November 13, 2018 / 12:49 PM / a month ago

UK gas price spread must more than double to trigger storage build-WoodMac

LONDON, Nov 13 (Reuters) - British wholesale gas price summer-winter spreads would need to more than double to at least 16 pence per therm before operators will take final investment decisions on new storage sites, according to energy consultancy Wood Mackenzie.

Gas storage is used as a buffer at times of high demand and low supply. Earlier this year, a cold snap triggered a warning of shortages, driving a spike in wholesale gas prices to their highest in at least a decade.

Utility Centrica closed Rough, Britain’s largest gas storage facility, last year as it had become too costly to maintain the ageing site, leaving the country with storage capacity equivalent to four to five days of winter demand.

As Britain’s domestic gas production continues to fall and with coal plants being phased out by 2025, peak winter conditions are likely to cause acute supply concerns, the consultancy said.

Wood Mackenzie forecasts, based on average winter weather, that the difference between the winter and summer price is likely to remain in the 5-10 p/therm range until at least the mid-2020s. It is currently around 7 p/therm.

This is too low to encourage developers to invest in new gas storage sites. For investors to make a final investment decision (FID), they would need a number of years of sustained increases to summer-winter price spreads and volatility.

“It is estimated that investors in seasonal facilities would need at least 16 p/therm on an annual basis before FID can be taken,” the note by the Wood Mackenzie said.

There are around eight potential new storage sites in Britain.

Last month, the chair of the Gas Storage Operators Group told a parliamentary committee that investment in new, large gas storage sites in Britain is unlikely due to market prices offering low returns. (Reporting by Nina Chestney; Editing by Jan Harvey)

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