Gas Security of Supply Background Energy security has quite rightly featured as one element of the so-called energy trilemma describing the multiple and interconnected challenges of sustainability, affordability and security. At a consumer level there is great awareness of affordability, and there is general acceptance of the need to decarbonise primary energy consumption at reasonable cost, but what of the awareness of energy security? To quote a much used phrase how much to keep the lights on? There is necessary tension between the three axes of the trilemma. Energy policies are expected to increase unit prices by 18% for gas and 33% for electricity by 2020, offset largely (forecast) with efficiency savings and non-commodity elements that will see combined energy bills for domestic customers rising by only 1%. This is a tough challenge. In the non-domestic sector the forecast net burden is 26% burden by 2020. Renewable energy supplies themselves are seen as key elements of energy security, but the UK s primary response in this sector is to build wind generation capacity, itself at the whim of prevailing winds. Security of supply manifests itself in two ways: (i) through supply failure, and (ii) network failure. Although supply constraints are frequent in the water sector (hose-pipe bans) it is a long time since the widespread electricity blackouts of the early 1970s, however electricity unserved are words back on the political agenda as coal, oil and ageing nuclear plant face closure by 2020. Equally, with only infrequent and temporary interruption of network infrastructure, perhaps there is a sense of complacency around the forward availability of pipes, wires and storage facilities to deliver energy to homes and commerce. This paper presents a policy position with respect to Gas Security of Supply, but by its very nature this is integral with the wider debate on energy security. The policy also highlights the importance of European and indeed international issues as natural gas in particular becomes a globally traded commodity through long distance pipelines and via LNG shipping. Key aspects of the gas security of supply policy relevant to EUA and its members are:
1. The vital importance of gas supplies and infrastructure in the period of coal, oil and nuclear plant decommissioning to 2025 and their ongoing role in the intermittent renewable power generation era. 2. The opportunity for the UK to exploit unconventional but indigenous sources of natural gas and to manufacture biomethane at scale, and in so doing reduce import dependency. 3. Market mechanisms and the UK s role in a wider and integrated European gas supply and storage network, including the issue of gas quality interchangeability. 4. The opportunity for embedded generation to play its full part in future security of supply. Gas as a source of secure power A secure electricity supply requires secure gas supplies and delivery infrastructure. EUA supports the 2030 trajectory for UK gas demand presented by the slow progression National Grid scenario. To believe the Gone Green trajectory would leave the industry taking its eye off the ball for future infrastructure investment requirements. We generally welcome the Government s policy initiatives for electricity market reform to secure electricity supplies into the future and look forward to the separately announced strategy for gas due in autumn this year. Gas has a two-fold role to play in power generation: firstly as base load power generation during the era of coal and nuclear retirement to 2025, and then as both a base (with CCS) and as a back-up in the era of increased renewable wind energy. The greater demand for flexibility of gas supplies, with current estimates ranging from a peak day delivery requirement between 300 and 700 mcm/day is a huge challenge for the industry; the current network has not been proven beyond 480 mcm/day. With annual gas demand estimates also ranging from 40 to 130 bcm/year (100 bcm today), there is clearly scope for industry and government to refine its estimates going forward to provide better information for future investment decisions. For gas long term future in power generation we also welcome the governments renewed focus on the CCS competition and desire to see a UK post-combustion demonstration
project on gas-fired CCGT plant. In the near term we would encourage a detailed audit of current CCGT plant to give confidence that first generation plant currently operating is not vulnerable to the proposed European Industrial Emissions Directive. Unconventional Gas Supplies There is no doubt that shale gas has shifted the security of supply balance for the United States. Visible evidence of this is in former LNG import terminals now operating in export mode, and natural gas wholesale prices dropping to around $0.30 per therm (currently around 55p per therm in UK). In the UK estimates of shale gas reserves range from 200 to 1000 tcf, with 10-20% reserves recoverable this gives estimates of between 20 to 200 tcf of gas that is recoverable compared with an annual consumption today of 3.5 tcf. We are supportive of continued exploration activities in the UK and are confident with some 2.5 million fracks having taken place globally that safety and environmental concerns can be overcome such that shale gas (and coal bed methane) can contribute to the UK s gas security of supply position in the medium to long term. EUA welcomes the innovative approach by both transporters and suppliers to demonstrate the injection of biomethane to the gas grid and the inclusion of large scale biomethane plant in the RHI scheme. As an excellent example of integrated waste management and renewable energy production, further investment should be targeted towards capital cost reduction, with gas quality requirements for the grid kept under review as part of wider EU efforts on gas quality harmonisation. Market Mechanisms and Integration with European Supply and Storage Networks We welcome Ofgem s Significant Code Review and policy position announced in November 2011 and concur that the proposed reforms on cash-out will help limit the severity and duration of a gas deficit emergency (GDE), provided physical supplies are available to the market. In our gas storage operators response to these proposals we have highlighted the need, now being considered by DECC, of the need for possible further interventions, potentially through some sort of storage obligation or mechanism, to avert the likelihood of a GDE occurring. As in our specific policy on gas storage our members are committed to
