UK Energy Part 1: The Winter Outlook
Two interesting reports have been published recently, Energy Trends from the DTI updated with 2005 Quarter 2 data and Winter Outlook Report 2005/06 from Ofgem. These two reports contain a wealth of data on the UK energy market past, present and looking forward to the winter. However I am less impressed with the analysis and conclusions drawn from the data. In part one of this article I discuss the Winter Outlook Report, part two discusses the Energy Trends report here: UK Energy Part 2: 2005 Quarter 2 Update.
In August I wrote about the UK gas and electricity crisis we could expect this winter based on data from the May consultation on winter 2005/06 from Ofgem. The Outlook report is the result of that consultation and aims to show how the security of supply of the UK gas and electricity networks is maintained even in cold winters. So how are we looking?
Not too good it seems although the report doesn’t go so far as to spell that out. Here are three points which raise concern (in addition to the concerns of the earlier article):
- The maximum natural gas beach forecast for winter 2005/06 has been reduced from the optimistic figure of 336 million cubic metres per day to 327 mcm/d. This is now lower than the 331 mcm/d of winter 2004/05 though it hasn’t reduced as much as annual extraction has so may still be optimistic. Remember last winter was unusually warm yet even 331 mcm/d still resulted in record supply interruptions.
- It is assumed that 13 mcm/d will be available from the new Isle of Grain LNG terminal, rising to 17 mcm/d (maximum capacity of the terminal) during the very coldest days. I think this is extremely optimistic since the terminal isn’t even operational yet and there are unconfirmed reports that early deliveries involved in commissioning have been diverted to the US. This diversion of LNG tankers is a very real threat highlighted in the report.
- It is also assumed that 42 mcm/d will be available through the continental Interconnector. I think this is extremely optimistic. Last winter the capacity of the Interconnector was 25 mcm/d but despite acute gas shortage and extremely high prices in the UK actual imports fell short of name plate capacity when they were most needed. This was limited by market dynamics not technical capacity so expecting significantly increased volumes from the continent seems unreasonable especially since some LNG deliveries destined for Europe are likely to be redirected to the US, the UK has itself exported less gas to continental storage over the summer and cold weather in the UK is likely to be matched by cold weather on the continent.
These three points raise doubts over gas supply. I think there are also doubts concerning how demand is planned to be managed.
Virtually all the flexibility in gas demand comes from combined cycle gas turbines (CCGT) which were responsible for 88% of last years record demand response. Last winters demand response was 351 mcm in total. The forecast for an average winter (its definition warmer now than in the past) this year is 100 mcm but remember that assumes the beach gas, LNG imports and Interconnector operating as described above. It doesn’t take a very large deviation from the (in my opinion very optimistic) import expectations for the gas shortage to increase dramatically. A 1 in 10 cold winter which certainly isn’t beyond the realms of possibility would require 2200 mcm demand response of which apparently only 1300 mcm could be met by CCGT. Again this assumes optimistic imports which given a 1 in 10 cold winter over continental Europe seem even more implausible.
Obviously the side effect of reducing gas demand in this way is that electricity supply is also lost. Another assumption of this report shows 100% availability of the 2GW electricity interconnect with France. This import is again subject to market dynamics as gas imports are, the market isn’t perfect. It is possible that even with clear economic signals to import both gas and electricity a higher emphasis on security of supply (due to less privatisation) on the continent could result in reduced imports. The assumptions continue with the expectation that 2.1GW of mothballed (non-gas) generating capacity will be brought on-line in event of gas shortage. For this to happen there needs to be timely market signals to justify the expense of bringing the infrastructure back into service. Timely market signals are not something the weather is renowned for!
In conclusion I remain unconvinced by the argument that security of supply can be maintained adequately. Although this report does show supplies to be adequate it makes in my opinion some extremely optimistic assumptions about gas and electricity imports, relying on untested infrastructure and untested magnitudes and similarly optimistic assumptions on CCGT electricity generation substitution.