Centrica plc – Written evidence (LES0041)
Executive Summary
As an integrated energy company – producing, storing, trading, supplying, and saving energy for our customers - Centrica is proud to play a central role in the UK energy market. As well as serving over 9 million domestic and non-domestic customers, Centrica also has interests in power generation, upstream gas production and storage and a significant energy trading business.
Our plans for future investment encompass a range of new low carbon technologies including batteries and other flexible plant, hydrogen facilities (including storage) and services for consumers such as charging infrastructure and heat pumps. Of particular relevance to the Committee’s inquiry, Centrica has recently reopened our Rough storage facility, which is licenced to store up to 54bcf of gas. Our ambition is to repurpose the Rough field into the world’s largest methane and hydrogen storage facility.
In light of the Government’s target for a fully decarbonised electricity system by 2035 and Net Zero across the whole of the UK by 2050, long direction energy storage should be a key area of policy focus as part of the transformation of the overall system. Previous methods of energy storage via carbon intensive fuels will no longer be available and a higher proportion of intermittent electricity generation will be added to the system. The extent of this will depend on consumer responsiveness in the new energy system. However, at least initially, this is unlikely to be enough to offset the other changes. Significant investment is therefore needed in new energy storage infrastructure. This is confirmed in various assessments and studies have been conducted on this topic including by National Grid ESO which will become the Independent System Operator and Planner once the Energy Bill becomes law.
Some degree of policy intervention is needed to facilitate these investments. Even without the changes brought by decarbonisation it is likely that relying only on market signals will result in the under provision of storage. This is particularly true as energy markets become more global and there is greater exposure to, high impact events that cannot be dealt with by traditional evaluation models.
There is a necessary distinction between storage facilities depending on the responsiveness of the asset concerned. Some storage will only be required for a matter of hours and will compete against other forms of flexibility such as dispatchable low carbon power generation (although this may also require storage of input fuels) and demand response. A more significant issue exists around long-term seasonal storage. This is particularly important for the UK given the seasonal nature of demand which is unlikely to change and the increasing reliance on international markets as traditional energy production declines.
National Grid ESO, in its Future Energy Scenarios (FES23) includes a range for electricity storage of c.18GW to 30GW for 2030 and 34-60GW for 2050 (excluding vehicle to grid capacity). This will be a range of technologies and time frame. More recently, the Royal Society identified a figure of 100TWh total capacity.
Short term storage will large be through batteries whereas medium and long term electricity storage could be pumped hydro, liquid or compressed air etc. Hydrogen storage, for reuse as a gas or for power generation, is likely to be a cost-effective form of energy storage, especially as existing infrastructure can be re-used.
Energy networks have operational constraints which means they have to be in balance. For electricity this is on an almost continuous basis whereas for gas a daily balancing requirement is the norm. There is also an element of commonality in energy provision in the sense that the network has to serve all users at the same time. Finally, the consequences of a shortfall are more serious to consumers than in other products. Therefore, there is an inherent need for storage in the energy sector which is larger than most other sectors.
This underlying challenge in maintaining a balance will become further exaggerated by the transition to net zero as more intermittent generation is added. The globalisation of energy markets, particularly gas, will also mean that storage requirements will go up compared to today. If dispatchable low carbon generation can be retained and supplemented, this may reduce the need for energy storage in the electricity sector. However, this will itself increase the storage requirements for fuel inputs, whether that is natural gas or hydrogen. Interconnectors will also help to the extent that the UK remains reasonably integrated in wider energy markets. There is, however, likely to be some correlation between the energy situation in the UK and neighbouring countries.
Demand side response can be improved, especially as new technologies become available. However, there is a “non-negotiable” aspect to a large part of energy consumption whether that is in homes or businesses. Reductions in demand will only partially offset the factors above which point to energy storage needs increasing.
Centrica is particularly concentrating on utility scale battery storage and gas/hydrogen storage in depleted oil and gas fields and salt caverns. We currently own and operate around 50MW of battery storage in the UK and Ireland and manage the output of a further 100MW in a range of international markets.
We are building a 900MW portfolio of solar and battery storage assets over the next five years and recently announced plans for our biggest battery yet – a 65MW two-hour battery storage plant in Perthshire. Our facility at Roosecote has a maximum capacity of 49 MW. It is made of more than 100,000 second generation lithium-ion battery cells. It is connected to the Electricity Northwest 132kV South Lakeland distribution network. Although it has a limited duration, it can respond to fluctuations in demand and be at full power in less than a second. This is approximately 10 times faster than similar services provided by conventional generation. We aim to have around 250MW new capacity in large scale battery storage projects by 2026.
