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batteries) that will be needed to balance both systems. With low wind levels, gas prices would need to rise higher. However, very high gas prices create an incentive for gas users, which includes power generators, to offer gas through the NGG DSR or the on- the-day commodity market, which further exacerbates a power system crunch. As natural gas accounts for 40% of the power generation, the closer coordination of emergency measures, notably demand response across the sectors, is required. NGSO operates both the national gas and electricity grid in Great Britain and is well placed to ensure synergies in the system operation and security of supply.

Assessment

Natural gas plays a crucial role in the United Kingdom’s energy sector. It is used by 80% of households for residential heating, and gas plays an important role in reducing the carbon intensity of the UK electricity supply as it has recently replaced larger shares of coal. Consumption in the industrial and commercial sectors, by contrast, forms a small share in gas demand.

Since 2015, UK gas demand has increased, reversing a trend in which demand had been declining thanks to a higher boiler and building efficiency in the residential sector and the changing industrial structure. The increase was due to a decrease in global gas prices, environmental regulation on coal-fired power plants, and the government’s introduction of the CPF in the power sector, which favoured the operation of gas generation at the expense of coal. Although coal generation is expected to decline further in the next few years, gas generation is expected to remain stable, as the growing renewables supply and the flat electricity demand constrain the growth opportunities for gas.

UK gas production has also seen a modest reversal, with the increase in production from the UKCS in the past few years encouraged by a more favourable tax policy for the exploration and development of new offshore resources. That said, the decline in UKCS production is expected to resume and the UK market will become more dependent on imports, primarily from Norway and continental Europe, and on LNG.

The United Kingdom has a well-developed competitive wholesale gas market, which appears to be working well. The market is characterised by high liquidity and low concentration, bolstered by good interconnections with neighbouring markets in Europe and by access to global markets through a significant LNG regasification capacity. Wholesale prices for natural gas, although they have increased, are competitive by European standards.

Amid the increasing reliance on natural gas in the energy system and increasing imports, potential security of supply concerns were raised, notably in the light of two events: the closure of the Rough storage facility, which accounted for over 70% of gas storage volume in the United Kingdom, and the “Beast From the East” weather event which resulted in a gas deficit warning.

Yet closer examination of these developments suggests that these concerns might be misplaced. In the case of Rough storage, although very sizeable in volume, it could only release its gas very gradually. Such slow-responding storage is most valued when seasonal differences in the price of gas are great and conversely the pipeline

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infrastructure limited. This storage closure in the United Kingdom is in line with the developments in other European gas markets, where many slow-acting storage facilities had to close.

What is more relevant to the United Kingdom’s security of supply is its ability to perform on a peak gas day. With significant domestic supplies, pipeline imports from Norway, interconnections with continental Europe, and LNG import capabilities, the United Kingdom appears to be in a very strong position when it comes to natural gas security of supply.

NGG estimates that the system could manage a 1-in-20 year peak day of around 472 Mm3 thanks to an around 103 Mm3/d spare capacity in interconnection capacity. By contrast, during the cold weather experienced on 1 March 2018, gas demand – although higher than on any day in the previous seven years – amounted to 418 Mm3, still below the historic peak demand of 465 Mm3/d (8 January 2010).

Indeed, closer examination of the “Beast from the East” reveals at least three points that were key to the response, but these are also areas worth monitoring more carefully. The first was that gas and electricity security are increasingly interrelated as the response of the electricity market, coincided with a very strong wind output. Second, although they had little or no effect on annual gas bills, higher prices over a few hours is a feature of both gas and electricity markets to maintain supply security. Third, the event showed that the interconnected nature of the UK and continental European gas and electricity markets, in fact, enhanced the security of supply of each.

Experience with similar events in North America demonstrated the importance of coordinating gas and electricity system operations during such events, something that is currently only permitted in the United Kingdom in emergency circumstances. One area worth further investigation is improvements to programmes for DSR, particularly for large customers. On 1 March 2018, NG asked customers for bids to cut their gas load but received no offers as a seasonal electricity demand response programme had ended as planned the day before the event. Finally, the future relationship of British and European markets remains uncertain because of the United Kingdom exiting the European Union.

