Britain’s energy system is drowning in natural gas. There are so many things in this country that so far, at least, no one is sure what to do with it.
If at this point you’re wondering if I’m crazy or what you read an article a year or two ago: no.
This is mid-May 2022; the war in Ukraine continues; Europe is desperately trying to give up Russian natural gas, and electricity bills in the UK (including, yes, gas bills) are at record levels.
And I promise I haven’t lost my marbles. The UK is indeed experiencing an almost unprecedented oversaturation with natural gas.
This probably still sounds implausible, so consider the spot price for gas in the wholesale markets right now as proof. We are talking here about the so-called “day ahead” prices: the price you will pay for natural gas if you want it delivered tomorrow.
The main northern European price (TTF, as you know) fell slightly after the Russian invasion of Ukraine, but it is still much higher than before the invasion, and more than twice last summer.
Now look at the UK’s main wholesale gas price, NBP or “National Balance Sheet” to give it a technical name. It fell from about 285 retirement pensions in late March to just 38 retirement pensions a few days ago. At the time of writing, it had jumped to 100 p / term, but was still much lower than before the Russian invasion. In fact, these wholesale prices are at their lowest in almost 18 months.
What’s going on here? Why are prices in the UK so low and on the other side of the channel they remain so high?
To understand the answer, you need to remember that energy markets are largely a product of physical infrastructure. It is necessary not only to extract natural gas from the ground, but also to build pipelines so that it enters people’s homes. When it comes to gas, geography matters; steel pipes matter.
Much of Europe, as we all know, is heavily dependent on Russian gas, much of which comes through pipelines through Eastern Europe, the Baltic and the Black Sea to Central Europe. Germany, in particular, is heavily dependent on this gas flow.
And, as you also know, everyone in Europe is doing everything possible to reduce dependence on Russian gas.
Good news … and not very much
Now Europe could potentially get more gas from North Africa and some also from Azerbaijan, which is building new pipelines to the continent. It cannot get much more gas from the North Sea, nor from Norway, nor from the UK – largely because they (primarily Norway) are already pumping out as much as they can physically now.
This leaves another option: delivering gas through the tanker from the far edge. The good news is that there is potentially plenty of gas available, especially from the U.S., whose shale fields are rapidly producing methane.
But now we face another problem with physical infrastructure: even if America had unlimited gas supplies and an unlimited number of tankers to transport liquefied natural gas to Europe, there are not enough terminals through which we can get it. In fact it’s a little more subtle than that: it lacks LNG’s terminals the right places.
The Iberian Peninsula actually has a lot of LNG capacity, but the problem is that gas from Spain to Germany is really very difficult. There are three major terminals in the UK. There are several terminals in France. But there is no LNG terminal in Germany.
In recent months, a huge amount of LNG has been diverted to Europe (attracted by the high price of gas), but ships do not have enough space to supply gas. This brings us back to the UK, where in recent weeks large amounts of LNG have leaked from tankers through regasification facilities and into the gas network. The two gas pipelines connecting the UK with the rest of Europe are now operating at full capacity (indeed, they have recently been running 20 per cent above capacity).
The problem, however, is that these pipes just aren’t big enough to get all the gas coming into the UK through these LNG tankers, into continental Europe. And because we do not have many internal storage facilities in this country, and because it is quite warm now, and most of our boilers are turned off, there is no more gas.
There were some strange consequences. One is that with all this cheap gas for the day ahead rushing around, British power generators are having fun, including their gas-fired power plants and producing as much electricity as they can.
As a result, the UK, which normally has to rely on imports of electricity from the continent, has temporarily become a major exporter of electricity, sending electricity at speeds of more than four gigawatts to continental Europe in recent days.
Another result is that not only are natural gas prices very low, but so are wholesale electricity prices, which are now lower in this country than in most other parts of Europe.
Interesting footnote: if the UK had more internal storage (instead of ravaging our largest underground gas tank a few years ago), we could put more of that cheap gas aside before what could be a horrible winter. Instead, we burn it at power plants. On the other hand, if we had a lot of storage, it would be an additional demand for gas, which could mean that there would be no price anomalies.
Anyway, at this point you may be wondering: how soon will this be reflected in my account? Is the cost of living crisis over?
I fear that the answer in both cases is depressing. After all, although wholesale gas and electricity prices for the next day are indeed at their lowest, domestic energy suppliers, with whom we all have accounts, say they are instead contracting for months or even years. ahead.
And if you look at the price of gas a year ahead, it is almost at the same level as in northern Europe, and still much higher than before the invasion. In other words, even though the UK is drowning in gas, the markets assume we won’t in a few months, and as a result, consumers are getting almost no relief from these very low prices.
One of the reasons these markets may be right is that many Nordic countries are moving very fast towards installing LNG capacity.
According to Mike Fullwood of the Oxford Institute for Energy Research, building a full-scale gas terminal, such as the three we have in the UK, takes several years, there is a temporary solution: special tankers known as floating storages (FSRU).
The Dutch are already putting several of them into operation, and Germany plans to launch one in the winter. So the cold months are coming, the market may indeed be right.
These very low prices can be just a temporary anomaly.
Despite this, there is something surreal in the situation. If only for a short period, in an era of natural gas shortages, record natural gas prices, the UK suddenly feels oversaturated with natural gas.