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Inside the ‘crazy’ decisions that left Britain with no gas storage and vulnerable to Putin

·17-min read
Inside the ‘crazy’ decisions that left Britain with no gas storage and vulnerable to Putin
Inside the ‘crazy’ decisions that left Britain with no gas storage and vulnerable to Putin

Chris O’Shea and Kwasi Kwarteng met in Number 11 Downing Street last week in the teeth of a crisis. Summoned to crisis talks on energy bills, the boss of British Gas owner Centrica and the Business Secretary sat through a “chaotic” meeting with the Chancellor and the Prime Minister, which ended in a press release and little else.

But meaningful discussions are underway in private. The pair reconvened to try to thrash out a deal to reopen a key national resource: Centrica’s giant natural gas storage site under the North Sea.

Kwarteng’s interest in the project is a marked change in tone from the Government.

Ministers had shrugged their shoulders when Centrica shut down the site, Rough, five years earlier, saying that it no longer made financial sense to keep the facility open.

Now, Britain needs it back. With Russia restricting gas supplies to Europe as it weaponises energy alongside its war on Ukraine, politicians from Berlin to London are scrambling to shore up their stockpiles as winter looms.

Without gas storage, Britain finds itself dangerously vulnerable to Putin’s machinations. It is a predicament rooted in a decade of complacency by politicians of all parties who are now engaged in a war of blame.

Already, the constraints on global gas supplies since last August have pushed household bills to levels that are unbearable for millions of workers, more than 30 British energy companies have collapsed, and inflation is soaring to rates that have not been seen in 40 years.

Winter threatens to bring even more severe consequences in Europe and the UK, as millions of households fire up their boilers and turn on the lights earlier, drawing on more than twice the amount of gas.

British factories are being prepared for potential shutdowns if supplies fall short, while officials in Whitehall reckon six million British households could face blackouts under worst-case scenarios.

The closure of Rough in 2017 means Britain is missing a key line of defence. The site, which lies 18 miles off the east coast of Yorkshire and more than a mile under the seabed, can supply Britain for about 10 days during winter.

If reopened, it is unlikely to make a big difference to household bills. But it could provide vital energy security if North Sea supplies and imports fall short amid intense competition from abroad.

A regulator’s dire warning

Centrica closed its Rough gas storage site in 2017 - Centrica
Centrica closed its Rough gas storage site in 2017 - Centrica

O’Shea and Kwarteng want to get Rough back up and running for winter. Nothing is certain yet, however, and it will not be open at full capacity, given the short time available.

The last-minute scramble has reignited questions over whether the facility should ever have been closed, and the Government’s wider attitude in the past decade to gas supplies and prices.

Senior politicians, ministers, civil servants and energy experts all describe a common thread running through the years: a sense of complacency driven by cheap, abundant global gas supplies, and faith in markets to deliver, even as regulators and experts warned about the risks. That faith now risks looking like complacency – and, for some, it is starting to turn into regret.

“From a geopolitical point of view, of course, this was a different era,” one former minister insists, reflecting on the Government’s decision in 2013 not to subsidise storage.

“It was before Crimea. Remember, this was when Putin was still a partner of the G7. So this was at a time when we weren’t as worried as perhaps we should have been about the future.”

Ed Miliband was mid-way through his time as Labour Energy Secretary in October 2009 when he was blindsided by a damning report from the energy regulator.

“Project Discovery” was commissioned by Ofgem’s then-boss Alistair Buchanan to investigate how secure Britain’s gas supplies were. It made for startling reading.

Since the discovery of oil and gas in the North Sea in the 1960s, Britain had become increasingly dependent on the fuels, with most of its heating and a major chunk of electricity running on natural gas.

Yet with reserves getting tapped out and demand soaring, the supplies were no longer enough. In 2004, Britain became a net gas importer, a key shift that started to make officials jittery.

Calls were also growing for investment to overhaul the energy system and cut carbon emissions.

A crunch on gas supplies in 2006 when Rough was damaged by fire, and Russia’s closure of a pipeline to Ukraine in 2009 during a dispute, added to tensions.

Project Discovery warned of “unprecedented challenges, which will grow over the next two decades”, with Britain’s rising dependence on imports flagged as a key risk. More gas storage would potentially be needed by 2015, it said.

