APPENDIX 18
Memorandum by National Grid
INTRODUCTION
1. This paper is National Grid's written
evidence to the House of Commons Trade and Industry Committee's
inquiry "Security of the gas supply".
2. National Grid plc (National Grid), through
its subsidiary company National Grid Gas plc, owns the gas transmission
network and four of the eight gas distribution networks throughout
Great Britain. National Grid also, through its subsidiary company
National Grid Electricity Transmission plc, owns the electricity
transmission network in England and Wales and operates the electricity
transmission system throughout Great Britain.
3. The competitive energy market in the
UK has developed substantially in recent years, establishing separate
roles and responsibilities. The provision of gas to meet consumer
demands and contracting for capacity in networks is the responsibility
of suppliers and shippers. The structure and performance of the
markets is the responsibility of Ofgem (the Office of Gas and
Electricity Markets). National Grid has two main responsibilities
in the gas market: the first, as the primary transporter, for
ensuring there is adequate and reliable network capacity to meet
anticipated gas transportation requirements; second, as system
operator of the transmission networks, for the residual balancing
of the system.
EXPERIENCE OF
THE GAS
MARKET OVER
THE WINTER
OF 2004-05
4. The 2004-05 winter in Great Britain was
generally mild and overall the sixth warmest over the last 77
years. There was, however, a colder period in late February/early
March which was also experienced in most parts of Europe. Interactions
between the GB gas and electricity markets and those on the Continent
are growing. In general, both the gas and electricity interconnectors
responded to price signals through the differences in spot prices
between Great Britain and the Continent. However, the prevalence
of long-term contracts in less developed markets on the Continent
can also have an impact on gas flows. For example, during the
late cold spell in March imports through the gas interconnector
were notably reduced due to shippers buying gas in Britain to
export, in effect, offsetting any gas imports. In the case of
the electricity interconnector with France, flows over the winter
were heavily influenced by price differentials between the two
markets and this led to increased volatility. In both cases, the
experience of last winter has confirmed the view that it is imprudent
to assume full imports to Great Britain through the interconnectors
for planning purposes. As the British energy markets become more
complex and interrelated, security of supply will significantly
depend on the commercial arrangements relating to the importation
of energy and the demand-side response.
OUTLOOK FOR
WINTER 2005-06
5. National Grid provides a winter outlook
report each year to Ofgem, which they publish. This covers the
outlook for the gas and electricity markets in Great Britain.
In recent years, a preliminary report has been published in the
Spring. This year, National Grid undertook a consultation on the
outlook for this coming winter with the intention of gaining wider
industry perspectives in light of the increasing influence that
European and World energy markets have on the GB energy markets.
This consultation was issued in May. This initiative was well
received by the energy industry and the responses provided some
valuable input into the conclusions. The outcome of the consultation
was published by Ofgem in the 2005-06 Winter Outlook Report on
5 October 2005. [26]
6. This Report details a base case, which
reflects the latest information and analysis available to National
Grid. This has been informed by our annual Transporting Britain's
Energy consultation process (which primarily covers gas), information
from electricity generators on the availability of their power
stations and the responses received from the consultation on the
winter outlook. Given the high degree of uncertainty outlined
above, the base case contained in the report should not be seen
as a prediction. It does, however, represent a balanced view of
the outlook for this winter. This base case is in the table below.
This is compared to last winter's assumptions to provide easy
comparison for the Committee:
| Supply (mcm/d) |
Maximum Forecast 2005-06 | Base Case Assumption 2005-06
| Comments on 2005-06 | Winter 2004-05 Assumptions[27]
|
| Beach | 327 | 303
| 92.5% max beach | 346 |
| National Grid Grain LNG | 17
| 13 | | -
|
| Interconnector Imports | 48
| 42 | 75% new imports |
25 |
| Total Supply ex Storage | 392
| 357 | | 371
|
| Existing Storage | 114 |
114 | | 131 |
| New Storage | 6 |
5 | 75% new storage |
— |
| Total Supply inc Storage | 512
| 476 | | 502
|
| | |
| |
7. Since last winter, the gas supply to the beach from
the UK Continental Shelf (UKCS) has continued to decline and more
rapidly than expected. Supplies from the UKCS are also interrupted
more frequently due to a number of factors. The base case therefore
assumes the availability of beach gas at 92.5%.
8. However, additional gas is expected to be supplied
on completion of the projects listed overleaf. This assumes that
they operate at 75%, which reflects an expectation of the likely
performance of new facilities. The base case assessment for this
winter therefore suggests that gas availability at peak for the
forthcoming winter will be around 26 mcm/d lower than that assumed
in the 2004-05 Winter Outlook Report.
| Project | Base Case (mcm/d)
| Comments |
Expansion of the gas interconnector to Belgium
(phase 1)
| 42 Base Case (at 75%)[28]
| Additional import capacity expected to be commissioned in Nov 2005
|
| National Grid Grain LNG | 13 Base Case
| Commissioned in July 2005.
