Tuesday 6 March 2018

Market Solutions to Severe Weather Problems

No need to remind anyone that last week saw some pretty cold weather.  And as anyone paying attention knows, it's gas (for heating) that sees us through (1); and the days when we were self-sufficient in natural gas ended in 2004.   For whatever reason, successive governments have generally (2) taken a 'market' approach to gas (unlike electricity) and so we rely on price signals arising from an effective, flexible and competitive wholesale market to allocate scare resources in the most efficient manner, as the text-book would suggest (3).

And so it came to pass last week:  demand rocketed;  spot prices all across Europe rose strongly in consequence;  market players threw everything they had into these high prices (including some large industrial gas users, who sold gas back to the Grid); and we got by.  As a demonstration of efficient markets in operation, this one was pretty good.  It's all the more impressive when you know that (a) last year 'Rough', the UK's only really big gas storage facility put up the shutters for the last time; and (b) some of our usual sources of gas had some unfortunately-timed difficulties just when it mattered.

But it was a relatively close thing.  The energy minister Claire Perry was asked if the government might be re-considering its 'brave' decision not to give public financial support for a new gas storage facility to replace Rough  -  her predecessors spurned Centrica's bid for a big hand-out, as we noted several years ago  -  and she gave it short shrift again last week.  That's quite a contrast with the electricty sector, where large amounts of cash are spent in retainers for generators guaranteeing winter capacity - the 'Capacity Market'. So: 'market solution' it remains.  A good job the global LNG market is awash with supply just now ...

So:  did I just write "market players threw everything they had ..." ?   Yup.  How, then, do we account for this?
Source: IUK
That fishy shape is the graph of gas imports (blue line) across IUK, the most important gas interconnector between here and continental Europe.  As we'd expect (the UK being a net importer and winter being peak gas demand), it was importing at close to full capacity through the first weeks of February.  But look what happens just when the coldest weather strikes (27th-28th last week) - virtually nothing.  Was IUK inoperable?  Nope, fully open for business throughout.  Were spot prices higher in the continent than in the UK?  Again, nope.  So - why did imports only pick up again at the weekend - after the Grid had been forced to issue a system warning, and start buying back gas as mentioned above to maintain pressure (thereby pushing UK prices even higher)?  Might it be a re-run of *problems* that the EC was meant to have been fixed years ago (see second link above), when continental authorities were found to have been over-riding market-based decisions in the gas industry?   Surely not!  After all, the EU is a market of free movement of goods and services ...

Nice to know who your friends are.


(1) ... and makes a nonsense of the idea you'll read here and there, that we could 'decarbonise' completely, and that we don't need gas at all.
(2)  There is of course the little story of Mr Eggar and his *touch on the tiller* we've told before: it's how we got the IUK in the first place.
(3)  We've also recounted several times how the UK LNG importing sector was rebuilt in the 2000's by the private sector, to a capacity that completely replaces our North Sea gas production - and all with no goverment intervention, direction nor public money of any kind.



dearieme said...

Would it be cheaper to subsidise a replacement for Rough, or just to nuke a few continental capitals?

Nick Drew said...

Reminds me of when I was a staff officer; whenever we were convened around a table to come up with a plan of action for some strategic endeavour, it was usual for someone to say

Phase 1 - bomb Paris ...

old habits die hard

david morris said...

So what you're saying is

The EU attempted to turn the energy screw on the UK ?

Why hasn't this had wider publicity ?

Anonymous said...

I had no gas central heating at all for three days last weeks. Wednesday, Thursday, Friday. Due to low gas pressure, my boiler would not light. We froze our nuts off!

Sounds to me that supply was deliberately severely restricted in an attempt to push up prices. A pox on these gas suppliers!

Nick Drew said...

David - no: most unlikely, and there would be much worse they "could" do. Simply pointing out that talk of the "free EU market" requires qualification, even day-to-day.

Nick Drew said...

Anon - would you mind telling us what area you live in?

I'm pretty surprised (& shocked) to hear that - any detailed explanation (e.g.local explosion / mains rupture)?

Your pox-curse on suppliers may be fair on a number of grounds, but not deliberate withholding. The suppliers just love selling into a wholesale market of >£3/therm (usual winter price on sixth of that), and pump whatever they can

Electro-Kevin said...

Anon @ 7.20 - Are you sure it wasn't your condenser pipe frozen ? When a kettle of hot water didn't work I just sawed mine off. There is a tap under the boiler to restore pressure (water I think.)

Steven_L said...

When you say 'continental authorities' do you 'the French'?

I was looking at ETF's the other day. Has anyone else noticed that all SG's 'Lyxor' EFT are virtually identical? It doesn't matter whether you buy a Russia, an India, a Brazil or a Malaysia ETF. They are all stuffed full of the same dozen or so French multinationals.

Did the FCA authorised this blatant mis-selling or is this another example of 'pass-porting' working against the consumer?

Nick Drew said...

The French? Surely not???

BTW, the Dutch (who are notorious for it) interrupted exports to Germany last week. Any German gas importer will tell you - the Russians are more reliable as suppliers than the Dutch

('politically', that is, i.e. willingness to keep pumping even when it's cold & in short supply back at home - they need the hard currency! Not so reliable technically, though: on the quiet, there are often technical hitches in Russian supplies. It's just that all the continental importers expect small tech glitches and ensure they have enough storage to overcome them. That's no big deal: gas pipeline issues are generally fixed quite quickly. Everyone is too polite to talk about it.)

Anonymous said...

I guess the Dutch need to keep those greenhouses and factory 'dairies' going.

Anonymous said...

Surely it was Rough coming back on and Import through Bacton that saved the day.

Lng stocks look pretty well down!

Nick Drew said...

Anon - more or less everything seemed to struggle back to its feet as March began

I have just read UK spot price peaked at 535p/therm on 1 March. If any deal was actually transacted at that price, it's quite something - & you could see why people were exerting themselves to supply. It would be interestng to know what INEOS were paid to release contract gas back to the Grid

rwendland said...

I see that just a week ago Germany granted Nord Stream 2 a construction and operation permit. I guess that will stop Germany having to worry about the Dutch or Ukraine halting supplies?

If the Nord Stream 2 has the same capacity as 1, it is equiv to about 60% of UK consumption if I have my sums right. Will it in due course make UK supplies any more secure as our own production drops down from 35%?