National Grid's liquified natural gas (LNG) plant is seen at the Isle of Grain in southern England August 16, 2013. The Mayor of London's preferred plan for a new airport on the Isle of Grain would require to relocate one of Britain's key gas import facilities at a time the UK relies ever more on overseas supplies. Photograph taken August 16, 2013. REUTERS/Paul Hackett (BRITAIN - Tags: TRANSPORT BUSINESS POLITICS ENERGY ENVIRONMENT)/File Photo

The surreal, but also real, problem of Britain’s gas glut – Sky News

The UK energy system is drowning in natural gas. There are so many things in this country that for the time being at least no one is quite sure what to do with them.

If at this point you’re wondering if I’ve lost my mind or you’ve been reading an article from a year or two ago: No.

It’s mid-May 2022; The war in Ukraine is still raging. Europe is desperately trying to move away from Russian natural gas, and UK household energy bills (including, yes, gas bills) are at record levels.

I promise I didn’t lose the balls. The UK is already experiencing an unprecedented glut of natural gas.

This may still seem unreasonable, so consider, as a guide, the spot price of gas in wholesale markets at the moment. We’re talking about so-called “next day” prices here: the price you’d pay for natural gas if you wanted to deliver it tomorrow.

Ed Conway's article on why gas prices are so cheap in the UK and why consumers don't see the added benefits

The Northern European headline price (TTF, as it is known) has fallen slightly since the Russian invasion of Ukraine, but it is nonetheless much higher than it was before the invasion, and more than twice the level it was last summer.

Now look at the UK’s main wholesale gas price, NBP or “national equilibrium point” to give it its technical name. It dropped from about 285p in the heat in late March to just 38p a few days ago. At the time of writing, it had bounced up to 100p in the heat, but it was still significantly lower than it had been before the Russian invasion. In fact, those wholesale prices are at their lowest level in nearly 18 months.

What’s going on? Why are UK prices so low, while still so high on the other side of the channel?

To understand the answer, you need to remember that energy markets are in large part a product of physical infrastructure. Not only do you need to get natural gas out of the ground, you also need to build pipelines to get it into people’s homes. When it comes to gas, geography matters. Important steel tubes.

Much of Europe, as we all know, is highly dependent on Russian gas, and most of it is transported via a series of pipelines through Eastern Europe, the Baltic Sea and the Black Sea to Central Europe. Germany, in particular, is highly dependent on this flow of gas.

As you also know, everyone in Europe is doing their best to reduce their dependence on Russian gas.

Good news… not good

Now, Europe is likely to get more gas from North Africa and some also from Azerbaijan, which is building new pipelines on the continent. They can’t get a lot of gas from the North Sea, either from Norway or the UK – in large part they (mainly Norway) are already pumping as much as they actually can now.

This leaves another option: getting gas via tanker from further afield. The good news here is that there will likely be plenty of gas available, especially from the United States, whose shale fields are producing methane at a rapid rate.

But now we face another problem with physical infrastructure: Even if there is an unlimited supply of gas in America and an unlimited number of LNG carriers to take it to Europe, there are not enough stations from which we can get it. In fact, it’s more accurate than that: there are not enough LNG plants in right places.

There is already a lot of LNG capacity on the Iberian Peninsula, but the problem is that it is difficult to transport that gas from Spain to Germany. There are three large terminals in the UK. Some stations are located in France. But there is no single LNG terminal in Germany.

Ed Conway's article on why gas prices are so cheap in the UK and why consumers don't see the added benefits

In recent months, a huge amount of LNG has been redirected to Europe (due to rising gas prices), but ships are running out of places to put their gas. This brings us back to the UK, where a lot of LNG is flowing from tankers, through regasification facilities and into the gas network in recent weeks. The two gas pipelines connecting the UK to the rest of Europe are currently running at full capacity (in fact, they’ve been running at 20 per cent above capacity recently).

However, the problem is that these pipelines are not big enough to push all the gas coming into the UK via those LNG carriers across continental Europe. And since we don’t have a lot of local storage in this country and since it’s quite warm now and most of our boilers are off, there’s nowhere else to go.

Ed Conway's article on why gas prices are so cheap in the UK and why consumers don't see the added benefits

There were some strange consequences. One is that with all that cheap gas that comes today, British power generators have been shining, powering gas-fired power plants and producing as much electricity as possible.

The result is that the UK, which normally has to rely on electricity imports from the continent, has temporarily become a major exporter of electricity, sending power at a rate of more than four gigawatts across mainland Europe in recent days.

Another consequence is that not only are natural gas prices very low, so are wholesale electricity prices, which are now lower in this country than they are in most other parts of Europe.

Interesting marginal note: if Britain had more domestic storage (instead of our largest underground gas tank running out a few years ago) we might put more of that cheap gas aside, before what could be a horrific winter. Instead, we burn it in power plants. On the flip side, if we have a lot of storage, that’s extra demand for gas, which could mean this price anomaly won’t happen.

Anyway, you’re probably wondering at this point: How long will this be reflected on my bill? Is the cost of living crisis over now?

I’m afraid the answer either way is frustrating. While it is certainly true that wholesale prices for gas and electricity for next-day delivery are indeed at an all time low, the local energy suppliers we all have our accounts with say they tend instead to sign up for energy contracts that are delivered months or even years ahead.

Ed Conway's article on why gas prices are so cheap in the UK and why consumers don't see the added benefits

And when you look at the price of gas for next year, it’s about the same level as in northern Europe, still much higher than it was before the invasion. In other words, even though the UK is drowning in gas, markets are suggesting we won’t be in a few months, and as a result, consumers get little or no relief from these very low prices.

One reason these markets may be right, is that many countries in Northern Europe are moving too quickly to install LNG capacity.

While it will take a few years to build a full gas plant like the three in the UK, according to Mike Fulwood of the Oxford Institute for Energy Studies, there is an interim solution: special carriers known as floating storage units (FSRUs).

The Dutch have already started running a few of them and Germany is planning to start one in the winter. So, in the colder months, the market can really prove it right.

These extremely low prices could just be a temporary anomaly.

However, there is something surreal about the situation. Even for a short while, in an age of natural gas shortages and record natural gas prices, Britain suddenly has a natural gas glut.

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