Department of Energy and Climate Change
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Fallon: no new subsidy needed for gas storage - decision saves bill payers up to £750 million

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

  • UK gas supply is resilient with supplies outstripping demand
  • Government and Ofgem are already taking action to boost resilience
  • Study finds no case for Government to subsidise investment in new storage

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:

  • Two storage facilities were opened at Aldbrough, Yorkshire in November 2012, and Holford, Cheshire in February 2013.

  • Two more facilities are under construction at Stublach and Hill Top Farm, both in Cheshire, and will be completed in early 2014.

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

  1. The decision was informed by independent analysis from Redpoint. Redpoint estimate that the direct support for a new seasonal storage facility over 10 years would be £750m under a semi regulated support regime.
  2. Gas security policy framework
  3. The UK has the most liquid and one of the largest gas markets in Europe, with Britain’s gas supply infrastructure able to deliver more than twice the daily required amount of gas, (around 700mcm/day) when compared to average daily demand in the winter of 2012/3 (at 290mcm/day).
  4. UK import infrastructure capacity has increased 5-fold in the past decade, with gas supplied to the UK from a diverse range of sources, with around 50% from UK gas fields, a third from Norwegian and EU pipeline imports, 20% from LNG imports from global markets and 7% from gas storage.
  5. *There are a further 12 gas storage projects in the pipeline, that have passed through the planning process and are waiting for market signals to begin construction. Aldbrough II (SEE/Statoil); Baird (Centrica / Perenco); Caythorpe (Centrica); Deborah (ENI); Esmond Gordon (Encore Oil); Hatfield West (Scottish Power); Gateway Storage (Stag Energy); Islandmagee/Larne (Infrastrata/Mutual Energy); King Street (King Street Energy); Portland (Portland Gas Ltd); Saltfleetby (Wingaz/Gazprom); Whitehill (E.ON).
  6. The review has been conducted in response to an Ofgem report to DECC in November 2012
  7. DECC Gas Generation Strategy
  8. Gas will continue to be a crucial part of our energy mix to the 2030s. It is a reliable and flexible fuel for electricity and modelling in the Gas Generation Strategy suggests that we will need significant gas generation capacity by 2030.
  9. In the longer term, gas has the potential to provide significant amounts of low-carbon electricity when fitted with Carbon Capture and Storage (CCS), and natural gas will supply the majority of our heat demand into the 2030s.

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