working with DECC to deliver a solution that provides a benefit to both current and future storage operators. The UK has significant gas import capacity including up to 46 bcm/year through its two pipeline connections to Holland (BBL: 20 bcm/y) and Belgium (IUK: 26 bcm/y), and 56 bcm/y of LNG. Of course gas will only flow through these pipelines to the UK if prices are favourable (the entire European market has the right degree of liquidity) and the imported gas is physically compatible with UK quality requirements. On this latter point we note the very important work being done by the GASQUAL consortium in responding to the CEN mandate M400 to develop a harmonised natural gas quality standard that would in principle remove certain barriers to trade amongst European suppliers and grid operators. We think it is imperative that UK has commercial access to potential gas supplies (and associated storage) entering the EU from major new pipeline projects delivering gas from Russia and the Caspian region, but care is needed in avoiding unintended consequences from unilateral changes to European gas quality standards. EUA does have concerns over adoption of the EASEE-gas specification as the harmonised standard across Europe. There is no certainty that such a wide tolerance in combustion characteristics would lead to the continued safe operation of the UK cohort of appliances. We do not support also the view that large consumers of gas should take responsibility for modulating their own combustion equipment to accommodate possible fluctuations in gas quality across the proposed range. Any solution should be implemented at network level. We encourage DECC to consider gas treatment plant in the same light as gas storage plant in its further consideration of additional mechanisms to secure future gas supplies. Embedded Generation A feature of centralised generation is relatively low overall utilisation of energy but with large economies of scale. With a growing need to improve fossil fuel energy efficiency however, microgeneration devices in the home have the capability to remove the most polluting producers from the pool as they operate best at times of peak household demand. Take-up through FIT has fallen well short of the government s first year target of 1,500 units - in fact only 200 units are registered through FIT. With a tariff of just 10p/kWh and no guarantee
beyond the first 30,000 units the industry is surely missing an opportunity in the window where gas-fired heat and power generation are essential elements of the security of energy supply jigsaw. EUA consider that a 50% increase in the tariff should be supported with a removal of the cap to encourage further investment in cost reduction of these technologies. With such investment the industry is confident of installing up to 1m units by 2020 through on-going new build and replacement cycles, generating up to 20 GWh under peak day conditions (similar to continental imports of electricity), and in so doing mitigate some 2.1m tonnes of CO 2 annually. At a cumulative policy cost to 2020 of around 200m this compares well with a CCS plant of the same CO 2 removal capacity costing some 1.2bn.
Summary Policy Position on Gas Security of Supply Gas fired power generation is a vital component of electricity SOS in the near to medium term; further industry efforts are needed to refine forward gas demand estimates, particularly peak demand, to trigger the right infrastructure investment decisions. Subject to addressing environmental and safety concerns, EUA supports the continued development of shale gas deposits in the UK as a way of reducing import dependency. Further cost reduction investment in biomethane technology is required to deliver this secure and renewable source of gas to the grid. Beyond cash-out reform, EUA supports the development of a further market intervention, to include gas storage, to both reduce the likelihood and severity of any gas deficit emergency. Future commercial access to a European gas supply grid with good liquidity is essential. As part of this, a network-enabled solution should be found to any proposed widening or harmonisation of gas quality standards; this together with gas storage should be considered as part of additional market interventions. There is a near-term opportunity to support both gas SOS and efficiency through deployment of gas-fired embedded generators in the home. An increase of 50% in the FIT for such technologies is required to realise this.
Supporting Notes References 1. Statutory Security of Supply Report, DCC/Ofgem November 2011 2. Directive EU 994/2010 Measures to safeguard security of gas supply 3. Estimated impact of energy and climate change policies on energy prices and bills, DECC, July 2010 4. Ofgem Gas SCR Draft Policy Decision November 2011 SOS availability of energy to meet reasonable demand ; EU directive lays down SOS standard for gas. Identifies risks and drivers. DECC report - Relies on National Grid Data Electricity Generation Peak electricity demand flat to 2030 at 60GW. Capacity currently ~90GW but closing 19GW (12 coal, 7 nuclear to 2020!) 8.3 GW under construction (4.3 gas, 3.6 renewable) 13.2 GW consented (8.7 gas. 3.7 renewable) ISSUE: timely delivery of these projects; gas is key New nuclear capacity by 2025? Possible, but need to get a move on. Renewable connections being accelerated under Connect and Manage scheme; leads to some network constraints ahead of reinforcements being made, but spread as charges across all network users. EMR will introduce a capacity mechanism; this will be market wide not a strategic reserve; National Grid to manage as System Operator. Mechanism will include demand side reduction auctions.
