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.

ND

(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.