For the ministers and officials assembled, it was an embarrassment all around.
Late last week, as we were at the annual Windsor Energy Consultation (WEC) just outside London, British Gas Plc confirmed that the nation was facing a natural gas shortage as freezing temperatures grip the country.
You see, blizzards, strong winds, drifting snow, and bitter cold recently brought Britain to a standstill as the weather system nicknamed the “Beast from the East” combined with winter storm “Emma” to create some of the most testing weather the U.K. has had to face in years.
Now, I can attest first hand that this cold snap was not something to take lightly.
As a regular attendee of the Windsor Energy Consultation over the past decade, a visit that includes spending three days each year at the royal residence, I know that Windsor Castle can be drafty in any weather.
But this time around, it was positively frigid.
“Frosty” Windsor Castle grounds (St. George’s Chapel on the left), March 2, 2018; photo: Bill Arnold
And nationwide, this “big freeze” has brought to light a very serious problem.
And it’s one that is only getting worse…
Bitter Cold Adds (Further) Fuel to the Flames
The unfolding gas crisis has brought about a renewed immediacy to a major political issue that has been percolating in the U.K. for some time now.
You see, for the third year in a row, a portion of my two briefings (one to the plenary meeting; one to the ambassadors), was devoted to the growing global need for a new “energy balance.”
Simply put, that balance involves two related advances.
The first is an expansion in the number of reliable (and distinct) energy sources. The second addresses the extent to which these sources provide a genuine interchangeable network of availability from such sources.
The rise of renewable sources (solar, wind, biofuel, even geothermal) has been the most visible manifestation of the developing balance. But the crucial element to remember is the balance nature of it all. Related: OPEC Deal In Jeopardy As Iran And Saudi Arabia Square Off
As we have noted in the past, this is not an exercise in finding a “silver bullet” to wean the market from a dependence on any particular energy source.
All energy sources are required. It’s the integration of these sources that translates into the most efficient, cost-effective, and best solution for both producers and consumers.
Now, among the assembled officials and sector dignitaries at this year’s Windsor meeting, there was a widespread agreement that a global “energy balance” is necessary.
But you wouldn’t know it looking at the situation developing currently.
In fact, despite that agreement, the current gas crisis emerging in the U.K. actually results from a shocking referendum decision back in 2016…
Delays in moving on still contentious (and well over budget) nuclear power plants combined with ongoing pipeline problems from the North Sea offshore fields has left any “energy balance” forward planning very much in limbo.
Yes, the increase in wind power in the U.K. has occurred more rapidly than expected, but it still lags behind the rise in demand.
The majority of demand in the U.K. is still covered by natural gas – both from the North Sea, which is becoming increasingly questionable when it comes to extractable volume, and expanded liquefied natural gas (LNG) imports.
Unfortunately, the nation’s supply issues have been complicated by one event that has overshadowed everything else for more than a year and a half.
I’m talking about “Brexit,” the British decision to leave the European Union.
And the supply issue that followed this landmark decision is creating a major problem for British energy consumers.
But after a sidebar conversation with a British Gas executive at Windsor, the reasoning behind my original argument has become even more compelling…
Why Brexit is Hiking U.K. Power Prices – and the Worst is Yet to Come
As I explained back in July 2016, history tells us that the winter of 1946-1947 was one of the worst experienced by the U.K. in a century – and the coldest in three.
Coming so soon after the end of World War II, an already crippled economy felt the full impact of freezing weather that killed both livestock and crops, while jamming roads and railways with snow.
It got so bad that at one point, Winston Churchill observed that he couldn’t even get his favorite cigars.
But the main concern was the provision of electricity. Not a single power-generating station in all of England had escaped wartime destruction, and a return to “normalcy” in the power sector was still years away.
So during the cold winter of 1946-1947, the entire British population had to hunker down.
Now, the current situation is hardly as dire.
But ever since the U.K. voted to separate from the EU on June 23, I’ve been waiting for the initial signals that this divorce will have consequences in the energy sector.
Now we have one, with dire consequences for British consumers…
Brits Should Expect (Much) Higher Power Prices
The signal shows a coming double whammy for British natural gas users, as a result of the post-Brexit decline of the British pound sterling to more than thirty-year lows against the dollar.
This decline has prompted two energy moves in very different directions. Unfortunately, neither is good for anyone living in the U.K. as temperatures decline…
First, the descent of the pound sterling has prompted U.K. retail natural gas distributors to forego discounts moving forward. This is, of course, based on the same reasoning that will certainly result in another round of appreciable electricity price hikes by the major national utilities.
