Centrica move hits energy security
Concerns about Britain's energy security were fuelled today after British Gas owner Centrica shelved plans worth more than £1.5 billion for two gas storage projects.
The energy giant blamed the Government's decision not to subsidise investment in new gas storage and "weak economics" for axing the projects in East Yorkshire and the North Sea at a cost of £240 million.
While widely expected, Centrica's decision leaves the UK increasingly reliant on imported gas. The UK has less than three weeks of gas storage supply, much less than Germany and France, which is used to help meet demand spikes during cold weather.
In March the prolonged cold spell saw Britain's stored gas supplies fall dangerously low, with warnings of supply interruptions.
The Department of Energy and Climate Change (DECC) ruled out subsidising investment in new gas storage earlier this month, saying it was unfair for the burden to fall on taxpayers.
The Government says storage accounts for just 7% of the UK's gas supply, with around half coming from the North Sea and the balance from pipelines from mainland Europe and Norway and shipments of liquid gas.
Centrica said it will not proceed with its planned £1.5 billion conversion of the Baird depleted gas field in the southern North Sea off the North Norfolk coast.
The project was expected to create more than 1,000 construction jobs and would have been able to store 108 billion cubic feet of gas - enough to meet 13.5 days of peak demand.
It would have become Britain's second-biggest gas storage site behind Centrica's Rough facility off the coast of East Yorkshire, which has 118 billion cubic feet of capacity.
Centrica says Rough can meet 15 days of peak demand and accounts for about 75% of the UK's current storage capacity.
And it also put on hold indefinitely its much smaller project to convert a depleted gas field at Caythorpe in East Yorkshire into a "fast-cycle" storage facility. The project, which had a price tag of more than £100 million, would have held up to 7.5 billion cubic feet of gas to rapidly meet demand spikes.
Centrica said: "This decision was taken in light of weak economics for storage projects and the announcement by the UK Government on September 4 ruling out intervention in the market to encourage additional gas storage capacity to be built."
The projects relied on being able to buy gas cheaply in the summer when demand is low, and selling it for a profit during the winter when demand soars.
Its decision not to proceed was influenced by the narrowing difference between summer and winter prices - known as the spread. This has been driven by factors including more liquid natural gas (LNG) shipments from markets such as the Middle East.
A Centrica spokesman said: "We believe there's still a need for new gas storage capacity in the UK but unfortunately market conditions now do not make that investment possible for us."
A House of Commons report in 2011 said the UK needs to "significantly increase" its gas storage capacity.
It said: "The Government must develop a strategy for achieving this. Doing nothing - or continuing to give inconsistent signals to the market about which approach it will choose - could result in no storage being built. This would diminish energy security."
Centrica commissioned two reports on gas storage, which found subsidising it would have added 40p to 80p a year to customers' bills over 25 years.
Energy minister Michael Fallon argued that the decision not to subsidise gas storage will save consumers £750 million over a decade.
DECC insisted the market can provide new gas storage capacity without subsidy, citing two new storage facilities in Yorkshire and Cheshire which opened during the past year. It added two more storage sites in Cheshire are being built and are due to be completed in early 2014.
A DECC spokeswoman said: "The UK has the capacity to deliver twice the amount of gas required on a normal winter's day, and has coped well with recent extreme winter conditions. Gas storage, while important, only provides a small proportion of UK total supply.
"Subsidising storage risks adding significant costs to consumer bills, with the costs of the subsidy outweighing any benefits to security of supply."
Centrica, which is thought to be planning a price hike for customers, will write off money spent on buying Caythorpe and 70% of Baird, as well as engineering costs, resulting in £240 million of impairments and provisions.
Earlier this year Centrica also pulled out of plans to build the next generation of new nuclear power plants in the UK, leaving French utility EDF to go it alone.
With wrangling over subsidies for new nuclear dragging on, Centrica blamed "uncertain project costs", instead opting to return £500 million to shareholders.
Meanwhile the firm is investing heavily in the US, which is benefiting from a shale gas boom.
Centrica is also reportedly planning to add an average £100 to annual bills despite vowing earlier this year to use an earnings windfall from the cold weather to keep a lid on tariffs.