Hurricanes Rita and Katrina could impact LNG supplies. See para. 18.
|
| Humbly Grove Storage Facility and Hole House Expansion
| 5 Base Case[29] (at 75%)
| Commissioning expected imminently. |
| | |
CONSEQUENCES OF
THE OUTLOOK
FOR THIS
WINTER
9. The gas supply and demand balance in Great Britain
principally depends on the weather. However, a wider range of
variables also have an impact:
— more gas being imported from Europe;
— the contractual arrangements between suppliers
and consumers developing;
— projections of offshore production capability
and reliability; and
— the interaction between the gas and electricity
markets (around 33% of electricity generation capacity in Great
Britain is now gas-fired).
In particular, we believe that the flows on the interconnector
and imports of LNG are subject to substantial uncertainty and
have a large bearing on the overall balance of supply and demand.
Clearly, these flows will be heavily influenced by European and
global energy markets and the associated regulatory regimes.
10. The uncertainty that arises over this number of variables
and the confidential nature of commercial arrangements between
suppliers and consumers means that firm predictions are not possible.
However, analysis can be done looking at:
— Historical weather patterns.
— Historical electricity generation.
— Expected generator availabilities and their
ability to react to price signals.
— Anticipated gas supply.
11. Using these base case assumptions, our analysis shows
that in average weather conditions there will be sufficient gas
to maintain supplies to domestic and other non-daily metered customers,
such as small industrial and commercial premises. In average weather
conditions, large, intensive gas consumers (the daily metered
sector) may need to make a modest reduction of their use of gas,
providing a demand-side response. This demand response takes two
forms. Some large users of gas choose to have interruptible gas
contracts with their shippers. In addition, some large consumers
without interruptible contracts could choose to sell their gas
rather than use it, in response to prices. This is a normal function
of the British gas market.
12. If Great Britain were to experience a repeat of 1985-86
weather—statistically, around a one in 10 cold winter[30]—then
there will be sufficient gas to maintain supplies to domestic
and other non-daily metered customers. However, a more significant
demand response will be required in such a winter or if gas deliveries
are below our base case levels. Our base case assumption in a
one in 10 cold winter suggests a required demand-side response
of 2.2 bcm.
13. In a one in 50 cold winter[31]
(ie a severe winter, such as that experienced in 1962-63) it is
still expected there will be sufficient gas to maintain supplies
to domestic and other non-daily metered customers. The required
demand-side response could, though, increase to around 3.7 bcm,
which would be equivalent in scale to over 60 mcm/d for around
60 days.
Demand-side response
14. A contribution to the required demand-side response
in the gas market can come from Combined Cycle Gas Turbine (CCGT)
power stations. However, in order for there not to be an impact
on the electricity market, this generation would need to be replaced.
This could result in more extensive use of coal and oil-fired
generation, [32]CCGTs
running on distillate where they have the capability to do so,
reliance on imports from France over the darkness peak and overnight,
and a return of some mothballed plant.
15. The scale of potential gas demand response estimated
in our modelling for a colder than average winter is far in excess
of that required (and therefore seen) to date. National Grid believes
that while this level of response from CCGTs is feasible, it is
towards the upper end of possibilities. The demand-side response
cannot be provided by the CCGT sector alone, and the non-power
Daily Metered (DM) market sector (mainly large industrial and
commercial users at 1,700 supply points) would need to make up
the residual requirement. Obviously the wider demand-side response
will be heavily influenced by there being sufficiently high prices
for there to be the commercial incentive to react. The table overleaf
summarises the analysis of the demand-side response required,
which is contained in the Winter Outlook Report, and illustrates
the potential extent of the demand-side response requirement from
the non-power DM sector. It should be recognised that the analysis
in the table assumes the response from the CCGT sector to continue
throughout the winter period. A lesser response from CCGTs would
lead to a greater demand-side response from the rest of the market.
SUMMARY OF
GAS DEMAND-SIDE
RESPONSE ANALYSIS
| Winter severity | Estimated demand-side response required (bcm)
| Potential contribution from CCGT sector (bcm)
| Approx residual requirement as percentage of non-power DM market sector[33]
|
| Average | 0.1 | 0.1
| None |
| 1 in 10 cold | 2.2 | 1.3
| 30% on average over 40 days |
| 1 in 50 cold | 3.7 | 1.8
| 50% on average over 50 days |
| | |
|
16. In order to help the demand side respond, Ofgem has
instigated debate through a Demand Side Working Group. One of
the initiatives that have come forward through this forum is that
National Grid will provide daily information on the gas supply
situation on its website, helping the demand side to understand
and react to gas supply pressures. National Grid will also issue
warnings to the market when gas supplies look particularly tight—these
will be called Gas Balancing Alerts—this will also help
the demand side to identify times where it may be particularly
commercially beneficial to reduce their gas demand and resell
gas to the market.