Maintaining profit margins will be impossible at current levels, given the forex pressure on the bottom line. Most observers also believe that increased taxes are now inevitable, as the unexpected currency (effective) devaluation has made revenue an important factor.
Fact is, even before Brexit, this was placing additional pressure on an already strained power sector.
But in a post-Brexit world, this is leading to some serious difficulties, both for end users and domestic power distributors, with problems – some Brexit-related, some not – hitting all British energy sources…
The U.K. Cut its Winter Gas Reserves – Just in Time for the “Big Freeze”
Chief among those concerns are the profitability of North Sea production, and a decimation of renewable alternatives (for example, over a third of all jobs in U.K. solar have vanished).
The British end user, however, is going to feel the pinch in an additional way…
You see, in June 2017, utility giant Centrica plc (CPYYY) announced plans to close the offshore Rough storage facility, which currently accounts for about 70% of all British natural gas storage capacity.
Immediately, the news caused a spike in winter-month natural gas futures prices, as fears of a natural gas shortage come winter began to swarm.
Fears that seem to have come full circle…
An Ill-Timed Outage
In the midst of the “big freeze,” Centrica announced a 12-hour outage at the Rough facility.
As a result, gas prices for immediate delivery more than doubled to their highest level in almost a decade as the arctic chill, and high snowfall levels drove up the demand for heat and electricity. In fact, demand for gas was so high last week that the National Grid Plc asked large industrial customers to scale back consumption.
“The closure of Rough has changed the landscape for U.K. gas storage. and today that landscape looks very bleak for major energy users such as U.K. manufacturing industry,” Mike Foster, chief executive officer of the Energy and Utilities Alliance told reporters. “Prices have rocketed, hitting British industry particularly hard. If supply is interrupted, it will be the industry that has to stop production to protect consumers and their heating needs.”
In previous years, Rough acted as a buffer for supply shocks like the U.K. is currently dealing with. In fact, the Rough facility was previously able to meet as nearly 10% of the nation’s daily peak winter demand.
But with its impending closure, Centrica now is only withdrawing gas that remains at the site, and even that process is subject to hiccups like they saw last week.
And that’s creating a knock-on effect.
You see, in the summer, U.K. demand for natural gas comes primarily from gas being pumped into storage for winter heating.
And that has introduced the second major post-Brexit energy move…
British Gas is Being Exported – Only to Be Reimported Again at a Premium
The dramatic change in cross-currency valuations following the Brexit decision has resulted in the U.K. exporting more natural gas to Belgium.
The “spare fuel” being exported is actually coming primarily from volume that would have gone to Rough for storage…
Except that the weaker pound means that it’s now more profitable to send the gas along the east-west North Sea pipeline to the terminal center at Zeebrugge on the Belgian coast instead.
However, just about all analysts agree that the rising exports from Britain to Europe are more a result of the collapse in currency value than the impending Rough closure. A Brexit-induced “pounding of the pound” has provided some nice profits for European importers… and Centrica has obliged.
But for the average Brit back home, hoping to heat their house during this year’s “big freeze,” the short-term future may require a traditional British stiff upper lip.
Now, due to its limited natural gas storage capacity, the U.K. has tried to counteract its supply woes with increased LNG imports from Norway, Qatar, and the U.S. In fact, the National Grid welcomed its first LNG import from the U.S. last summer, as this super-cooled fuel continues to find new buyers abroad.
But even that has come with its own set of challenges this winter.
Truth is, even with the influx of supply from the U.S., LNG imports have been scarce across Europe this season, as a surge in demand from China and other Asian counties have driven up the cost of this super-chilled fuel.
Which left the U.K. with little maneuvering room when the cold arrived last week.
In other words, we’re looking at a nasty cycle: today’s rising exports of British gas will go to European storage, with some of that returning as higher-priced imports when the weather gets colder.
Now, Britain isn’t suffering alone.
Gas prices in the Netherlands have surged to more than four times the levels it saw this time last year, according to data from the Pegas exchange, after demand rose there with the cold.
But this isn’t the first time that natural gas price shocks have left U.K. consumers out in the cold this winter. In fact, the market was roiled by an explosion at one of Europe’s major gas trading hubs combined with a major outage at the North Sea Pipeline just before the Christmas holiday.
The bottom line here is, as I mentioned back in 2016, the energy situation in the U.K. is quickly heading from bad to worse.
A predicament that has only intensified over the past 20 months since I first wrote about it.
Which only goes to show that a global “energy balance” is more imperative than ever.
And as the rest of the world slowly starts to catch up to what we’ve been saying, this means one thing.
The next few years will be brimming with “energy balance” plays.
By Dr. Kent Moors
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Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment. His… More