What would happen in an emergency?  

Last month, as a moderately cold snap hit Europe, gas prices soared, with Heren reporting trades up to £1.70/therm (84€/MWh or $29/MMBtu) for day-ahead gas on the 22^nd November. All this occurred despite gas demand being at moderate level of 359 mcm on the day, way short of the UK gas demand record of 449 mcm on the 7^th January 2003, and even shorter of a peak day demand forecast, which is above 500 mcm. With potentially the coldest months still to come and January gas trading at nearly 90p/therm, many questions are being asked about what would happen if cold weather really hit. This article provides an overview of the current situation and what would happen in an emergency where the system is in immediate danger due to a gas deficit. January’s Mzine will consider in more detail the Safety Monitor regime, the impact of a Safety Monitors Breach emergency, and the likelihood of an emergency through the rest of the winter.  

What is a gas emergency?  

The regulatory framework for a gas supply emergency is set out in the Gas Safety (Management) Regulations 1996. The GS(M)R require NationalGrid and the other public gas transporters to prepare Safety Cases for the Health and Safety Executive (HSE). There are various types of gas supply emergency. A Network Gas Supply Emergency (NGSE) is an emergency on the National Transmission System (NTS) and is managed by National Grid is its role as the Network Emergency Co-ordinator (NEC). A local Gas Supply Emergency (GSE) is normally a loss of pressure on one of the distribution networks, and therefore does not have a national dimension, and would be tackled primarily by the distribution network operator. There are three types of NGSE.  

An NGSE Gas Deficit Emergency (NGSE GDE) is a total imbalance across the system – insufficient gas is entering the network to meet demand and to maintain safe pressures across the NTS, therefore there is a risk of the NTS collapsing. A GDE is likely to be caused by a really, really cold day, or a supply problem at one of the major input points (beach terminals, Rough storage, Interconnector), or of course, a combination of the two. A GDE could very quickly progress to the situation where NationalGrid is directing large customers to turn off gas demand.  

An another form of emergency is an NGSE GS(M)R Safety Monitors Breach. This is quite a different type of problem. Supply of gas to the UK during winter is based on the assumption that on certain cold days, there will not be sufficient gas available from production or imports to meet demand, and therefore gas from storage will be required. In order to ensure that there is sufficient gas in storage maintain supplies throughout the winter NationalGrid publishes Safety Monitors indicating the levels gas in storage that would be required if cold weather hits, whether it be tomorrow, next week or next month. Because of this requirement, if levels of gas in storage drop towards or below the Safety Monitors NationalGrid may declare an emergency, even though there is enough gas to meet demand in the short-term. Safety Monitors are a form of insurance against cold weather that may (or may not) come later in the winter. The Safety Monitors regime was introduced in October 2004 to replace a system called Top-Up whereby Transco itself stored gas to ensure sufficient supplies for a severe winter, and has caused some controversy, as it is based on the assumption that supplies will be guaranteed only to priority firm customers, not to most medium to large industrial customers with firm contracts. There are three Safety Monitors: Long-range storage (LRS), which is the large Rough depleted field gas storage facility that is designed to empty over 67 days, Medium-range storage (MRS) which includes the salt cavities at Hornsea and Hole House Farm, and the onshore depleted fields at Hatfield Moors and Humbly Grove, all of which can empty in around 15 to 20 days), and Short-range storage (SRS) the four peak-shaving LNG storage facilities, that are designed to empty in only 5 days.  

The final form of NGSE is a Critical Transportation Constraint. This is a problem on the NTS where NationalGrid cannot maintain pressure to specific offtakes. This could be caused by failure of a compressor or pipeline, or a problem at one of the LNG peak-shaving facilities on a cold day. An NGSE CTC is likely to be resolved by local interruption and demand-side response.  

Emergency stages  

NationalGrid’s safety case sets out various stages of a gas supply emergency. One of the key principles is to provide incentives on shippers and customers to help resolve a potential emergency before an actual emergency is declared, at which point all bets are off and NationalGrid can basically instruct shippers or large consumers to do whatever is required to protect the system and gas supplies to priority customers. A key issue then has been encouraging demand-side response. There are already a group of around 1,300 customers that have interruptible contracts, including a number of power stations and large and medium-sized industrial sites. However, for this current winter and next winter, more demand-side management will be required if the weather is cold. As part of its aim to encourage demand-side response, NationalGrid has launched the Gas Balancing Alert. The idea of the GBA is as an early-warning system of either a Gas Deficit Emergency or a potential Safety Monitors Breach. Every day NationalGrid assesses forecast gas demand and supply for the next day. If forecast demand is above the trigger level (currently set at 477 mcm) NationalGrid issues a GBA. The trigger level is based on expectations of reasonable supply from production, imports and storage, however, if any of the groups of storage facilities are within two days of a potential Safety Monitor Breach the trigger level is adjusted down. For example, if MRS was close to its Safety Monitor, these storage facilities would be discounted in the maximum supply calculation, reducing the trigger level to 449 mcm.  

