Policy Briefing
Review of Energy Policy: 2018
Dec 2018
Our previous work on UK Gas Security and assessments of UK energy policy have suggested that the current approach to natural gas in the UK’s energy system is one of ‘gas by default’. This approach assumes that the existing capacity and its supporting infrastructure will be there when called upon to provide secure access to energy services. Looking forward there are numerous uncertainties relating to the future role of gas, yet despite this, it only attracts one-page in the Government’s recent White Paper ‘Powering to Net-Zero’, along with a promise to consult on market structure.
Rather than ‘gas by default’, what is required is ‘Gas by Design’ – which would provide a clear strategy to describe and support the changing role of natural gas on the road to a net zero economy. The starting point for such a strategy must be an understanding of the current role of natural gas beyond the headline statistics – such as those used in the White Paper which notes that: “Gas currently represents almost 30% of final energy consumption and 40 per cent of energy generation.”
When writing this blog, we had the coldest temperatures for 10 years, I was working from home with the gas central heating on most of the day. A check of the power generation mix, told me that natural gas power (from combined cycle gas turbines) accounted for 45% of power generation, with coal at 5%, wind at 15% and solar 7%. The situation speaks to two key ‘energy system services’ provided by natural gas in the UK’s energy system. The first is inter-seasonal storage (for heating and electricity) and the second is the provision of flexible firm power needed to support renewable power generation.
UK gas demand is highly seasonal due to the role that natural gas plays in winter heating. Now that we can no longer rely as much on surge production from the UK Continental Shelf (UKCS), and our largest storage facility Rough – a depleted gas field – is no longer operational, we have to meet demand over and above that supplied by the UKCS. Domestic production is supplemented with pipeline gas from Norway, supply from Continental Europe via interconnectors from Belgium and the Netherlands, and LNG from three terminals. The latter represents a form of inter-seasonal storage as the terminals typically fill up in the summer months and then supply gas to the market when price dictates during the winter.
A visit to National Grid’s ‘Prevailing View’ dashboard tells me than since the turn of the year we have been drawing down on our LNG stocks, as we did the year before. However, I am also aware that cold weather in Northeast Asia has resulted in record high prices on LNG spot markets and it would be costly to attract LNG to the UK at the moment, which explains the lack of significant deliveries at present. It also takes two weeks for supplies to arrive from Qatar. While the UK enjoys a very high level of gas security, it remains the case this is guaranteed by the willingness of the consumer to pay the price needed to attract natural gas, but increasing reliance on LNG potentially globalises this risk.
If North Sea production continues to decline more rapidly than domestic gas demand, as projected by the Oil and Gas Authority, we will have to import more natural gas. This will have important economic and climate consequences, in relation to balance-of-payments and the relative carbon intensity of the gas that we consume. The hope is that the decarbonisation of heat will significantly reduce natural gas demand in the future, thus reducing the amount we need to import. Of course, this also depends on the future dynamics of UKCS production. Here the White Paper, and its chapter on oil and gas, makes clear the tensions between ‘maximising economic recovery,’ the goal of the Government’s current approach to the North Sea, and its desire of the UKCS to be a net-zero by 2050 (production activities on the UKCS currently accounts for about 4% of the UK’s GHG gas emissions).
It is clear that Government wants the offshore industry to address its emissions—particularly venting and flaring, and it is also considering introducing GHG abatement to future licensing requirements. The industry is responding to these challenges – the Oil and Gas Authority submitted a New Strategy to Parliament at the end of last year. The danger is that additional costs associated with these requirements may make a mature, high-cost basin less attractive and accelerate the decline in production or put off would-be investors. This may actually increase the reliance on imports that have a higher GHG intensity.
Longer term, there is a desire to repurpose and integrate the existing offshore infrastructures to support Net-Zero, but this may not be realised if infrastructure is decommissioned. Discussions are still ongoing on a transformational ‘North Sea Transition Deal.’ In this context, a ‘gas by design’ strategy needs to address the future integrity of the entire value-chain from the upstream producers through midstream pipeline and storage to local distribution to consumers. This will become more challenging as both domestic supply and demand continue to decline, the former due to depletion, the latter to due to decarbonisation policies.
Flexibility is the second energy system service currently provided by natural gas. When the UK engaged in its ‘dash to gas’ in the 1990s it created a gas-based power generation system that replaced coal, delivering rapid decarbonisation as a co-benefit. The pipeline infrastructure was built to bring gas production onshore to supply the power industry, industrial customers and households for heating and cooking. The business model of gas-fired power required high load factors to pay for the investment in capacity.
Over the last 20 years, two things have changed, the first has been the rapid decline in the role of coal in power generation, particularly post 2015; the second, more recent and even more rapid, is the growth of renewable power generation. Almost by default, this is changing the role of natural gas. On the one hand, the fall of coal—which was less than 2% of power generation in 2020 and should be gone by 2025—will remove a source for firm and relatively flexible power, as well as a source of storage in stockpiled coal, potentially increasing the dependence on natural gas. On the other hand, the growing generating capacity of renewables means that the load rates/factors on gas power generation have fallen, although there has been some improvement as coal has been phased out.
As the cold spell demonstrated, we still need a lot of gas power when sufficient renewable power generation is not available. This highlights the role gas plays in supporting the security of supply on a short-term within day and day-to-day basis. Previous UKERC research has demonstrated just how flexible the gas network has become—assisted by the use of pipeline line pack as a source of short-term storage—but there are limits to that flexibility and things have been close this winter.
Longer term the hope is that there will be electricity storage to solve the problem, such as large-scale batteries and vehicle-to-grid technology, but that is still very expensive and more than some way off at the scale required. Interestingly, hydrogen is a possible alternative, but that may have to be derived from natural gas, in an initial phase at least. Equally, at present, demand management is not providing an effective tool to address this challenge, again, that may change in the future, but it will not address the seasonal variations in heat demand. For the moment, the natural gas system continues to play an essential role in balancing the power system as well as the changing hourly, daily and seasonal demand for heat.
Unfortunately, it is not a simple matter of turning down the dial from gas mark 10 as decarbonisation gathers pace and results in lower and lower gas demand. As gas demand falls, under the current system where the gas network is funded through gas bills, fewer and fewer customers would end up paying to maintain the system. Whilst this seems appropriate on many levels, it also overlooks the additional value that everyone benefits from i.e., providing resilience and flexibility to the UK’s wider energy system. In the medium-term it may be possible to blend biogas and hydrogen in the existing system.
Longer-term it may be possible to repurpose the gas network to support hydrogen and significant work is ongoing here, but timing is everything. There is likely to be a movement away from a national transmission system to regional networks, with the possibility that some regions will reduce their dependency on the gas grid entirely. In other areas there could be a more limited role for the gas grid, such as where hybrid heat-pumps have a greater role to play. These questions, that are far from the only ones, highlight the complexity of managing the changing role of gas as the energy system is transformed.
In sum, it is relatively easy to model and chart the gradual reduction in the role of unabated gas in the UK energy system, along with the redeployment of some existing assets and investment in new ones, to deliver a net zero energy system by 2050. The real challenge is working out how to get from where we are today, where gas is the most important element of the UK’s energy mix, to where we need to be by 2050. That is the purpose of a ‘gas by design’ approach, to ensure that the current energy services supplied by natural gas—both to the energy system itself and to consumers—continue to be available until no longer needed as the energy system transforms to become net zero.