UK taking ‘big gamble’ on further drop in energy prices, infrastructure expert warns

Ministers are taking a “big gamble” on energy prices easing further after failure to reach an agreement on increasing the UK’s gas storage capacity in time for next winter, the government’s top adviser on infrastructure has warned.

Sir John Armitt, chair of the National Infrastructure Commission, told the Financial Times that while the UK needed to move towards renewables, gas storage was needed to “boost our resilience”.

His comments came after talks between the government and Centrica, which owns Rough, the country’s biggest storage facility, collapsed over a disagreement on the level of state subsidies.

The site, which lies off the Yorkshire coast, was partly reopened at the government’s request last October in an effort to ensure security of supply ahead of this winter. Energy prices had soared as much of the rest of Europe sought alternative sources of gas after the main supplier Russia turned the taps off in retaliation for western support for Ukraine.

Rough is operating at only a fifth of its previous capacity after being in effect mothballed five years earlier. Energy analysts have warned that failure to expand the UK’s gas storage would leave the country vulnerable to future global energy price spikes.

“Allowing Rough to fall off the table again might be understandable if you are certain that the gas price spike of the last year won’t be repeated and that other forms of supply are secure,” Armitt said. “But that’s a big gamble to place, given the UK’s continuing reliance on gas in the short term.”

Armitt also warned any delay would raise the cost of expansion. “Let’s be clear that if a deal on Rough goes cold, the next time we want to resurrect it the costs would be even higher,” he said.

Britain has some of Europe’s biggest LNG handling capacity that allows it to turn the liquefied fuel back into gas. It also has two pipelines that connect with the continent and several links with Norway’s large North Sea gasfields. But Tom Marzec-Manser, head of gas analytics at ICIS, said the country would benefit from more storage as the UK cannot always rely on gas imports, especially in extremely cold weather.

During the “beast from the east” storm in 2018 some UK and Norwegian production suffered failures resulting from cold weather, pushing up spot prices.

“That’s the time you want gas at your doorstep,” said Marzec-Manser. “You can never discount that the kit won’t break down so, although it is great that we have two pipes that connect Britain with north-west Europe as well as the links with Norway, having reserves on your doorstep is prudent — you never know when the infrastructure will run into trouble.”

Unlike countries such as Japan, which imports gas on long-term contracts and has been protected from the volatility in energy markets, Britain and the rest of Europe are exposed to volatile daily and monthly wholesale prices since the liberalisation of the gas markets in the 1990s.

Wholesale gas prices have been falling in the UK and are now around 132p per therm, compared with the 598p per therm record in August, according to ICIS data.

But they remain volatile and are still much higher than pre-Covid-19, when they traded at around 40p to 60p a therm. Prior to the second half of 2021 there was just one instance in the previous 20 years that UK gas prices traded above 100p per therm.

The government said: “The future expansion of the site’s capacity is a matter for Centrica. We will continue to work with gas storage operators to look at options to further boost our security of supply.”

Centrica declined to comment.