Stage 1

Stage 1 of a potential emergency, would occur before any actual emergency has been declared. The key focus at this point is to try to avoid the emergency by normal commercial means: the market is still operational and shippers are encouraged to trade in order to help the system balance. A GBA should have been issued informing shippers (and consumers who check the NationalGrid website) that there could be a problem. There should be a huge incentive on industrial users to switch off at this point in order to sell gas back into the market, both because the market price is expected to be going through the roof as NationalGrid and shippers scramble for available gas, and because if they don’t do it voluntarily now, with a chance to receive the benefits of helping the system, they risk an emergency being declared and compulsory and unrewarded demand-side management kicking in. NationalGrid is also permitted to accept out-of-specification gas in order to maximise deliveries to the system. All interruptible customers should be off.  

Stage 2

If the commercial regime fails to resolve the problem, NationalGrid can move to Stage 2, the declaration of emergency. At this point the normal market is suspended, including the capacity regime and the On-the-day Commodity Market (OCM). In a Gas Deficit Emergency, shippers are obliged to do all they reasonably can to deliver their maximum gas under contract to the system, whatever it costs them. NationalGrid can also direct flows out of storage.  

Stage 3

If supply-side management fails to resolve the problem, the gloves finally come off and NationalGrid starts a firm load shedding process. This means instructing firm customers to stop taking gas in order to maintain pressures on the network. Customers consuming more than 50,000 therms/year are likely to be first to go, and these sites are required to provide NationalGrid with 24 hour phone and fax contact details to facilitate switching off. Next would be sites above 25,000 therms/yr. If these have been switched off and demand is still too high, NationalGrid would then go to public appeals for small users to switch off gas.  

Stage 4

Based on the principle that it’s better to lose a bit of the system than the whole system, the final option is to isolate (in effect cut off) entire sections of the network, in order to maintain pressures in most of the network. There will be an allocation process to determine where gas should be allowed to flow, and which parts of the network will be run down.  

Stage 5

The final stage of the process is restoration, where the system becomes operational again and commercial processes, such as the OCM and capacity regime are reinstated. This has to occur at the start of a gas day (6am), therefore there could be a period where the crisis has passed but emergency measures remain in place.  

The Aftermath

In an emergency maintaining the security of the system and avoiding danger to people is of paramount importance, and therefore takes precedence over normal commercial issues. However, after the emergency, there is likely to be an extended process determining how the various costs of the situation are resolved.  

Imbalance costs

The Network Code balancing regime is based on marginal cash-out principle. Shippers are incentivised to balance system inputs and offtakes on a daily basis, being charged for shortfalls at the System Marginal Buy Price (SMP Buy), which on a day where NationalGrid takes action is likely to be the most expensive price at which NationalGrid bought gas, and being paid for overdeliveries at System Marginal Sell Price (SMP Sell), which on a day where NationalGrid takes actions is likely to be the lowest price at which NationalGrid sold gas. Before and during Stage 1 of a potential emergency SMP Buy in particular is likely to be very high. With the suspension of the market at Stage 2 imbalance prices are fixed – SMP Sell at the prevailing System Average Price on the day, and SMP Buy at the level it got to just before the Emergency declaration. It is likely to be a very bad idea to go into an emergency short! This dual emergency cash-out price is a recent change following implementation of UNC Modification 0044 in October 2005. Previously imbalances during an emergency were all cashed out at 30 day SAP. The implementation of Mod 44 has spawned a number of other modification proposals as shippers scramble to mitigate their increased cash-out risks in an emergency situation. Other innovations have included the Emergency Curtailment Quantity (ECQ) which treats firm load shedding by NG as a system gas purchase, however, NG only pays for it at 30 day SAP, which may be much lower than on-the-day SAP and SMP Buy during an emergency.  

Additional gas claims

At Stage 2 of an emergency NG can require shippers to maximise deliveries of their gas under contract to the system. There is a recognition that some of this gas may be available under contract, but at extreme prices. Therefore, the UNC includes a claim process, whereby shippers can claim back additional costs from NG. Such a claim must be assessed by an independent reviewer and approved by Ofgem, as the costs of settling the claim will be smeared back across the whole system. 

Costs for customers

The issues above have focused on shippers, but what about the costs for industrial gas customers (and even potentially smaller users) left without gas for crucial periods? Clearly there may be very significant costs in terms of lost production, cost of alternative fuel if available (and possibly therefore, the cost of additional CO₂ emissions following a switch to more carbon-intensive fuels), contractual costs etc. However, there are currently very limited means for users to recover these costs. Any payments to customers will basically depend on their contracts with shippers, which may, or more likely may not, cover damages for loss of supply. There is an advantage to customers in voluntarily curtailing gas offtakes at Stage 1 or 2 of an emergency, at which point they may be able to strike a deal with their shipper to benefit from the profits made from selling gas back to NG. However, in most cases, outside of the existing interruptible contracts, there are no commercial frameworks for such deals. With concerns about this winter looming large, suppliers such as Gaz de France and Powergen have been advertising demand-side management deals to their customers, but it is unclear what take up there has been. There is a major risk that, should an emergency occur, many gas customers will be left short of gas and short of compensation.  

Written by Nick White.

Nick White will be one of the speakers at the Petroleum Economist Executive Briefing The Winter Gas Supply/Demand Crunch on 31^st January.