Gas (Supply and Demand)

Part of the debate – in the House of Commons at 3:51 pm on 14th March 2006.

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Photo of Alan Johnson Alan Johnson Secretary of State for Trade and Industry 3:51 pm, 14th March 2006

Early yesterday, National Grid issued a gas balancing alert as a prudent signal to the market to increase gas supplies further. That was a planned measure and not an emergency response. National Grid took that action in response to an increase in gas demand due to the cold weather, problems on the supply side with the Rough storage facility being out of operation, and low delivery through the interconnector at the weekend. That resulted in a significant call on short-range gas storage and the resulting spike in the gas price.

As of today, the demand-supply situation has eased compared with yesterday. Demand has fallen to a near seasonal norm. Supply has increased, with greater flow through the interconnector. We are also seeing deliveries through the Isle of Grain and a further shipment of liquid natural gas is due to dock tomorrow. Deliveries from the North sea are performing strongly. National Grid expects supply and demand to balance today and does not anticipate the system being out of balance in the coming days. But National Grid, Ofgem and my Department will of course continue to monitor the situation carefully, in case of any change in the anticipated demand-supply picture.

There is no doubt that Rough being closed is making things more difficult than they otherwise would be. Rough accounts for about 80 per cent. of our total storage capacity. It can supply 10 per cent. of average daily winter demand. Were it in operation, we would not be experiencing any problems this week. Hon. Members may recall that an accidental fire a few weeks ago shut the main pumping station; the damage caused is still being repaired. We are in close contact with Centrica, which owns the facility, and understand that it will not be back in action for a couple of months.

It is, of course, normal for storage to be used during the course of the winter. We would expect the market to be drawing on short and medium-range storage in current circumstances, particularly at this late stage of the winter. We have had a spell of colder weather later in the winter and the UK's long-range storage facility has been shut for a month. The gas system and market has responded to those circumstances.

Let me reiterate that on present information, we are not expecting a formal gas supply emergency. While it is clear that we must not be complacent, it is equally important not to cause unnecessary panic. The present situation does not threaten domestic, or the vast majority of commercial and industrial, supply. And even were there to be an emergency, National Grid would be able to maintain supplies to domestic and other key gas consumers.

Of course the situation has had a major impact on prices. The spot gas price has increased significantly since the weekend. I know that for some heavy industry it is not easy to make alternative arrangements and the high prices will have an impact. The market is responding to a tight demand-supply situation, as we would expect. Gas suppliers have every incentive at those prices to maximise supply from all possible sources and we are in close contact with the operators of the interconnector to ensure that it flows as much as possible.

Market liberalisation in mainland Europe is a key factor in reducing energy costs for British consumers. That is why we have been encouraging the European Commission to take action and why we warmly welcomed the hard-hitting report that it published on 16 February. We shall continue to press for market reform.

Looking forward, significant new import infrastructure—new pipelines and liquefied natural gas import terminals, as well as increased storage—is to be delivered by the energy sector in coming years. Representing some £10 billion of investment, that will increase security of gas supply to the UK and should reduce upward pressure on UK prices.

In short, the circumstances are exceptional: our largest storage facility is out of action and we are experiencing an unseasonably cold spell of weather. None the less, supply is meeting demand and the market mechanisms are working, albeit at a relatively high spot price. National Grid, Ofgem and my Department continue to monitor the situation carefully.