Thursday, 5 September 2013

Glory Be! A Subsidy Scam Rejected

Miserable beggars
The Telegraph reports that Michael Fallon, the all-purpose safe-pair-of-hands-around-Whitehall (with energy as one of his many responsibilities) has rejected Centrica's sustained lobbying to have a monster sub bunged their way for building a new gas storage facility.  Centrica, a company I admire in many regards, has form on this (follow the Centrica tag below if you're interested) and its propensity for putting out the begging-bowl is vexatious.  However, 
"ministers have rejected calls to subsidise new gas storage facilities, insisting Britain has plentiful gas supplies and that subsidies would be an expensive waste of bill-payers’ money."
Good man, Fallon ! This has been a lengthy saga - it dates from 3 years ago and we wrote about it then - and should have been rejected out of hand ab initio.  But exactly the right outcome has eventually resulted.  It's against the run of play because DECC is busily destroying the electricity market with ever more complex and interventionist subsidy schemes in that sector: but we should be grateful for small mercies.

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In case anyone here has fallen for the Centrica's security of supply pleading - always the last refuge of the scoundrel - let me rehearse the facts.  The UK has quite a bit less gas storage capacity (as measured in number of days' supply) than some European countries.  But there's an excellent reason: we have still-extensive (although declining steadily) and fairly flexible indigenous production, whereas the countries regularly cited as having more storage, don't.  France has almost no indigenous production; German and Italy very little; Belgium absolutely none at all.  They are also big importers from, err, Russia which, whilst a very reliable supplier per se, is prone to letting the side down once in a blue moon when it punishes the Ukraine for stealing gas, and interruptions to western supplies are collateral damage.

In fact, 'strategic' storage (for countering threats to security of supply) has many of the characteristics of a red herring.  The raison d'etre of the UK's large storage facility (there is only one very large such facility) is for seasonal use, based on the fact that demand, and hence price, is reliably lower in the summer than the winter.  If the price differential is sufficiently great, it makes sense to store summer surpluses for half a year.

So how do we handle seasonality with UK production declining ?  Easy: we let the market determine whether it's more efficient to build hugely expensive offshore storage facilities (our onshore storage potential is for small, short-cycle, non-strategic facilities, of which we have plenty with more on the way, completely unsubsidised because the economics make good  commercial sense) - or to solve the seasonality (and maybe also security) in other ways.  And lo ! - it turns out to be cheaper to run a combination of (a) not producing so much in summer, and (b) exporting our summer surpluses and buy them back in winter !  How so ?  Because continental European seasonal storage capacity is in significant surplus (they over-provided it, for 'strategic' reasons of course, haha) and so we are, in effect, simply using theirs. It's cheaper that way.

And the strategic aspect ?  Seeing the easily-predicted decline in UK production half a decade before it started, the market concluded there was money to be made building new import facilities.  Which it did - massive new pipelines from Norway, and even more capacious new LNG terminals which, taken together, more than replace 100% of our own North Sea gas production capacity.  Even better, two bi-directional pipelines were built connecting the UK to the continent, allowing the seasonal trick to be played in large quantities.  (I have recounted before how the first of these was initiated - a great tale and an important lesson in practical government.)

So now we have the seasonal requirement completely cracked, and (thus far) a very fine solution to the strategic issue via diversification of sources of supply.  The key point is: no government money was involved.  If something makes commercial sense, it doesn't need a subsidy.  And if there is no commercial sense, one should be very suspicious before proceeding at all.

 Is everything in the garden rosy ?  Not entirely.  To start with, when the seasonal gas-flow trick started, it occasionally ran into problems when the French imposed arbitrary dirigiste regulatory requirements on their gas suppliers to buy every molecule of gas available in winter.  Our protectionist friend Budgie always avers that this is exactly what Johnny Foreigner will always do and we should plan accordingly.  Pleasingly, as I've said before, in this case sanity has been restored by beating up the French under EU free-market law and it all works satisfactorily now.

The bigger problem of course, is that the lion's share of our LNG imports comes from Qatar, which is awfully near to, errr, trouble ... but that's not going to be solved by another week's worth of UK gas storage capacity, and is a subject for another time. 



CityUnslicker said...

masterful post ND.

Nick Drew said...

ta: glad someone liked it !

Timbo614 said...

So last years panics by the press about only 1-2 days supply left, were just that? A good story?

Oh! Nice article! Makes it nice and cosy in here :)

Nick Drew said...

The "only 1-2 days supply" panic of Feb or March (I forget which) was indeed a load of hyper-ventilating nonsense

(I particularly enjoyed the embellishment: "there is only 1-2 day's worth in the offshore storage, but the LNG tanks are full ! this is wicked, why is the LNG being held back ?!" - as if they had a clue as to the logical sequence for utilising inventory)

UK plc (gas division) came through a very difficult winter period with flying colours

everything worked more or less as it should

the government was not involved ...

Weekend Yachtsman said...

Every argument he put forward for rejecting this idea would apply equally to bloody windmills.

So how about it, Mr. Fallon? Make yourself a hero AND get a tory majority at the next election...what's not to like?