In the UK, domestic and industrial appliances are designed to operate within a certain gas quality specification range – partly determined by the mix of various hydrocarbon gases that make up natural gas. Other countries also have their own specifications, but there is a longer history of cross border trade in Europe as a result of its dependence on imports and greater levels of interconnection. Therefore the gas specifications are more compatible with each other than with the UK.
If the quality falls outside the UK’s specification range, National Grid, the operator of the UK National Transmission System, is unable to accept gas. This means that gas that can be consumed in markets such as France, Belgium, the Netherlands and Germany, cannot be imported into the UK.
If this were to happen at a time when the UK gas supply-demand was tight, for example during the recent period of inclement weather (UK Winter 2010), it could result in price spikes and/or interruptions in the supply to the UK market, even though there might be plentiful supply elsewhere in Europe.
Since the publication of Ofgem’s (the UK’s energy regulator) latest “Project Discovery – Energy Market Scenarios” analysis, the EU Commission has launched a study to look at the costs and benefits of harmonising gas quality specifications across the EU, however this study is not expected to yield results in time for the UK to make a timely decision on its own specification.
To date, Fluxys, the Belgian network operator, has been able to ensure that UK specification gas has been able to reach the entry point for the Interconnector. However, as sources of supply and flows of gas within the European market have changed, it is becoming more difficult for Fluxys to ensure UK spec gas reaches the Interconnector entry point at Zeebrugge.
What you need to know
Gas prices in the UK are likely to rise as the supply demand balance changes. These prices rises will ultimately be reflected in consumers’ gas prices, dependent on the contract they have with suppliers. If other sources of supply are unable to respond to these price rises, or demand does not fall as a result of fuel switching or demand reduction, National Grid may be required to take action to ensure the physical balance of the system, e.g. interrupting supply.
GM&T, along with colleagues from Interconnector UK, Fluxys and GTS (Dutch network operator) have been working closely to solve this issue over the last few years. GM&T has met several times with Ofgem on this matter, and has kept the Department of Energy & Climate Change informed.
GM&T has been working with other companies to gain a consensus on the best way forward for the UK gas industry.
It is unlikely that the market can deliver a solution since investments in gas treatment plants require up-front capital investment; recovery of such investments are highly uncertain through free market tariffs, making such investments very risky.
Such unpredictable and sporadic price spikes are however not sufficient to justify capital-intensive long-term gas treatment plant investments. The structure of the market and the uncertainty surrounding the timing of the problem mean that it is highly unlikely that the market will provide a timely solution. Even if gas suppliers were willing to invest in gas quality treatment facilities, Ofgem would need to put in place a regulatory framework so companies would know the terms under which they would invest.
GM&T believes the best solution would be a regulated approach which would enable National Grid to invest in gas treatment facilities and provide a service to gas companies under regulated tariffs. In the event that treatment facilities were used less than forecast, National Grid would be allowed to recover any stranded costs from consumers. Such a cost recovery approach can be regarded as the insurance premium end users pay to protect them from the impacts of price spikes. By targeting costs specifically at end users the approach ensures that those who benefit from such insurance, pay for it.
Contacts for further information
Alex Barnes, Head of Regulatory Affairs