Dear reader,
Twelve months ago, UK officials and energy companies were sweating over the possibility that Britain and Europe could face gas shortages over the winter. Fortunately, none of the worst-case scenarios materialised. But that shouldn’t breed complacency.
Wholesale gas prices in Europe have fallen more than 90 per cent since hitting record highs of about €340/MWh last summer. The subsequent warm winter meant the continent entered spring with gas storage levels well above the five-year average.
The worst of the energy storm may have passed. Yet the UK government mustn’t let itself be distracted from the pressing need to further bolster the country’s domestic supplies. National Grid, which oversees Britain’s energy system, highlights the mountain the country has to climb to wean itself off natural gas, most of which is imported. Fossil fuels as a whole made up 82 per cent of the country’s total energy supply in 2022, it says in a report published this week.
Even before Russia’s full-scale invasion of Ukraine, domestic supplies of natural gas met only about 40 per cent of the UK’s needs. More than a third came via pipelines from Europe while the rest was shipped from countries, including the US, Qatar and Russia, as liquefied natural gas.
UK energy company Centrica this week secured an $8bn deal with US group Delfin Midstream to buy 1mn tonnes of LNG a year. The 15-year contract could be sufficient to heat 5 per cent of UK homes for that duration. The majority of British homes are still fitted with gas boilers. The agreement is the latest example of Europe and China racing to lock in LNG shipments from the US to replace Russian exports.
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However, it is likely that the Delfin agreement won’t commence until 2027. That is when the US group is due to complete a new LNG export terminal near Louisiana. Analysts pointed out that the terms of the contract mean Centrica’s energy trading arm could choose to divert shipments to the markets offering the highest prices. Last year, the trading and marketing business accounted for £1.4bn out of Centrica’s £3.3bn of total group adjusted operating profit.
Centrica last year also extended an agreement with Norway’s Equinor to receive an additional 1bn cubic metres (bcm) of gas a year for three winters. Equinor already supplied 9 bcm a year to Centrica.
Traders are cautious about the winter ahead. Fatih Birol, executive director of the International Energy Agency, warned this month that energy prices could rise again in Europe if gas demand in China ramps up. Much will also depend on whether both Asia and Europe experience particularly cold weather conditions.
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Niall Trimble, managing director of The Energy Contract Company, a consultancy, said the following couple of winters could again prove tricky for similar reasons. Countries, including the US and Qatar, are racing to build new facilities to increase the global supply of LNG. But these could take several years to come online. LNG supply capacity should rise from 520 bcm/year in 2021 to about 720 bcm/year in 2027, said Trimble.
Until then, “if there is a coldish winter here [in Europe] and a coldish winter in the far east, prices could soar”, he said.
The UK has set stretching targets to improve its domestic energy security. These include raising offshore wind capacity from just over 13GW to 50GW by the end of the decade.
But energy companies are becoming increasingly exasperated about how these targets will be achieved. Long waits of up to 15 years for grid connections stymie investment. With generous subsidies for clean energy schemes available in the US and EU, there is a danger that some companies could start to prioritise projects elsewhere.
National Grid’s chief executive John Pettigrew lamented this week that the new power lines required to connect projects can also take a decade to pass through the planning system.
The government has promised reforms to both. Mortgages may have replaced gas bills as the latest national obsession but ministers mustn’t let new challenges steer them off course.
Other things I am enjoying this week
Former UK prime minister Liz Truss, whose premiership lasted just 49 days after her “mini” Budget debacle last year, is making a comeback. She has convened a “growth commission” of 13 international economists in an effort to restore credibility for her “pro-growth” agenda. Read more about it in the Financial Times here.
FT colleagues George Parker and Lucy Fisher assess whether Rishi Sunak’s government can avoid defeat in the next UK general election in this insightful Big Read.
Fellow Lex writer Elaine Moore has a new podcast series asking whether the world has reached peak social media and what comes next.
Have a good week,
Nathalie Thomas
Lex writer
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