Written evidence submitted by National Gas (WIN0027)

National Gas Transmission (NGT) is the backbone of Britain’s energy system today. We will play a leading role in the transition to a clean energy future that works for every home and business. We own and operate the national gas transmission network, delivering energy to where it is needed in every part of the country. We keep households warm and underpin their quality of life. For business, we fuel growth and innovation. We are looking to the future by developing the hydrogen transmission system of tomorrow. We are responding to this inquiry to explain our role in the energy transition and to outline some points for reflection regarding the UK Government’s approach to Winter energy supply.

We have a significant role to play in delivering affordable energy security for the UK throughout the journey to net zero and beyond and we understand the vital role we can play in decarbonising our own system and providing hydrogen solutions for the UK. This will grow the economy, create skilled jobs and provide export opportunities to meet the economic growth ambition for our country. Our response sets out that:

  1. Last winter, our critical energy network faced unprecedented challenges due to worlds events, such as the war in Ukraine and the resulting extreme fluctuations in the gas markets. Despite this, during the fiscal year 2022/23, the National Gas Transmission segment contributed £7.99 annually to the consumer bill.

 

  1. GB has always secured the gas required, and DESNZ, Ofgem and National Gas analysis has concluded that it will remain well-positioned to do so. A key factor in GB’s ability to secure the necessary gas is an appropriately incentivised, flexible, and accessible market.

 

  1. The gas network remains essential to a functioning electricity market. Last year there were periods of low wind and sun where gas provided the backup generation, managing periods of extreme swings from high renewables generation to almost none.

 

We would be happy to discuss further the points raised in this consultation response.

 

Preparing for the Winter

 

What role did the UK grid play in the high domestic prices of winter 2022-23?

 

The UK's gas network operates within a controlled regulatory framework. Revenue is primarily generated through the sale of network capacities and is not tied to the wholesale gas price. While certain operational costs, such as fuel gas for the compression fleet, are directly recovered from the industry annually, overall, their impact on consumer bills remains minimal, despite a relative increase last year.

 

Last winter, our critical energy network faced unprecedented challenges due to worlds events, such as the war in Ukraine and the resulting extreme fluctuations in the gas markets. In the face of these difficulties, we have remained steadfast in advancing our core objectives: delivering dependable, affordable, and sustainable energy to our consumers. The National Transmission System (NTS) played a pivotal role by offering flexibility in gas supplies, which translated into competitive prices reflecting market conditions. Notably, substantial quantities of LNG were successfully imported as a result.

 

Consumer billing. During the fiscal year 2022/23, the National Gas Transmission segment contributed £7.99 annually to the consumer bill. This marked an increase from the preceding year, 2021/22, when the National Gas Transmission portion of the domestic consumer gas bill was estimated at £7.30.[1] The rise in costs was primarily attributed to higher General Non-Transmission revenue in 2022/23, driven by elevated forward gas market prices, which in turn led to an uptick in projected shrinkage costs. Despite making up a small percentage of consumer billing we have been working hard to keep this cost as low as possible and many of our innovation projects are looking to provide increased efficiencies and ultimately lowers costs. Our contribution to domestic bills covers the expenses associated with operating, maintaining and extending the high-pressure gas transmission network throughout Great Britain, along with the costs related to the services provided by the System Operator in ensuring system equilibrium.

 

Gas remains a cornerstone of the UK energy landscape, playing a vital role in energy security. Our network continues to fulfil the heating requirements of 83% of households[2], powering British industries and facilitating flexible electricity generation. As such, maintaining supply security and resilience remains our utmost priorities.

 

What more could have been done to prevent price shocks being passed to consumer bills?

 

To effectively mitigate the passing of price shocks onto consumer bills, Ofgem could consider revising the price cap mechanism, incentivising the adoption of longer-duration gas contracts. The current price cap structure inadvertently discourages the establishment of long-term gas contracts, thereby leaving consumers vulnerable to the impacts of abrupt short-term global price fluctuations.

 

Furthermore, the insolvency of certain suppliers resulted from their failure to hedge their contracts, exposing them to the volatility of the short-term market. This demonstrates the necessity for robust regulatory measures that could have bolstered suppliers' resilience against price shocks, ensuring a diversified approach to gas procurement beyond immediate market trends.

 

For instance, the House of Commons Committee of Public Accounts found that a “regulatory gap” contributed to the collapse of 29 energy suppliers (since July 2021), impacting approximately 4 million households. The financial repercussions, amounting to £2.7 billion, translate to an additional £94 per household, compounding the strain on consumers already grappling with record-high energy prices.[3] We agree with the Committee's assertion that the current price cap provides only minimal safeguards against escalations in the wholesale energy price.

 

How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?

