The end of self-sufficiency is proving painful for British
THE last time oil prices were as high in real terms as they are today—in the dark days of the 1970s—the British had one reason to be cheerful. The discovery of large dollops of oil and gas beneath the North Sea was transforming the country from an importer of energy into an exporter, promising a big economic windfall and a degree of insulation from gyrating oil prices. SNIP Yet Britain’s gas market is changing fundamentally in ways that make it much more vulnerable to higher gas prices. As domestic supplies dwindle, Britain must make up the shortfall from overseas, either through pipelines from Europe or by buying shipfuls of liquefied natural gas (LNG) on the global market. Currently, North Sea production can supply around two-thirds of Britain’s maximum demand; that will fall to around half as soon as 2010. Expensive gas is particularly painful for Britain, which relies on the stuff to heat around 85% of its homes. The country also uses gas to generate around 40% of its electricity, a particularly high proportion that is set to rise still further over the next decade. All but one of Britain’s doddery nuclear plants will be closed by 2023, and new environmental laws could mean that up to half of coal stations will have to shut down over the coming years. On current plans much of that capacity will be replaced by cheap, quick-to-build gas plants, boosting demand and making Britain even more reliant on flaky supplies from the international markets. Consumers have already discovered just how vulnerable Britain is now that it is no longer self-sufficient. In November 2005, in the midst of the coldest winter for years, gas prices quadrupled in the course of a few days. Later that winter, a fire at Britain’s only big gas-storage facility provoked a smaller spike and prompted National Grid, which runs the gas and electricity supply networks, to give warning for the first time that there might not be enough gas to go around. Despite the high prices, little gas flowed in from Europe, whose non-liberalised companies—often tied into murky long-term contracts—preferred to keep their gas reserves for their own consumers. LNG ships were notable mainly for their absence, with many diverted to the Far East to take advantage of Asia’s willingness to pay even higher prices than Britain. Such volatility—exacerbated by a lack of storage, another legacy of the North Sea’s past bounty—could be even more disruptive than higher prices. Import facilities have since been beefed up. A big new pipeline from Norway, capable of carrying up to a fifth of peak demand, was completed in 2006; upgrades to an existing one from Belgium were finished in 2007. New LNG terminals in Kent and south Wales can receive gas cargoes from Algeria or Qatar and several gas stores are being built. But recent history suggests that British energy providers will have to pay over the odds to secure international gas. Ominously, and despite all the new capacity, National Grid’s gas-supply forecast for the coming winter is its most uncertain for years. Britain’s shaky and pricey gas market will translate into pain for Gordon Brown. High oil prices have already forced one embarrassing climbdown, when a planned increase in petrol duty in October was postponed amid shrieks from motorists squeezed by record pump prices. Consumer-price inflation, at 3.8%, is almost two percentage points above the government’s target. A big hike in gas bills will hurt households up and down the land, pushing up the overall inflation rate still higher, and stoking fiercer demands from disgruntled public-sector workers for pay rises that the government can ill afford. High energy prices have already wrecked another government ambition, to reduce to zero the number of people living in “fuel poverty,” defined as those spending more than 10% of household income on heating. Energywatch, a consumer watchdog, says that over 4m households are fuel-poor, a figure that has doubled since 2004, reversing an eight-year decline. The malfunctioning gas market is now leading many—including, privately, some energy-industry bosses—to call into question Britain’s entire model of liberalised energy markets, credited with keeping British gas prices lower than those in Europe for many years. The government argues that the situation would be greatly improved if Europe were to liberalise its markets along British lines, encouraging European firms to respond more quickly to British price signals. But with Brussels deciding against a forced break-up of Europe’s gas giants earlier this month, ministers could be in for a long wait. http://www.economist.com/world/britain/displaystory.cfm?story_id=11792847 Scary times ahead
THE last time oil prices were as high in real terms as they are today—in the dark days of the 1970s—the British had one reason to be cheerful. The discovery of large dollops of oil and gas beneath the North Sea was transforming the country from an importer of energy into an exporter, promising a big economic windfall and a degree of insulation from gyrating oil prices. SNIP Yet Britain’s gas market is changing fundamentally in ways that make it much more vulnerable to higher gas prices. As domestic supplies dwindle, Britain must make up the shortfall from overseas, either through pipelines from Europe or by buying shipfuls of liquefied natural gas (LNG) on the global market. Currently, North Sea production can supply around two-thirds of Britain’s maximum demand; that will fall to around half as soon as 2010. Expensive gas is particularly painful for Britain, which relies on the stuff to heat around 85% of its homes. The country also uses gas to generate around 40% of its electricity, a particularly high proportion that is set to rise still further over the next decade. All but one of Britain’s doddery nuclear plants will be closed by 2023, and new environmental laws could mean that up to half of coal stations will have to shut down over the coming years. On current plans much of that capacity will be replaced by cheap, quick-to-build gas plants, boosting demand and making Britain even more reliant on flaky supplies from the international markets. Consumers have already discovered just how vulnerable Britain is now that it is no longer self-sufficient. In November 2005, in the midst of the coldest winter for years, gas prices quadrupled in the course of a few days. Later that winter, a fire at Britain’s only big gas-storage facility provoked a smaller spike and prompted National Grid, which runs the gas and electricity supply networks, to give warning for the first time that there might not be enough gas to go around. Despite the high prices, little gas flowed in from Europe, whose non-liberalised companies—often tied into murky long-term contracts—preferred to keep their gas reserves for their own consumers. LNG ships were notable mainly for their absence, with many diverted to the Far East to take advantage of Asia’s willingness to pay even higher prices than Britain. Such volatility—exacerbated by a lack of storage, another legacy of the North Sea’s past bounty—could be even more disruptive than higher prices. Import facilities have since been beefed up. A big new pipeline from Norway, capable of carrying up to a fifth of peak demand, was completed in 2006; upgrades to an existing one from Belgium were finished in 2007. New LNG terminals in Kent and south Wales can receive gas cargoes from Algeria or Qatar and several gas stores are being built. But recent history suggests that British energy providers will have to pay over the odds to secure international gas. Ominously, and despite all the new capacity, National Grid’s gas-supply forecast for the coming winter is its most uncertain for years. Britain’s shaky and pricey gas market will translate into pain for Gordon Brown. High oil prices have already forced one embarrassing climbdown, when a planned increase in petrol duty in October was postponed amid shrieks from motorists squeezed by record pump prices. Consumer-price inflation, at 3.8%, is almost two percentage points above the government’s target. A big hike in gas bills will hurt households up and down the land, pushing up the overall inflation rate still higher, and stoking fiercer demands from disgruntled public-sector workers for pay rises that the government can ill afford. High energy prices have already wrecked another government ambition, to reduce to zero the number of people living in “fuel poverty,” defined as those spending more than 10% of household income on heating. Energywatch, a consumer watchdog, says that over 4m households are fuel-poor, a figure that has doubled since 2004, reversing an eight-year decline. The malfunctioning gas market is now leading many—including, privately, some energy-industry bosses—to call into question Britain’s entire model of liberalised energy markets, credited with keeping British gas prices lower than those in Europe for many years. The government argues that the situation would be greatly improved if Europe were to liberalise its markets along British lines, encouraging European firms to respond more quickly to British price signals. But with Brussels deciding against a forced break-up of Europe’s gas giants earlier this month, ministers could be in for a long wait. http://www.economist.com/world/britain/displaystory.cfm?story_id=11792847 Scary times ahead
