Catherine Gras 15/01/2019
This post is not about Brexit, although as a French citizen, managing UK and German companies, I hope multiculturality will not disappear post March 29th. My intent is to remind you of some of the key things that happened, or failed to happen, on the GB gas market in 2018. To try and predict what is waiting ahead of us in 2019 and beyond.
2018 is a tale of glass half full or half empty, a tale of optimism and realism …
Looking right back to the end of 2017, a significant number of companies began to pressure BEIS to open a discussion on gas security of supply. This subject has been ignored for years and it was quite a surprise to see it back on the table. These companies were mostly energy users, concerned with rising cost and most likely to bear the brunt of any supply disruption. After considerable effort, they managed to persuade BEIS to table an industry workshop on the subject in March 2018, at the end of the winter.
In the interim came the last week of February 2018, the attack of the ‘Beast from the East’. Most of you will remember road and rail disruption, chaotic pictures and excitable reporting on the TV … but none of you will remember a gas supply disruption. Why not? Because our industry was able to manage the crisis. Being able to manage a thing, though, does not mean it did not happen and we should not indulge in thinking “we made it, everything is fine”.
For the first time in years, the transportation network operator was struggling to find solutions. These days at the end of February and start of March demonstrated the limited resilience of the UK gas market, we had a sudden wakeup call after years of weak signals on its fragility, indicating that the situation was indeed problematic.
Following this in March came the much expected workshop on security of supply. Clearly a good time to face reality and think differently given the recent events. A significant number of questions and recommendations were raised by the participants, with one main question in the background: do we have the energy system we need to support the country’s economy? i.e. reliable and reasonably priced gas and power?
The optimistic amongst you might believe a workshop is a good sign the Government is ready to listen, however the realists amongst you might recognise that a workshop can be used to show a response has been made, allowing the organiser to do nothing further.
Ten months later, we still fail to see what came out of this workshop … some work has been done by BEIS with contributions from OFGEM and National Grid, true, but we have not seen anything concrete from this. Recently, a year after the beginning of all this, a BEIS select committee inquiry was launched, but what should we expect from it?
Even before the BEIS Select Committee had the time to collect written evidence, let alone to publish their conclusions, Greg Clark made it clear that the gas market was a successful example of non-intervention to allow the market to deliver.
It is clear the optimists hold sway, believing that the situation is perfectly managed and there is no reason to change anything, but for us realists, we are already expecting more price spikes and higher gas and electricity bills at times of tensions on the market.
In June we had the announcement of the mothballing of another storage site in the UK. Meaning 70% of the flexibility offered by storage sites was closed down or withdrawn from the market in less than two years. As a strong believer in the benefits of a liberal market, I’m sure you will reply that it is good some assets exit the market if they are not able to survive the economic conditions. However, if you consider what the market can do and, most importantly, cannot do, you may be concerned why, despite a rising demand for flexibility, the operator of a fairly recent flexible asset cannot remain in the market? Obviously this is not something that exercised BEIS in any way during their reflections on security of supply.
I, however, am willing to propose a reason. This is all about the level playing field between the industrial assets in the UK and their competitors in Continental Europe.
The main element in this level playing field is the tax system. Anyone looking at countries in Europe will think that companies in the UK enjoy a good fiscal regime with low corporate tax. True for the most part, notwithstanding the archaic and punitive tax called “business rates”. When this tax accounts for as much as all your other operating costs taken together, it is a problem, especially when all your competitors are paying nothing of the kind. We, at Storengy UK, and many others have been discussing change in this area with the Government and although there were good proposals on the table to modernize this tax and cure some of the most striking problems, the Autumn budget was silent on this subject.
Whilst this topic is a political nightmare and the particular situation of storage operators may not be sufficient to justify making a bold move on this, I still believe we should try to change this tax and make sure it does not impact other sectors as badly as it does us.
I will finish the review of this year with a long story that turns into a complete fiasco. Am I talking about B*E*IT … no, this the GCR, the Gas Charging Review, the GB implementation of the EU Tariff code. After nearly two years of stakeholders’ consultation, industry workshops and forums, 11 proposals were tabled. In July 2018, the Panel in charge of reviewing the implementation of the GCR recommended none of the 11 options should be chosen. This recommendation was then passed to OFGEM for a decision on the way forward. Just before Christmas 2018, we got the decision from OFGEM. It had taken them another five months to confirm they would not pick any of the proposals, asking the industry to go back to the drawing board.
The GCR is important for storage operators, but not only them, any user of the gas network may be impacted by a change in tariffs especially as these changes may be very significant. During those five long months that we waited for a decision, OFGEM conducted an impact assessment on the different options but following the decision has not published any of the results. Having access to this analysis will be key to understanding what the best solution for GB gas market could be. The current tariff system may not be fully compliant with the EU code, but it is working. Any change should therefore be for the best of the market, not solely for compliance with rules that may soon no longer apply to this country.
I believe we should forget about the timing given by the EU and OFGEM and work on a solution that will guarantee reliable and fairly priced gas for consumers. A solution that will also help us face the challenges of increasing low carbon intermittent energy production that requires increasing flexibility from the gas market. This will be one of my main wishes for 2019.
So for the coming year I ask myself what position should I take? optimistic? realistic? It’s difficult to say what will happen on these issues in 2019. So I will choose realism for now, but I will continue to look for those signs to feed the optimist within.
Energy is our future, save it!