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Bill payers will not be asked to subsidise increased investment in new gas storage facilities, Energy Minister, Michael Fallon confirmed today.

Bill payers will not be asked to subsidise increased investment in new gas storage facilities, Energy Minister, Michael Fallon confirmed today, saving bill payers subsidy costs which over 10 years could have amounted to £750 million.

Independent analysis, commissioned by Ministers, shows the UK gas market continuing to function well in attracting gas from a range of sources to meet current and future demand, with gas storage providing only a small proportion of UK total supply (7% in 2012).

The UK has capacity to deliver twice the amount of gas required in a normal winter, and has coped well with extreme winter conditions, such as the extended cold snap this March, and the coldest December since records began in 2010.

Gas storage, while important, only provides a small proportion of UK total supply, and does so in combination with our diverse range of alternative supply infrastructure such as UK production, and pipeline or LNG imports.

Storage facilities cycle their capacity – injecting and withdrawing gas as required by the market. Therefore, unless restrictions on their use are put in place, storage facilities cannot be relied upon to have gas when needed by the market. However, they are an important source of flexibility, helping the gas market balance when demand is high.

Government takes gas security of supply seriously. Ministers therefore considered whether intervening in the gas market to encourage more gas storage could improve security of supply without adding disproportionate costs to energy bills.

The analysis, by Redpoint, concluded that the costs of intervention would far outweigh any benefit to security of supply, meaning that Government and consumers would be subsidising investment that large energy companies could pay for themselves.

Energy Minister Michael Fallon said:

“This decision will save bill payers around £750 million over 10 years. Security of supply can be delivered more cheaply by the market and action is already being taken to ensure that it provides sufficient energy in the short and medium term.

“The Government is committed to doing all it can to help consumers reduce energy bills, and there is no benefit in further expensive subsidies when the market is working. Gas supplies worldwide are increasing, and it is increasingly easy to import additional supplies to the UK if required.

“It is up to industry to get on and invest in building gas storage, and they are doing so. Two gas storage facilities have recently been built and two more are under construction.”

Industry is already investing in building new gas storage facilities:

Once these facilities are complete, the capacity of UK storage facilities to meet peak demand will have doubled since 2000.

There are a further 12 gas storage projects in the pipeline that have passed through the planning process and are waiting for the right market signal to begin construction*.

Action has already been taken by Government, Ofgem and National Grid to boost security of supply from 2015, with plans to extend short-term solutions to contract in additional gas capacity on demand.

Ofgem are also sharpening incentives for wholesale gas suppliers to secure their gas supply, and there is now a better functioning market in Europe, making it easier to move gas to where supply is tightest.

A Capacity Market will be run in 2014 to incentivise investment in new gas plant and other flexible capacity to boost electricity supplies, from the winter of 2018/19. Participants will bid to provide new capacity at a fixed annual fee. In exchange, they will be obliged to have that capacity ready for when it is needed e.g. in winter when demand is highest.

Put together, these measures will mean the public can expect to have reliable supplies of electricity and gas at minimum cost.

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.

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.

Notes for Editors