Gas demand volatility linked to renewables
On 1st March 2018, when the UK was amid the ‘Beast from the East’, National Grid issued a gas deficit warning for the first time since the system was introduced in 2012. The warning followed multiple gas supply outages, including South Hook LNG terminal, Kollsnes gas processing plant and the BBL interconnector between Britain and the Netherlands.
This resulted in reduced supplies from Norway and Holland, leading within-day gas prices to reach a record high of 350p/th. However, roll ahead nearly a year, and there is a marked difference in gas prices, with day-ahead prices falling to a 16-month low of 45.6p/th on 19th February.
Cornwall Insight analysis finds that while the weather remains mild and LNG flows and storage levels hold up, it is not surprising that gas prices have fallen year on year. However, the underlying volatility in gas demand is still a significant factor, resulting from the growth of renewables in the power sector. This may present a structural vulnerability that could make the gas market more sensitive to weather-driven changes in the future.
Alex McGregor, Analyst at Cornwall Insight, said:
“There is a dramatic difference between this time last year and today – and it’s not just the weather conditions. The turnaround in prices has stemmed from a change in GB’s gas supply mix, above seasonal normal temperatures, healthy gas storage levels in Europe and the changing role of gas in power generation to become more flexible.
“The most significant difference in GB’s supply mix from last year has come from LNG. A lower price differential between Asia and Europe has incentivised cargoes to go to GB, resulting in an influx of 62 LNG tankers come to GB since the start of October 2018 compared to just 16 between October 2017 and February 2018.
“This has not only helped put downward pressure on GB gas prices but also led to a noticeable fall in storage withdrawals this winter. This trend has been seen across Europe, with gas storage facilities in Belgium, France, Germany and Holland all up year-on-year – also helped significantly by milder weather.
“Higher wind output levels are also changing the way gas is used for power generation. With higher levels of wind capacity, total gas demand for power falls and thus contributes to the lower gas prices. However, given that wind output is intermittent, gas-fired power stations are still required to act more flexibly.
“During the ‘Beast from the East’ gas demand went above the level expected from a 1 in 20-year cold spell demand forecast. Recently, we had exceeded the forecast on several occasions but not down to extreme weather. The two events this year – 23 and 31 January – both occurred when wind output was low.
“This goes to show that lower overall gas demand for power does not prevent demand spikes, particularly in a more renewable power system where gas provides flexible provision as mitigation against variability in renewable output.”
Source: Cornwall Insight