Miliband, sources say, was infuriated by what he saw as an overreach by the regulator into policymaking.

“He felt he had been undermined,” one former civil servant said. Another added that “words were exchanged – some of them expletives” between the regulator and senior officials.

However, Miliband had little time to act. By 2010, he had been replaced as energy secretary by Chris Huhne after Labour lost the general election and a coalition between the Conservatives and Liberal Democrats took power.

Ed Miliband was Secretary of State for Energy and Climate Change in 2009 - Dominic Lipinski/PA Wire
Ed Miliband was Secretary of State for Energy and Climate Change in 2009 - Dominic Lipinski/PA Wire

Huhne commissioned a deeper report from the regulator that also made for worrying reading. Britain’s growing reliance on uncertain international gas markets came with risks, it said. Fewer long-term gas contracts was good at times of low prices, but it exposed consumers to price swings.

Being able to buy gas from Europe during a crisis wasn’t guaranteed, it added, as other member states might block exports.

The regulator proposed a range of options to bolster supplies, from market transparency to contract terms, strategic gas stocks, and government support for storage.

This was not the route ministers chose to go down.

Lack of state support

On a partly overcast day in June 2013, businessman George Grant caught the train from Edinburgh to London as he mentally prepared for a key meeting.

The founder of Stag Energy had spent most of the preceding decade putting together proposals for the Gateway project – a vast storage facility that would be built in salt caverns beneath the Irish Sea, comparable to Rough.

Now he had been granted an audience with the latest energy minister, Michael Fallon, to discuss whether it would go ahead.

At the time, Britain had roughly 15 days of gas storage in a typical winter – with most of this guaranteed by Rough. Gateway could have added another five days.

But Grant’s meeting with Fallon, in a Whitehall office, was brief, lasting only 30 minutes. Fallon is said to have listened politely to a presentation, before telling him that there was no prospect of the Government intervening in the market.

Michael Fallon - AP Photo/Kirsty Wigglesworth
Michael Fallon - AP Photo/Kirsty Wigglesworth

It proved to be a fatal blow. Although Gateway had been supported by previous ministers and had planning permission, its financial backers were unwilling to go ahead without some form of state support.

They were arguing either for energy suppliers to have European-style obligations to fill up storage to certain levels for the winter, or for a “cap and floor” mechanism that would guarantee Stag a minimum income but also limit its profits. The latter would have been funded by a levy on consumer bills of about £1, according to Grant.

They were not the only ones seeking government support. The commercial case for gas storage had fallen. Projects tend to make their money out of the difference between gas prices, buying gas when it is cheap in the summer and storing it to sell at higher prices in the winter.

This gap was shrinking, however. Air conditioning in Asia fuelled summer demand and the global market in liquified natural gas (LNG) boomed. Industry bosses argued the market was ill-equipped to value gas storage. They said it should be seen as an “insurance policy” and was worthy of taxpayer support.

But the Government was not convinced. Instead, officials focused on resilience through diversity. A combination of supplies from the North Sea, pipelines from Norway and LNG shipments from around the world, as well as a new push into renewables, would keep Britain’s lights on.

On September 4, 2013, three months after his meeting with Stag, Fallon announced there would be no subsidies for gas storage facilities. He said the move would save bill-payers £750m over the next 10 years.

To make its case, the Government drew on analysis by the consultancy Redpoint, which ministers said had concluded that generally the “costs of intervention would far outweigh any benefit to security of supply”.

A partial finding that a new gas storage facility would have been of benefit, was glossed over. Ministers argued it would not be ready “until the 2020s”, when they expected gas supplies to be abundant.

Fallon added the UK’s storage capacity had already grown, and pointed to a further 12 projects in the pipeline. Two of them were Centrica’s proposed gas storage sites in the North Sea and East Yorkshire – Baird and Caythorpe.

Less than 10 days later, Centrica announced it was ditching the projects, blaming the Government’s decision to scrap support. Only one gas storage site now open was built after the announcement, according to Ofgem, Storengy’s Stublach in 2014.

The decision not to invest in storage infuriated heavy industrial gas users. They knew they were first in line for any cutoffs if supplies fell short, with households protected.

