UK gas prices surge on supply fears

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The price of wholesale gas surged to a record high on Friday after the unexpected closure of one of three import pipelines.

A technical fault at the UK-Belgian interconnector, one of the UK's biggest import pipelines, forced the shutdown.

The price of gas for same-day delivery jumped as much as 50% to 150 pence a therm.

It comes amid a prolonged cold snap which has already sparked fears that the UK will run out of stored gas.

Analysis

Today's price spike demonstrates just how vulnerable Britain's energy system can be, particularly in the winter.

The prolonged cold spell means demand for gas is high. As we are approaching the end of winter, our own gas storage levels are low.

That leaves us more reliant upon imported gas from places like Norway, Qatar and mainland Europe. This reaches us through key pieces of infrastructure - LNG terminals and pipelines.

But when one of those breaks down, concerns about supply and demand grow and the market gets nervous.

The UK-Belgium pipeline is expected to return to full capacity. The immediate supply shock is over.

But if this cold spell continues into April and our domestic gas storage runs out, it is possible that wholesale gas prices could spike up again.

"I don't think the price has ever been higher. It's certainly super spike territory," a gas trader at a utility said. "The worrying thing is it can probably go higher."

The latest statement from Interconnector UK (IUK) said it had solved the problem of the failed water pump, which occurred at about 07:00 GMT.

The company said it could confirm that normal operations had resumed and that gas would flow at full capacity from 15:30 GMT.

The gas price fell back to 100 pence a therm earlier in the day when the company indicated that the fault would soon be fixed.

Gas market 'responsive'

Meanwhile, some reports suggested that the unusual cold weather could lead to the UK running out of gas within days, but the government denied this.

"Protracted cold weather increases demand, but the UK gas market is responsive and our gas needs are continuing to be met," said a spokeswoman from the Department of Energy and Climate Change (DECC).

"Gas storage would never be the sole source of gas meeting our needs, so it is misleading to talk purely about how many days' supply is in storage.

"We are in close contact with National Grid, who are able to step into the market to source gas and increase incentives on gas suppliers if they think there is a risk of a supply shortfall, " she added.

The National Grid said that normal demand in March was about 270 million cubic metres, while Friday's forecast for demand was 320 million cubic metres.

Start Quote

The next week will be critical”

End Quote Joe Conlan Energy analyst

That is higher than normal but still well below the level that triggers a danger warning. A spokesperson said the market was "responding positively" and "there is plenty of gas available".

Next week critical

However, energy analyst Joe Conlan from Inenco warned that there was still a risk that customers might be asked to rein in their gas use next week. His calculations suggest the UK has just 1 and half day's gas supply in storage.

"The next week is critical. A lot of business demand will fall away over the weekend but the system could get tight again after that. It all depends on whether they manage to ramp back up supply."

The UK has one eighth of the storage capacity of Germany. But DECC pointed out that the UK has other energy sources.

"Some countries on mainland Europe have more gas storage capacity than the UK but they don't have the benefit of North Sea supply and our extensive range of import infrastructure," the spokeswoman said.

Corin Taylor from the Institute of Directors business leaders' group said: "The failure of the interconnector is a stark warning.

"If we don't expand domestic gas production, we will be left exposed to potential supply shortages and more volatile prices. Shale gas could not come at a more vital time."

On Thursday, the boss of the energy firm SSE, Ian Marchant, warned that there was "a very real risk of the lights going out" in Britain, because the government was significantly underestimating the scale of the capacity crunch facing the country.

That call was echoed by Ignacio Galan, Chairman of Iberdrola and Scottish Power. He said that while the Energy Bill was going in the right direction, "greater clarity of detail is needed if investment in new power stations is to be speeded up."

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