The Secretary of State for Energy and Climate Change (Mr Edward Davey)
Gas will continue to be a crucial part of our energy mix to the 2030s and beyond. It is therefore essential that we have secure supplies at competitive prices. Great Britain has a well-functioning gas market with high levels of liquidity, and comparatively low wholesale gas prices. Previous independent assessments1 show that we enjoy high levels of gas supply security provided by a diverse range of supply sources, including our own production, pipeline imports from Norway and the EU, imports from global markets via LNG and storage. These sources have provided reliable gas supply over recent challenging winters, including our highest ever daily gas demand in January 2010 and the protracted cold spell earlier this year.
At the same time, new challenges are emerging, including our increased dependence on gas imports, and greater demand volatility. We therefore already have a range of measures in hand to promote our gas security. We also asked Ofgem to report to us on the outlook for gas security of supply and whether there is a case for further interventions in the gas market. Ofgem’s report, published last November, confirmed the resilience of our gas market. Since then, my Department has been working to assess whether the potential benefits of a further intervention in terms of more secure supply and effects on gas prices might outweigh the associated costs and risks.
We have analysed three interventions in the gas market to establish whether they might improve our gas security cost-effectively. Our analysis shows that, although such interventions could enhance our gas security, under most scenarios they would not do so cost-effectively. If considering only the direct benefits in terms of avoided costs of disruption against the cost of building the storage, the costs outweigh the benefits in all cases. In addition, all options risk unintended consequences through distorting a well-functioning GB gas market or crowding out investment in alternative gas supply sources. These effects could undermine any additional security of supply intervention might bring. Therefore, we see no clear case for a further intervention in the gas market.
Given the importance of gas we will instead press ahead with a range of interventions already in hand to improve our gas security of supply. These include:
Ofgem’s proposals to sharpen incentives on gas suppliers to secure their supply via changes to emergency cash-out processes, and review of the efficiency of our gas interconnectors with Europe;
Our work within the EU to ensure adoption and implementation of a variety of measures to enhance gas security through a well-functioning, integrated and transparent European gas market;
Changes to the electricity market which should provide a further incentive for power generators to safeguard their fuel supplies;
Our work to maximise the economic production of our domestic gas resources including from the North sea and unconventional sources such as coal-bed methane and shale.
We expect these measures will further improve the supply security of GB’s well-functioning gas market. Further details of our analysis and a copy of the cost-benefit analysis can be found at https://www.gov.uk/government/publications/gas-security-policy-assessment.
1GB Gas Security and Options for Improvement: A report to the Department for Energy and Climate Change”, Poyry, March 2010, “Gas Security of Supply Report: Ofgem report to Government”, Ofgem, November 2012