Concerns mount over UK’s winter gas price risk

Energy suppliers could be hit in the pocket by rising gas prices this winter as delays in refilling UK storage facilities put the nation at risk of price shocks, analysts have warned.

UK suppliers are under intense political pressure to keep a lid on rising retail energy prices but the gas market has entered the summer season with the second lowest storage inventories on record and will face a 30 per cent reduction in the amount that it can inject into winter storage facilities at least until October.

At the same time gas production from the UK’s usual sources in Norway and the Netherlands are restricted, meaning the UK will need to rely more heavily on continental gas markets which in turn are expected to double their dependence on Russian gas supplies compared to import levels last year.

But analysts at Thomson Reuters’ Point Carbon warn that if the political tensions between Russian and EU reignite by October the result could be a disruption to much-needed supply, and a steep premium to be paid by European gas users.

The EU last week brought allegations of market abuse against state-owned gas giant Gazprom, prompting concern that tense relations between Russia and the EU could sour further resulting in supply disruptions as seen last year in Russia’s dispute with Ukraine. 

Point Carbon analyst Oliver Sanderson told Utility Week that Russian gas flows into Europe in the final quarter of last year were between 170-190 million cubic meters per day but that this year as much as 350-370 mcm/d is needed.

“If these higher Russian volumes do not materialize there is little other supply to draw on at current prices,” Sanderson warned, adding that market prices across Europe would need to soar in order to attract LNG deliveries from the competitive global market.

Although the UK frequently relies on a variety of import sources for its gas supply, this year there will be a reduced security of supply due to lower storage levels, which even when healthy are some of the lowest levels in Europe. Centrica confirmed on Monday that its Rough gas storage facility, which holds around 70 per cent of the UK’s domestic winter gas storage, will be reduced by as much as 30 per cent for at least six months.

The combination of Russian gas flow disruptions and an early start to colder weather could leave the UK more exposed to price shocks than most markets because its already low storage capacity has been depleted further.

Read Utility Week’s full analysis here.