Meanwhile the proposed development of Rough would allow for up to 200bcf of storage capacity (16TWh/year) which would provide for 5-10GW of storage capacity of thermal/heat energy. Centrica is currently discussing the pathway to implement this project which will require a suitable business model and funding of the required testing of hydrogen storage requirements.
Experience to date suggests that market frameworks will tend to undervalue storage and lead to lower amounts that are optimal to consumers. This is borne out by experience during the recent energy crisis which demonstrates the impact of infrequent uncertain events.
Typical option pricing models find it difficult to reflect these circumstances particularly as the value of storage is only realised late in the day. In stressed market conditions small amounts of additional gas can have significant impact on real time markets which only then feed back into forward contracts. The systemic shortage of storage capacity will likely get worse for a number of reasons:
In addition, the challenge of decarbonisation also presents new challenges. Policy therefore needs to evolve to promote storage investment. This could be through changes to existing policies such as the capacity mechanism, which will be reviewed under the government’s Review of Electricity market Arrangements (REMA). New policy instruments will also be needed such as a clear regulatory model for hydrogen transport and storage.
Finally, a degree of central oversight is needed to come to a view about the expected levels of storage and the role of different energy vectors. This needs to give a direction of travel for energy storage rather than being prescriptive and it should be flexible over time. The FSO\ISOP will be a suitable organisation to manage this process once it is in place.
The UK has some of lowest gas storage capacity in Europe at 12 days average or 7.5 peak winter days, compared to Germany at 89 days, France at 103 days and the Netherlands at 123 days. Storage facilities in the European Union are capable of meeting more than 20% of the annual demand for gas.
In response to this, last year Centrica re-opened Rough – the UK’s largest gas storage facility, 18 miles off the coast of Yorkshire – following a major engineering and investment project. The first injection of gas into the site in over 5 years was made in October 2022. With a storage capacity of up to 30bn cubic feet (bcf) of gas over winter 2022/23, the re-opening of Rough increased the UK storage capacity by 50%.
Centrica have since further increased Rough’s storage capabilities to 54 bcf, providing the equivalent volume of gas to heat 2.4m homes over winter. Our long-term aim remains boosting UK energy resilience by turning the Rough gas field into the largest long duration energy storage facility in Europe, capable of storing both natural gas and hydrogen.
Rough will help keep prices down for consumers by balancing the UK’s gas market, injecting gas into the facility when there is excess supply and putting that gas back into the UK’s gas network when customers need it most, keeping prices lower at that point of peak demand. The additional capacity means Rough can now store up to 6 days of average UK gas use.
More broadly, the risks to investors when demand for energy is low are too great to attract the level of investment that the UK needs to significantly expand its storage assets. The UK requires a regulatory model that supports storage asset investment by treating these as strategic assets for the country. Such an approach would come at no immediate cost to the consumer. Without a supporting regulatory model, there is unlikely to be any further investment to expand capacity at Rough for example.
The good news is that Britain will reach a high penetration of variable renewables faster than many global competitors. Experience gained effectively managing a variable grid, both in terms of the technologies deployed and policy mechanisms developed to incentivise these, will be valuable elsewhere. Given our geographic advantages, Britain can also – with the right policy choices - lead on hydrogen storage and Rough would be the largest European storage facility of this type.
There are a wide range of barriers to the energy transition that are also relevant for long duration energy storage. Network capacity and grid connection is a particular area of concern which needs to be corrected by the removal of unrealistic projects from the network connection queue. Storage projects particularly suffer as a result from the detailed methodologies used by the network companies which do not take into account the operational regime for batteries.
By way of example, one of our commercial partners was given a connection date in the 2030s and we’ve received quotes received quotes of 10-15 years to connect 49MW or less solar projects. Our consumer benefits case currently builds these protracted timelines in and the benefits for consumers will therefore be accelerated if changes to the connections regime are implemented without delay. The modelling of storage facilities from the perspective of grid congestion are also inadequate at present both at transmission and distribution connection levels.
A significant uptick in investment in transmission and distribution systems is also required with more rapid planning decisions as a key enabler. Hydrogen storage needs some additional development funding, particularly for depleted fields. More widely the workforce and supply chain constraints are also present for other elements of the energy transition.
Electricity storage projects such as batteries and some other technologies are already being added to the system. Centrica expects to invest £600-800m per annum between today and 2028 across a range of renewable and storage technologies. Larger infrastructure projects such as Rough gas storage will transition into operation over a longer period. With the right regulatory framework Centrica would expect to realise the expansion to 120bcf by 2028 and convert the site to Hydrogen in the early 2030s. Other gas storage options like smaller salt caverns can probably be implemented more quickly but are an order of magnitude smaller. We have undertaken deeper analysis of the technical requirements and timelines to realise this and would be pleased to share it with the Committee.
15 September 20023