculations.

One key aspect of Energy Security is the interface between Gas supply and Electricity Supply.

The reason why Gas is used for electricity generation is that it is energy efficient. Something like 55% of the energy input goes into electricity because there are two generators, one a turbine and the other a condenser system. Normal condensers manage at about 33%. The CCGT (Combined Cycle Gas Turbine) comes close to the optimum efficiency of a carnot cycle heat engine which is linked to the ratios of the absolute temperatures of the cold and hot parts of the engine.

Most gas during winter is used for heating. The contracts that people are on are generally fixed price. Hence there is no sensitivity to the spot price. The vast majority of heating gas is supplied through the Local Delivery Zones.

The consumption through LDZs is quite variable and linked primarily to temperature. On Christmas eve 209 mcm was supplied through the LDZs. The spot price was 1.0596 p/kWh. Less than a week later on 29th Jan 333 mcm was supplied through the LDZs. The spot price was 3.592 p/kWh.

The vast majority of demand is not sensitive to the spot price. Hence the spot price moves massively when the market is tight. The market is tight because of over optimistic assumptions.

Heating gas is essential for health reasons. Hence if the demand for heating gas goes up beyond what can be supplied we have to cut off industrial users.

National Grid’s figures from December gave a market leeway for electricity generation of 21%, but at the time 30% of electricity is used for gas. Hence if we had to shut off the gas generators we would end up with either brownouts or rolling blackouts.

Our first real problem is overoptimistic assumptions.

Every year a Winter Outlook report for Gas is prepared by National Grid. One of the difficulties is that the initial assumptions were over optimistic. The National Grid recognised this and reviewed their assumptions on 22nd December.

There are three main sources of gas. One is the North Sea (this includes imports from Norway) another is the Interconnector from Belgium and the third is the gasification plant at the Isle of Grain.

The table I am referring to is uses figures from the 7 days Tuesday 3rd Jan to Monday 9th Jan.

Original Review 7 day average
Max Ave
Beach 327 303 303 293
IOG 17 13 13 3
Interconnector 48 42 30 29
Total 358 346 325

It is important to note that on each of those days gas was taken from storage. Although we are not talking about massive demand they are not low demand days.
This is a shortfall of 21 mcm/d from the reviewed figures.

The Review of 22nd December accepted that the UK does not have enough stored gas to meet firm demand for the first time.

So we start out with overoptimistic assumptions.

The next problem is perverse market reaction. We do not have enough stored gas so we should be trying to store gas whenever possible. However, what actually happens is that stored gas is used before people increase imports.

There is a lot said about “liberalising the European Markets”. This is a red herring. In the past week on colder days we have been able to import 34 mcm/d. On the cold Thursday we imported 30 mcm/d. The problem is simple.

When it is warmer we should be still importing and injecting into storage. Furthermore we should be importing gas in preference to taking it from storage.

On Wednesday last week we imported 19 mcm and took 30 mcm from storage. If we can import 34 mcm then that is what should have happened. We would then have only taken 15 mcm from storage.

Storage as at yesterday morning at 6am had a total of 34 TWh of gas in it. 26 TWh in Long term and the rest in Short and Medium.

There are limits to the rate at which gas can be put in or taken out of storage. That affects how much gas the country can consume on any one day. If we hit certain limits that depend entirely on weather then we start having to cut off the gas generators with the knock on effects.

This brings me to Exercise Ostrich. National Grid ran an exercise about cutting off gas supplies because of a shortage of gas supply in September. It was called “Exercise Ostrich” – I wonder why?

We are where we are. The country is on a knife edge. If there is a patch of relatively cold weather we could end up with rolling blackouts.

The same problems exist for next winter as Milford Haven does not come on stream until much later.

It is not sufficient for the government minister to pray for warm weather. There is a responsibility for the government to ensure that we have security of gas supply. Although there is a short term cost to requiring that gas is imported rather than taken from storage, this reduces the spot price on the market and therefore, reduces the long term price of gas.

We also need contingency plans for a cold snap on how to minimise the effects of insufficiency of supply.

In the medium to long term we need to look at other demand reduction measures, but on this issue the government have abdicated their responsibility.


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