“I sometimes got the impression, when talking to ministers, that if the domestic sector didn’t experience power cuts, or gas shortages, even if prices were high, that somehow that was okay,” says Jeremy Nicholson, former director of the Energy Intensive Users Group, and now a director at the consultancy Alfa Energy.

“Well, of course, it’s preferable to the opposite. But if that is secured by shutting down swathes of industry, then that is a failure.”

But with global gas supply strong at the time, the decision generated little wider concern. The US and Qatar had given markets a major boost and investors had built three UK terminals, to ship in LNG from abroad, helping diversify the UK’s supplies. On top of that it looked as if the UK’s fracking industry might take off.

The Treasury, under George Osborne as chancellor, was also resolutely against doing anything that would add to consumer bills, according to sources.

Following his election as Labour leader, Ed Miliband had been attacking the Government on the issue and was preparing to fight the 2015 election on “cost of living” grounds. He promised to freeze gas and electricity bills for 20 months, accusing energy companies of profiteering.

“Any measure that resulted in even a pound being added to consumer bills would not have been looked on favourably,” says one civil service source.

Another adds: “There was a lot of tension in the coalition in 2013 over energy bills and there was a lot of negotiation, and I think it even went to the famous ‘Quad’ [David Cameron, George Osborne, Nick Clegg and Danny Alexander].

“They were trying to reduce bills by around £20 and it was proving epically difficult. Somebody told me, and the phrase they used was, that it nearly broke the coalition. It was hugely contentious.”

Current bills, not insurance policies, were the priority. Subsidies for gas storage were not high on the list.

Rough waters

Decisions made in 2013 set the stage for what was to come. Centrica decided to shut Rough in 2017. The ageing facility was losing hundreds of millions of pounds and needed around £1bn and five years to refurbish. The Government did nothing to dissuade its owners from the closure.

Claire Perry, an energy minister from June 2017, told Labour in a letter that any state support for Rough would have “undermined” investment in other infrastructure such as LNG sites and smaller storage facilities, and risked making the market dependent on government support. Centrica had not asked for government support on upfront costs, she added.

One former senior civil servant says any support for Centrica may have required “strategic change and perhaps an admission that the earlier strategy was flawed”.

“In particular, there was a perception at the time – whether valid or otherwise – that Centrica was doing this just to get some government money,” they added.

The failure to prevent Rough’s closure now looks particularly questionable, given that ministers are today pushing for it to reopen.

Sir Ed Davey, energy secretary in 2013 when the government decided not to subsidise gas storage, says Russia’s annexation of Crimea in 2014 should have changed the way Whitehall viewed the debate.

“It was getting clearer and clearer to me that we need to revisit the [storage] issue,” he says.

“It is an insurance policy for security of supplies. I was pretty surprised when the government didn’t work with Centrica.”

Was the decision not to invest in 2013 a mistake?

“When the facts change, I change my opinion, what do you do?”, he says.

“Unfortunately, the facts did change but the government didn’t change its mind. I can’t be responsible for those people. The underlying economics haven’t changed. What’s changed is the geopolitics.”

Underestimating Russia

Whitehall was alive to geopolitics. In 2017, ministers commissioned modelling which came the closest so far to replicating current circumstances. Consultants at Cambridge Economic Policy Associates looked at what would happen if all Russia’s pipeline gas to Europe was disrupted for a year.

This would cause shortages of gas in Europe but Britain would manage so long as it was “willing to pay” more than other countries, and as long as governments did not panic and halt pipeline flows.

If curbs on Russian supplies coincided with a failure of British LNG facilities, there were likely to be shortages in Britain. Rough made no material difference, the modelling said.

But the report carried something of a disclaimer. Limited evidence on what consumers and governments would actually do during such a severe shock left the consultants “unable to fully capture the complexities of what might happen in practice”.

After the report was published, the Business Department under Greg Clark, which had absorbed the energy brief in 2016, concluded that the UK’s existing strategy was still the right one.

With Europe in the grip of a major energy crisis, we may soon find out if that is correct. Russia has already cut gas flows through the Nord Stream 1 pipeline under the Baltic Sea to Germany to 20pc of capacity, leaving countries struggling to fill up their storage sites ahead of winter.

Germany, Europe’s biggest economy, has switched off lights that bathe historic buildings at night and stopped heating public swimming pools as it tries to save on energy following decades of growing dependence on Russian gas.

