Regulator foresees threat to gas supplies

Britain’s gas market faces a “cliff edge” in 2015-16 that could cause supplies to run short in the second half of the decade, the energy regulator has warned.

Alistair Buchanan, chief executive of Ofgem, told the Financial Times there was a risk that new gas supplies from Russia and the Caspian region might not be available in time to meet UK demand as domestic production fell.

He questioned whether Britain’s competitive market was structured in the right way to guarantee security of supply.

The warning comes after a week in which Britain’s gas system came under strain in the cold weather. At one point almost 100 large industrial users had their supplies cut off.

National Grid, which runs the gas transmission network, says the system has worked well. Four times in eight days it issued gas-balancing alerts to encourage increased supply and reduced demand, and each time the system responded.

Heavy investment in pipelines and liquefied natural gas terminals in recent years has greatly increased Britain’s import capacity.

However, in a letter to the FT on Wednesday, organisations representing manufacturers and big energy users say they are “concerned at the complacent nature of some of the comments about the UK’s energy supply” following last week’s disruption. “As a nation, we need to take security of our energy supply more seriously.”

That sentiment is shared by Ofgem, which is staying out of the political debate but wants to shape energy policy after the election.

Ofgem’s Project Discovery, an energy-security review due out next month, will portray the risk to gas supplies in a severe winter as the greatest challenge the system faces.

Ministers think UK demand for gas will fall sharply between now and 2020, in part because of steps to cut CO2 emissions. But Ofgem thinks demand may stay around its present level because energy-efficiency improvements may not deliver hoped-for savings, and power generators will be increasingly reliant on gas-fired plants that are cheap and quick to build.

Meanwhile, Britain’s gas production – down 40 per cent since 2000 – is expected to continue to decline.

Last year, world gas markets were heavily oversupplied, as production from new sources in the US and Middle East met demand that was severely weakened by the global recession. On Tuesday, the International Energy Agency think-tank repeated its assessment that the “gas glut” was likely to grow up to 2015.

One effect of the glut is to delay projects for producing and transporting gas, and Ofgem fears that those delays could mean tight supplies in Europe by the second half of the decade.

The IEA argues reassuringly that “Europe is geographically well placed to secure gas supplies from a variety of external sources”, but good geography is no guarantee that those supplies will flow. With its own production dwindling, Britain will be increasingly dependent on international gas markets, and particularly on continental Europe.

That means proposals to bring gas from Turkmenistan to central Europe are of keen interest to British consumers. The opening of a gas pipeline from Turkmenistan to China last month, creating an alternative route for its exports, was bad news for Britain.

Delays to the development of huge gas reserves in northern Russia are also a worry across Europe.

In the worst case, Britain’s gas prices could become increasingly volatile, and supply disruption increasingly common.

Mr Buchanan said the Ofgem analysis raised the prospect that the UK strategy of creating one of the world’s most liberalised and competitive energy markets might not work amid global supply shortages. He said: “The question is: is the Anglo-Saxon model robust enough to handle the challenge we face?”

It is a question the next government will soon have to answer.