The second area of concern is the future evolution of the retail markets (both gas and electricity). The government enacted legislation to cap the standard tariff prices. These caps will remain in place until at least 2020 and may remain through 2023, subject to the decision of the Secretary of State, and only after a review has taken place. Although the sunset provision implies that the measure is a temporary one, the legislation does provide limited guidance to Ofgem for their review beyond the sunset date whether conditions are in place for effective competition for domestic supply contracts.

The third area is the decarbonisation policy that is being applied to the residential heating sector. A desire to focus on residential heating is understandable given its prominence in gas use. However, the relative affordability of natural gas means that the substitution of gas by other heating fuels is not attractive economically in the future, notably as in a market with relatively high electricity prices electric heating or heat pumps are not economic. In the short-to-medium term, the decarbonisation policy should prioritise the focus on improvements in building energy performance to bring forward cost-effective results; also, technology costs are declining over time and district heating solutions or hydrogen or electrification are beginning to see a revival in some cities and communities.

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Finally, note that access to new gas resources faces a technical barrier because of the United Kingdom’s particularly narrow quality specification, developed when most UK gas came from the UKCS. The narrow specification requires certain LNG imports to be blended. Similarly, other methane sources, such as biomethane, may find it more challenging to meet the current standard. Field trials are being conducted on a new gas quality standard that would, if adopted, allow a broader range of supplies to be integrated more easily and cost-effectively.

Recommendations

The UK government should:

Enhance the coordination of security-of-supply responses between gas and electricity systems, including with regard to the role of demand response.

Maintain the security-of-supply benefits of interconnection with European gas and electricity markets.

Continue to prioritise energy efficiency improvements in existing gas-heated buildings while promoting fuel switching in new constructions to decarbonise the residential sector.

Continue to review gas quality standards to accommodate new sources of supply.

References

Jackson, S.R., A. J. Finn & T. R. Tomlinson (2015), New Challenges for UK Gas, Costain Oil, Gas & Process Limited, Manchester, www.costain.com/media/597018/new-challenges- for-uk-natural-gas.pdf.

IEA (International Energy Agency) (2019a), World Energy Balances 2019 First edition (database), Paris, www.iea.org/statistics/.

IEA (2019b), Energy Prices and Taxes 2019, Paris, www.iea.org/statistics/. IEA (2018a), Natural Gas Information 2018, Paris, www.iea.org/statistics/. IEA (2018b), Energy Prices and Taxes 2018, Paris, www.iea.org/statistics/. IEA (2018d), Gas 2018, Paris, www.iea.org/gas2018/.

NG (National Grid) (2017), Future Energy Scenarios 2017, NG, Warwick, http://fes.nationalgrid.com/fes-document/.

NGSO (National Grid Systems Operator) (2018), Winter Outlook 2018/19, NG ESO, Warwick, www.nationalgrideso.com/insights/winter-outlook.

NGG (National Grid Gas) (2018a), Transmission Operational Data, NG, Warwick, www.nationalgridgas.com/data-and-operations/transmission-operational-data.

NGG (2017), Gas Ten Year Statement 2017, https://www.nationalgridgas.com/insight-and- innovation/gas-ten-year-statement-gtys

Ofgem (Office of Gas and Electricity Markets) (2018a), Great Britain and Northern Ireland Regulatory Authorities Reports, Ofgem, London,

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www.ofgem.gov.uk/system/files/docs/2018/08/2018_gb_and_ni_national_reports_to_the_e uropean_commission.pdf.

Ofgem (2018b), State of the Energy Market, Ofgem, London, www.ofgem.gov.uk/system/files/docs/2018/10/state_of_the_energy_market_report_2018.p df.

UK Government (2018), UKCS Oil and Gas Production Projections, OGA (Oil and Gas Authority), London, www.ogauthority.co.uk/data-centre/data-downloads-and- publications/reserves-and-resources/.

UK Government (2017), Gas Security of Supply Review, Department for Business Energy and Industrial Strategy (BEIS), London, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_d ata/file/651297/gas-security-supply-assessment.pdf.

UK Government (2016), The Maximising Economic Recovery Strategy for the UK, Oil & Gas Authority (OGA), https://www.ogauthority.co.uk/media/3229/mer-uk-strategy.pdf

Wood, I. (2014), UKCS Maximising Recovery Review https://www.woodreview.co.uk/

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