Other EU countries are taking similar steps to cut demand – but no such changes have been proposed yet in Britain.

Vladimir Putin could yet go further in strangling supplies. And further pressure has come from technical problems that have laid low much of France’s nuclear fleet, creating demand in power plants for gas that would otherwise go into storage.

Britain gets little gas directly from Russia, but trades some gas with Europe via pipelines to Belgium and the Netherlands.

In recent months, it has been acting as a “bridge” to Europe, making use of its LNG terminals to send imported supplies to Europe, which does not have enough terminals to accept LNG itself.

Come winter, Britain will need to be able to buy some gas back.

That typically requires the UK’s wholesale prices to exceed those in the Continent to attract shipments. Yet with supplies so tight, that could mean extremely high prices this winter, further pushing up household bills. Meanwhile, the threat of market breakdown is a real concern should Moscow turn off the taps.

“We are in a scenario that nobody had really anticipated,” says Phil Grant, partner at energy consultant Baringa.

“Yes, your economic principles would suggest that we can still buy gas back [from Europe]. “But the security of supply concerns of any individual state will take precedence.”

“It is certainly possible that there could be force majeure declared by European suppliers [in a crisis] – that they end up not sending gas to other European countries including the UK,” says Jacob Mandel, senior associate at Aurora Energy. He believes the UK’s other sources of supply mean a prolonged shortage is unlikely.

A return to coal

Kwarteng, the current Business Secretary, has already taken steps that seemed unthinkable only a year ago. He has asked coal-fired power stations to stay online longer than planned, putting energy security ahead of concerns over carbon emissions in the short-term, just months after Britain hosted the Cop26 global climate summit.

Centrica says that talks about reopening Rough this year are “constructive”. The company insists it needs no taxpayer cash to get the facility running again.

However, talks are believed to involve financing mechanisms that could see taxpayers taking on some of the risks of the project, but also some of the returns.

A Whitehall source says the Government does need to “look at reopening Rough gas storage, for additional flexibility and resilience”, but they argue the facility is not a “silver bullet” and would do little to dampen prices.

A spokesman for the business department adds the UK’s “secure and diverse” energy supplies will ensure consumers get what they need.

Britain, he says, is better placed than other European countries thanks to the North Sea, LNG terminals and “gas supply underpinned by robust legal contracts.”

“However, in light of Russia’s criminal invasion of Ukraine, it is sensible that all possible options are considered to maintain security of gas supply, and that includes the future of gas storage if required,” the spokesman adds.

That will do little to silence some critics. Charles Hendry, a former energy minister, argues it was “a disastrous failure to not recognise that gas storage was a sensible insurance policy, which would, in the long term, have been good for UK consumers”.

He was a strong supporter of storage during his time in office from 2010 to 2012 and took the issue seriously, asking for daily updates on gas storage stocks.

“It wouldn’t have solved the problems which we’re facing. But it would have made them easier to manage,” he adds.

“The Government has to get actively involved in energy issues, because the consequences of getting it wrong for the country are simply too great.”

One industry source said the decision to close Rough looks “crazy” in the current climate. If the site is to reopen, it needs to have enough “cushion gas” which is permanently stored to help maintain pressure.

“You are buying gas when it’s never been more expensive, that you can’t sell until you decommission the asset,” the source adds.

Others are more sympathetic. Sir John Armitt, chairman of the National Infrastructure Commission, says: “I think it’s difficult to be overly critical, when we are just facing unexpected circumstances – as does the whole of Europe.”

Dan Monzani, a former civil servant and key architect of the Government’s energy strategy, says: “I still think diversity is the most important part of security.”

He argues that state-backed gas storage would have made almost no difference today – and may even have harmed investment in other areas such as LNG.

But earlier this year, Whitehall officials quietly approached George Grant, at Stag Energy, about Gateway again to discuss whether it could be of use in the current crisis. They were told it was too late – and that backers and developers had moved on.

“We tried to make the case at the time and we were unsuccessful,” Grant laments.

“We did say to the Government, once this option goes away, it’s going to be difficult to resurrect it.”

That is a refrain that will now be painfully familiar to Kwarteng, as he grapples with the decisions of his many predecessors.