110 bn investment required in electricity generation and transmission to meet both security and renewable objectives. Separate strategy to be defined for gas in autumn 2012. Gas Short-medium term resilience. Demand expected to fall slightly in NG s slow progression model from 100 bcm today to around 85 bcm/year by 2030. Gone Green scenario projects demand going down to 60 bcm. Range of uncertainty spans 40 130 bcm! How to square increased power gen load with falling total demand? Need to be careful not paying twice; once for renewable and once for back-up natural gas. Comparisons with EU where extra 140 bcm per annum required up to 2030 Gas SOS Significant Code Review; changes to emergency arrangements to more closely reflect the value of gas in an emergency. Shippers do not face true risk. Policy position is to raise cash-out price to value of lost load (up to 20 /therm). Also propose additional interventions but these are to be taken forward through a separate study. SCR will therefore just tackle cash-out reform. SCR Policy here: http://www.ofgem.gov.uk/markets/whlmkts/compandeff/gasscr/documents1/draft%20poli cy%20decision%20gas%20security%20of%20supply%20significant%20code%20review. pdf Appendix 3 of the above discusses some further intervention options. See also EU requirements for security of supply standard. Gas use: 1/3 power, 1/3 domestic, 1/3 industry Fwd demand to 2030 is more uncertain than electricity.
Peak demand is important; may need to grow this as gas becomes a marginal supply to electricity generation, meaning greater flex needed in response to demand and price signals. Peak may go to ~700 mcm/day from current 480. Range of uncertainty is from 300 to 700 mcm/day! Production new sources may be game changing. West of Shetland and unconventional gas sources (shale). Shale: may be 200 and 1000tcf reserves Perhaps only 10-20% recoverable (economically). Compares with 3.5 tcf annual consumption. UK shale may be bigger than Poland. US Shale story; first deployed 1947. Now 4.8 tcf/annum (more than UK demand). Forecasting ½ of US output by 2035. Impact has halved US whole sale prices for NG (current price ~$0.30 /therm). View in UK is that oil price may have to go to $200 to make UK reserves exploitable. US recoverable reserves estimated at close to 1000 tcf. Fracking has environmental concerns; care is needed but 2.5m fracks have taken pace globally. Not new. Supplies: good import and diverse capacity for UK; huge dependence on LNG in 2030, but will supplies arrive? Compare US story on impact of sale on LNG import now export terminals. Current import capacity is 42 bcm/y UKCS production, 156 bcm/y imports (54 bcm Norway, 56 LNG, 46 bcm from continental interconnectors.) Of the 46 continental supplies, 26 IUK (Belgium) and 20 BBL (Holland). LNG imports almost solely from Qatar (15 bcm in 2010); sole provider is a risk. Gas Quality Commission issued mandate M/400 to CEN in 2007 to harmonise gas quality standards for H-gas (high CV gas). Report in Dec 2011 on likely impact on EU s appliances. Poyr/GL report showing harmonisation is not economic. UK has narrow WI compared with rest of Europe. Commercial organisations riding rough shod over safety. EASEE want customers to manage their appliances to suit! Diluting gas is not so much of a problem (N2
ballasting of LNG for example) as enriching. Declining EU production is leading to an increase in imports. EU Gas Imports Aim -removing barriers to trade. SOS pipelines: Nordstream, pipe 1 on-line, pipe 2 commissioning (55 bcm when finisahed); Southstream (2015, still on paper) pipe under Black Sea to Hungary (63 bcm); would take 300 LNG tankers to do this! Nabucco (2013) from Iraq/Turkey to Austria 1.5 m pipeline, 100 bar. Both Nabucco and Southstream are in southern corridor, competing? No say Gazprom, room for both. EU needs another 140 bcm for new markets. EU doesn t want Ukraine getting in way of Russian gas anymore. Russia supplying 25% of European gas, 80% flowing through Ukraine. Directive strengthens prevention mechanisms and improves crisis response procedures. Need to take due account of renewable sources. What position for HHIC on gas quality. Costs of Energy Policies In 2020: Domestic Gas + 8 (18%) /MWh Electric +40 (33%) /MWh In 2020: Non-domestic Gas +7 (24%) Electric +37 (43%)
Micro CHP, embedded generation Current FIT of 10p/kWh failing to generate sufficient investment from manufacturers. HHIC lobbying for 50% increase to 15p. FIT only guaranteed for first 30,000 units a barrier to investment. Industry desire to install 1m units b7 2020 as part of normal replacement and new build cycles (1.6m boilers sold annually). Units generate heat and electricity at high overall efficiency at peak times (when dirtiest centralised plant is on-stream). Potential to link to smart meters. 1 m units thought to produce 20GWh on peak day (20kWh each). Govt target was for 1,500 units in first year; in fact only 200 registered under FIT. Annual mitigation of CO2 estimated at 2.1m tonnes, at a policy cost of 200m. CCS is expected to deliver 2m tonnes saving at a cost of 1.2 billion! Mike Foster Chief Executive, EUA