The Impact Of Prolonged Shutdown At Rough Gas Storage Facility

British Gas is a subsidiary of Centrica. Centrica manages the Rough gas storage facility and recently announced a prolonged closure of the site. Read on for a deeper insight into what this means to wholesale gas prices, which will affect consumer energy bills.

Centrica has confirmed the Rough gas storage facility - the UK’s largest long range gas storage facility - has been closed until 3^rd August 2016 for further testing.

The site has been experiencing technical difficulties since last year, however, further tests have revealed additional problems with the wells storing gas. Following the closure, Centrica estimates that at least four of their wells (out of thirty) will be operational by November, which should make up to a third of its shortfall.

An enhanced testing programme of the wells is expected to be completed by March/April of 2017.

As a result, wholesale gas prices, which are already volatile, are now even more volatile. The impact is expected to affect customer’s energy bills, if not this year, then most certainly in 2017.

Why the expected energy price rise?

Because it happened just a few years back when it was reported that Britain nearly ran out of gas. According to Rob Hastings of The Crown Estate, the country was six hours away from running out of gas. 

Where Our Gas Comes From

Image courtesy: http://www.thisismoney.co.uk/money/bills/article-2297420/Gas-bills-rise-200-British-reserves-run-dry-36-HOURS.html

The UK’s other main source of gas is imports of liquefied natural gas (LGN) with the largest source being Qatar. Experts believed that the UK marginally escaped a major gas shortage in 2013 because a ship from Qatar arrived just before supplies run dry.

Shipping in LNG from overseas is the most expensive gas supply we have. It can take a ship two-weeks at sea before it reaches onshore storage facilities.

How our gas infrastructure works

The UK has a diverse range of methods to get gas into storage facilities. It’s drawn from major pipelines connected to Norway, Belgium, and the Netherlands. There’s also Liquefied Natural Gas (LNG) imported via tankers with the largest supplier coming from Qatar.

Injections (when gas is put into storage) happen in the summer months when prices are lower due to demand being less. Demand increases in the winter months and wholesale gas prices rise as a result. 

Injections of gas go into storage facilities in the summer months and are subsequently withdrawn in winter months when demand is higher.

There are eight major gas storage facilities in the UK, each located in the South.

1.       Hatfield Moor

2.       Hornsea

3.       Aldborough

4.       Rough

5.       Humbly Grove

6.       Avonmouth

7.       Hole House Farm

8.       Holford

These are categorised as:

·         Short range – The only short range site in the UK is Avonmouth. This is an onshore site storing liquefied gas. Gas here can be condensed from the National Transmission system and later when it’s needed, it can be revaporised to be delivered back into the National Transmission System.

·         Medium range – These sites are commercially operated. The injection/withdrawal times are shorter and they can react quickly to a surge in demand.

·         Long range – Rough is the UK’s only long range gas storage facility. Gas is injected into it in the summer months where it’s stored until it’s needed in the winter months when demand rises.

Back in March 2013 when gas supplies ran dangerously low, the market reacted with a 7% increase in wholesale gas prices from the period of May 2013 to April 2014. Fifty percent of that increase happened in March when Britain was in the brink of harsh cold weather putting significant demand on gas supplies.

Understanding Wholesale Gas Prices and its Impact on your Energy Bill

According to uSwitch.com, “45% of the average energy bill is made up of the cost of wholesale gas, supply costs and profit margins”.

Energy suppliers need to pay for the gas supply they’ll be providing in advance of it being used. They absorb the higher wholesale gas prices and later pass that increase onto customers to protect their profit margins and operational costs.

Because energy firms can buy gas wholesale sometimes years in advance, increases and decreases don’t happen immediately. They can take a few winters to become apparent on your energy bill.

Where the real issue lies is when the energy supplier is facing higher supply costs to buy the gas wholesale and business customers in particular who generally use more and pay more on commercial tariffs find themselves having to renew contracts often bringing 12-month contractual agreements at a higher cost.

It should be noted though that under Ofgem rules, suppliers are required to provide customers with 30-days’ notice of price changes. Even if you are under contract with your supplier, you can switch provider during that 30-day window to a cheaper supplier.

The cheaper supplier will be the firm with more gas paid for in advance, but because volumes change, so too will the best energy supplier prices for gas change.

Since the price increases seen in 2013 to energy prices, wholesale prices have dropped significantly. Over the past few years, there has been a steady decrease to the prices.

A report by Reuters back at the start of July indicated that the gas prices were declining due to improved supply and less demand.

The recent announcement from Centrica about the prolonged closure of the Rough storage facility puts doubt on the demise of wholesale prices as there’s no longer certainty in the gas market that the UK has sufficient storage capacity as the Rough Reservoir is the largest gas storage facility the UK has.

This is a significant market change that’s already caused a rise in wholesale gas prices. It’s only a matter of time before energy suppliers pass the operational increases onto customers.

Should supply be expected to face a crisis, the only storage facilities will be short and medium range gas storage centres. That could see more imports of LGN, which is the most expensive gas supply to the UK. If that does happen, we can expect to see a significant rise to wholesale gas prices, which will eventually see consumer energy prices rise by a considerable amount.