LONDON—A lack of natural-gas storage facilities in the U.K., where capacity has been allowed to dwindle in recent years, has amplified the risks of a global shortage of the fuel and raised concerns that energy supplies won’t hold up if there is a cold winter.

U.K. is More Vulnerable than Other Economies to Surge in Demand for Natural Gas

The U.K.’s rapid shift to renewable energy, which has helped it cut greenhouse-gas emissions by 44% in the past three decades, is lauded by many in the industry. But the country’s experiences offer a reminder that decarbonizing an economy must be carefully managed.

Natural gas prices have risen sharply world-wide. Global demand has surged as economies snap back after Covid-19 lockdowns, while supplies have been hit by a combination of factors, including unusual weather events and restraint by U.S. producers, while Russia isn’t running its pipelines to Western Europe at full capacity.

U.K. natural gas prices have risen more than fivefold over the past year to €73.10 a megawatt-hour Wednesday, equivalent to $84.83, according to S&P Global Platts. That is slightly lower than the price in the Netherlands—the benchmark for continental Europe—but more than four times the price in the U.S.

But the U.K. is more vulnerable than most to gas shortages, analysts say. After a major storage facility shut down in 2017, the U.K. can now hold a week’s worth of natural gas stocks. That compares with three months in Germany, according to industry body Gas Infrastructure Europe.

High reliance on renewable energy, mainly wind, and low coal use has left the country heavily dependent on imported natural gas for electricity

generation when the wind doesn’t blow. A jump in energy prices leaves the U.K. “a victim of its own progress on lowering emissions,” economists at Dutch bank ING Groep NV wrote in a note this week.

The lack of storage follows a decision back in 2013 by the U.K. government not to subsidize loss-making gas-storage facilities. Output from the North Sea gas fields was declining, leaving the country more dependent on imports, at the same time as a transition from coal-powered electricity to renewables was under way.

At a meeting with the then-climate-change minister, energy-company lobbyists had urged the government to subsidize storage. “You have to be able to back your system up for when the wind doesn’t blow,” said Mike Foster, chief executive of the trade group Energy and Utilities Alliance, who was there.

After a consultation, the government said no. “They thought the risk wasn’t great enough,” said Mr. Foster.

By 2020, the U.K. relied on wind for 24% of its power-generation mix but didn’t have a backup plan when it fell to 2% of supplies in late summer this year, said Neil Atkinson, the former head of oil markets at the International Energy Agency, which advises industrialized nations on energy. Meanwhile, a series of local mishaps curtailed other sources of energy.

A fire disrupted the flow of electricity through a subsea electricity cable linking the U.K. and France. Some nuclear plants in Britain were offline while undergoing maintenance. In late summer, it was less windy than normal, resulting in turbines sitting idle.

Britain’s gas policy is based on faith that the market would produce a robust supply. But the government has intervened, imposing a moratorium on fracking projects and capping domestic energy prices to protect consumers from higher bills.

“The U.K. government has overseen policy failures,” Mr. Atkinson said. A spokesman for the U.K. government said it had taken “the right measures to protect the public from significant increases in energy prices.”

British customers will pay more for energy next month after the market regulator announced it would increase a price cap on gas and electricity prices. Some smaller consumer-energy providers have gone bust after failing to hedge against rising wholesale prices.

The U.K. government recently subsidized a U.S. fertilizer company to reopen a plant that had temporarily shut down due to spiraling gas costs. The company provided more than half the U.K.’s supply of carbon dioxide, a fertilizer byproduct that is vital in food processing.

Currently, around 40% of Britain’s electricity needs are met with renewable sources of energy, including biomass. Other fossil fuels, mainly gas, make up another roughly 40%, according to government data for the first quarter of the year. Britain’s remaining coal plants are due to shut by October 2024.

“The energy system is not a light switch,” said Daniel Yergin, an author and vice chairman of consulting firm IHS Markit. “When you go too fast, you hit the bumps.”

Duncan Sinclair, an energy expert at consulting firm Baringa, said extra gas storage would have had little impact on prices given the scale of global demand. “Generally speaking, the story of decarbonizing has been a success,” in the U.K., he said.

Since the 1970s, natural-gas fields around the U.K. provided a hedge against swings in supply. Gas could be pumped in when demand required. But local production declined, meeting half of U.K. gas demand in 2019, down from two-thirds in 2009, according to the government.

British officials and energy regulators judged the market could withstand shocks because the country still produces gas at home and imports from multiple sources. They include pipeline connections with Norway, Belgium and the Netherlands as well as purchases of liquefied natural gas from the U.S. and Qatar.

Gas-storage companies make money buying gas when it is cheap, storing it and selling when prices rise in winter. With gas prices relatively stable, gas storage in the U.K. was for many years loss making. After the government’s 2013 decision, the Rough storage facility, which was based in the sea off Britain’s east coast and provided 70% of the U.K.’s gas storage, shut in 2017.

The diverse mix of supplies has proved unreliable this year, however. Maintenance on North Sea gas fields and delays to new projects have hamstrung domestic output. U.K. gas output fell 28% in the first eight months of the year from the same period in 2020, according to consulting firm Wood Mackenzie.

U.K. gas stores are more than 90% full, but the country’s overall storage space is far lower than that of other major European economies. France, the Netherlands, Italy and Germany can house between a quarter and 37% of their yearly gas needs, according to analysts at the bank HSBC PLC. The U.K. can store just 2%. Its capacity of 10 terawatt-hours compares with 117 for France and 920 for the U.S., according to the International Energy Agency.

Adding to the predicament, most liquefied natural gas that flows into the U.K. does so on flexible contracts that allow overseas suppliers to divert cargoes if they can profit from sending gas elsewhere.

Building gas storage now would serve little purpose, said Mr. Sinclair. By the time facilities came online in four or five years, the focus may well have shifted to storing hydrogen.

Originally published by The Wall Street Journal

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