Keep-calm-and-carry-on-scan

Source: Wikipedia

In March of this year, a slight panic descended upon the UK as it came close to running out of natural gas after suffering a major gas supply disruption in the midst of an unusually long, cold winter. It has recently come to light, however, that the nation’s gas supply was possibly in even rougher shape than was originally believed; a representative of the Crown Estate said that the UK really only had six hours’ worth of gas remaining.

With the UK spring being the coldest since 1979 and supplies from the North Sea running low, the cost of keeping it lit and warm may become more expensive than ever. As shown in the Figure 1 below, gas prices in the UK have already risen over 30 pence/therm in the last four years, while gas storage levels have increasingly diminished.

uk gas storage levels

Figure 1: Graph generated in ZEMA; data from National Grid Gas Storage Short Range Stock Levels report and ICE Daily Settle UK Natural Gas Futures.

Even so, present circumstances are forcing the UK to rely more heavily on natural gas for heating and electricity. The passage of the Energy Bill 2012-2013 has seen the beginning of the end for many coal and nuclear power stations; eight coal-fired power plants were closed in April 2013 alone. This is partly because the stations were built almost half a century ago now and need to be retired. It’s also because the UK has set ambitious climate action targets in accordance with EU directives, aiming to produce 30% of electricity from renewable sources by 2020 and reduce greenhouse gas emissions by 50% by 2025 (in comparison to 1990 levels). Moreover, in spite of the UK’s exponential increase in wind farms over the last few years, their current wind power generation capacity is still too small to replace natural gas for primary power generation.

If supplies from Norway are insufficient, the UK will likely rely on more expensive Qatari liquefied natural gas to supplement their dwindling stores, as they did in March, and overall gas and electricity prices will rise. As mentioned in our blog on the European natural gas market, the UK faces significant competition from Asian markets, which are willing to pay nearly double for natural gas. But with both the Crown Estate and SSE—the UK’s second largest energy supplier—agreeing publicly that gas prices will likely soar in the coming months due to increased wholesale costs as well as continuing cold temperatures, the UK may just find themselves with more gas suppliers at their doorstep.