 

We believe that the existing gas market operates in accordance with its intended role, purpose and function and The Government’s approach toward supporting the sector has ensured this, although it does not always translate into an optimal outcome in terms of overall consumer costs. As we transition to net zero and begin to introduce increasing amounts of intermittent renewables, the need for UK Government support is going to increase. In this regard, we wish to present five key observations concerning market adaptability within the UK and potential avenues for UK Government intervention to enhance gas storage capacity.

 

Market flexibility. GB has always secured the gas required, and DESNZ, Ofgem and National Gas analysis has concluded that it will remain well-positioned to do so. A key factor in GB’s ability to secure the necessary gas is an appropriately incentivised, flexible, and accessible market.[4] The GB gas market has delivered security of supply to date and access to international markets allows GB to meet annual gas demand by supplementing indigenous production from the UKCS (United Kingdom Continental Shelf). This diversified approach bolsters supply security by mitigating overreliance on a singular source of gas.[5] 

 

The UK has an established reputation in promoting transparent market-based approaches and fully supports the evolution towards a liquid, transparent and flexible global gas market, including hydrogen. Market flexibility is essential to promoting global security of supply, ensuring that gas is delivered where it is most needed. To that end, the GB market functioned and continues to function, however we believe it needs to be even more robust for one off events such as the war in Ukraine, which contributed to higher global market prices for gas. We consider that there is a need to introduce additional tools that could help the market stabilise in instances of price shocks, such as increasing natural gas storage.

 

The gas network remains essential to a functioning electricity market. Last year there were periods of low wind and sun where gas provided the backup generation, managing periods of extreme swings from high renewables generation to almost none.

 

For instance, gas for power reached near peak levels in 2022/23, with the highest power station flows seen on the 12 Dec at 95.9 mcm/d. The peak power station demand added to the operational challenge of high demand but was exacerbated when it switched to the lowest gas for power day of 2022/23 on the 20 Dec of 9.4 mcm.[6] This 90% reduction was due to the quick response of the electricity network to winds. The average gas for power demand during the summer also increased, from 49.9 mcm/d in 2021/22 to 56.59 mcm/d in 2022/23 and was primarily due to outages on the French nuclear fleet and electricity being exported to France.[7] Currently, the market is set up to manage such extremes, however government needs to ensure this continues as we transition to net zero power.

 

The Government's backing for liquefied natural gas (LNG) has yielded positive outcomes. Notably, we managed unusually high LNG inflows and outflows over the past year, showcasing our capacity to effectively handle these, despite some challenges. This underscores the efficacy of UK Government support for LNG. A remarkable 26.2 billion cubic meters of LNG were received at Britain's Milford Haven and Isle of Grain terminals, marking a 53% increase from the 17.1 billion cubic meters in 2021/22. Simultaneously, 20.3 billion cubic meters were dispatched to the Netherlands and Belgium via the Bacton terminal interconnectors. These export volumes were four times greater than our Europe-bound flows in 2021/22.[8]

 

More government support is needed for storage of gas because it offers a significant advantage in terms of flexibility due to its relatively simple scalability. This can ensure a secure energy supply by storing energy within the UK and enables replenishment through large energy deliveries like LNG or pipeline gas. Seasonal storage benefits further, allow filling during summer and utilisation during winter when gas demand and prices are higher.

 

The reactivation of the Rough Storage facility in 2022 was influenced by changes in security of supply policy, driven by the war in Ukraine and increased global gas competition amid the post-COVID-19 recovery. Since the beginning of 2022, natural gas storage has consistently exceeded 13 TWh[9], a positive trend. It is crucial to expedite investments and business models for geological gas storage, ensuring availability in the 2030s for both hydrogen and natural gas. With the inclusion of gigawatts of electrolysers, hydrogen storage can aid in demand-side balancing and contribute to the UK's target of achieving net zero power by 2035. However, failure to do so might jeopardise the UK's 2035 power target and subsequent carbon budgets.

 

Energy independence. If the new North Sea gas licences were to yield additional gas supplies, our network could act as the bridge between new supplies and consumers. Moreover, hydrogen production could also be a big feature of this, also providing export opportunities in the near future.

 

August 2023

 

 

 

 

 

 

 

 

 

 


[1] National Gas, Regulatory Reporting Narrative, 2022/23

[2] Department for Levelling Up, English Housing Survey 2021 to 2022: energy, 2023

[3] House of Commons Committee of Public Accounts, Regulation of energy suppliers, Twenty-Fifth Report of Session, 2022–23

[4] BEIS, Statutory Security of Supply Report, 2022

[5] BEIS, Statutory Security of Supply Report, 2022

[6] National Gas, Regulatory Reporting Narrative, 2022/23

[7] National Gas, Regulatory Reporting Narrative, 2022/23

[8] National Gas, Regulatory Reporting Narrative, 2022/23

[9] Catapult Energy Systems, 7 barriers to hydrogen use in energy system flexibility, 2023