17. There have also been other areas where action has
been taken to put in place measures to help the market to function
or to protect consumers this winter. For example:
— changes in the area of emergency cash-out
prices in gas, which now better incentivise users to avoid triggering
a Gas Deficient Emergency;
— implementation of the final stage of the
two year programme to provide greater information about the operation
of the offshore gas sector and the interface between offshore
and onshore at sub-terminals; and
— the setting of safety monitors for gas storage
which ensures that there are appropriate levels of gas storage
throughout the entire winter, protecting domestic and non-daily
metered consumers. These are set higher this winter to allow a
contingency for a loss of supply or for gas flows that are lower
than expected. This could mitigate any loss of LNG supplies due
to Hurricanes Katrina and Rita. In addition, National Grid has
raised a Unified Network Code modification to increase the levels
of the safety monitors at all storage sites, if necessary, during
the winter.
IMPACT OF
HURRICANES KATRINA
AND RITA
ON THE
LNG MARKET
18. The impact on the British gas market of these hurricanes
is highly uncertain and is changing rapidly. However, it is clear
that the US gas position has the potential to be tighter this
winter than it would have been without the hurricanes, should
the recovery of gas production from the Gulf of Mexico be delayed.
Prior to Katrina, the National Balancing Point (NBP) forward gas
price exceeded the US Henry Hub price between December 2005 and
March 2006 (inclusive). The Henry Hub price now exceeds the NBP
price all winter, though this difference has narrowed significantly
of late. It remains to be seen whether the Henry Hub will reduce
back below the NBP price as gas production in the Gulf of Mexico
recovers and if the US experiences a mild winter. On the other
hand, depending on the winter experienced in Britain and how the
demand and supply picture develops here, the NBP price may increase.
Another factor that will determine the level of LNG imports into
Great Britain is whether those planning to import LNG into Britain
have access to the US LNG terminals and the nature of any sales
commitments that they may have in the British market. It should
also be noted that LNG importation occurs in other markets in
Europe. Diversion of LNG destined for the Continent could therefore
have a knock on impact on the amount of available gas that could
be received by Britain over the gas interconnector with Belgium.
LONGER TERM
SECURITY OF
SUPPLY OUTLOOK
19. There are a number of other gas importation and storage
projects due to be developed in Great Britain over the coming
years. A table of the proposed projects are below. Connection
of these projects to, and reinforcement of, the gas National Transmission
System will require a significant additional investment in the
over the coming years. National Grid estimates that this investment
to connect and/or reinforce the system to facilitate this investment
will cost in the region of £300 million per annum.
Future gas importation projects
| Import Project | Developer
| Location | Size (pa)
| Date | Status |
| Belgium Interconnector Compression (Phase II)
| IUK | Zeebrugge to Bacton |
Additional
7 bcm | Dec 2006 |
Under construction |
| Langeled | Gassco | Sleipner to Easington
| 25 bcm | 2006-07 | Under construction pipeline completion late 2006, first flow from Ormen Lange late 2007
|
| Dutch Interconnector (BBL) | BBL
| Balgzand to Bacton | 16 bcm |
2006-07 | Under construction |
| Tamden Link (FLAGS—Statfjord late life project)
| Gassco | New link to existing UKCS infrastructure
| -10 bcm | 2007-08 | Construction contract awarded
|
| South Hook LNG (Phase I) | Qatar Petroleum/Exxon Mobil
| Milford Haven | 10.5 bcm |
2007-08 | Under construction |
| Dragon LNG | Petroplus/BG/Petronas
| Milford Haven | 6 bcm | 2007-08
| Under construction, possibility of additional 6 bcm in later expansion
|
| Isle of Grain (Phase II) | National Grid
| Isle of Grain | Additional 9bcm
| 2008-09 | Construction contract awarded
|
| South Hook LNG (Phase II) | Qatar Petroleum/Exxon Mobil
| Milford Haven | 10.5 bcm |
2008-09 | Construction contract awarded
|
| Other LNG | Various | Various
| Various | TBC | A number of additional LNG projects have been proposed which are in the early stages of development
|
| 25 October 2005 | |
| | |
|
26
The Report can be found at the following address: http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/12493_214_05.pdf?wtfrom=/ofgem/index.jsp Back
27
The Winter Outlook report 2004-5 can be found at http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/9041_24304b.pdf Back
28
These numbers include the existing capacity of the interconnector
of 25 mcm/d. Back
29
The deliverability from Humbly Grove is expected to reduce as
storage is depleted, hence a higher rate can be expected if stocks
are near full. Back
30
"1 in 10 cold" winter-a cold winter, in which temperatures
would typically average ¸2C for a week and around 0C
for two months. Back
31
A "1 in 50 cold" winter-this is a severe winter where
there is a prolonged period of cold weather (ie temperatures averaging
¸2C over a month and +2C over a further 2 months). Back
32
Though it should be noted that there are issues around environmental
limits for coal and oil-fired generation, particularly those relating
to SO2 emissions, which may limit the potential for them to respond. Back
33
NB These are averages, requirements on individual days may be
higher or lower than shown. Back
| 
