UK's new gas charging regime putting 'severe pressure' on storage: Storengy

London — The UK's new gas charging regime is putting commercial storage operations under severe pressure, a spokesman for operator Storengy UK told S&P Global Platts.

After its introduction in October, the 'Postage Stamp' methodology has dramatically increased the cost of using storage and interconnection flexibility, so much so that it presents an existential threat to storage operations.

"Under the new regime there is a huge increase in NTS capacity costs for most storage facilities, and this will put many facilities under severe financial pressures over the coming years if charges remain at current levels," the spokesman said.

A discount for National Transmission System capacity purchases adjoining storage interconnections is currently under consideration by the UK's energy regulator, Ofgem, and could be crucial in ensuring survival in the mid-to-long term.

"If the 80% storage discount were to be introduced by Ofgem, then we believe that this would reduce these costs to a level where many storage operators may continue to operate for the medium to longer term," the spokesman said.

"If this were not to be implemented, or a decision to implement were delayed for a significant period of time, then I wouldn't be surprised to see further closing and mothballing of UK storage facilities as a result of the increased financial, and operational, pressures."

Storengy UK recently canceled an auction for storage capacity at its Stublach facility, citing uncertainty surrounding the UK charging regime.

In clarification, the spokesman said that: "Several interested parties [have said] that the uncertainty would mean that they wouldn't be able to take part in the auctions at the current time, and others saying that they would have to build a high level of capacity price risk into any bids."

"This, combined with our own concerns, meant that we had little if any option but to delay our auctions, and hope that the situation is clarified soon."

Ofgem is expected to rule on the storage discount -- proposed by Storengy UK -- early next year, although any amendments will not be introduced until October 2021. A discount of 50% is currently written into the methodology as it stands.

Operators of the UK's gas interconnectors with mainland Europe did not wish to comment officially on the subject, but it is understood that the impact has been significant on flexibility operators and shippers alike.

Significant impact

"The Gas Charging Review changes are having significant impacts on us, and indeed for many in the industry," the spokesman continued.

"Like many businesses we have had to completely revamp the way we book capacity, and monitor capacity bookings and costs much more closely. Despite this we have seen a huge jump in cost, with previously fairly inexpensive capacity bookings now becoming one of our biggest operational costs."

"We have been doing a huge amount of work over the spring/summer period to prepare for the new charging regime, and completely changed a lot of our systems and processes... there have been a few teething problems with regards to the move to booking NTS Exit Capacity in the within-day auctions," the spokesman added.

Storengy had hoped to auction a two-year product for capacity at Stublach after observing a market need for this, but viewed charging uncertainty as a possible barrier to a successful auction.

"We were looking at these auctions as a way of trialing it following interest in longer-term contracts from numerous interested parties," the spokesman said.

"Clearly the current uncertainty on capacity charges would have had an even greater effect on the two-year product, as both NTS costs for the current and future years are now likely to change."

Revenue under-recovery

Storengy has also proposed that an 80% discount is applied to the Revenue Recovery Charge (RRC) imposed by NTS operator National Grid on capacity reserve prices in the event that the network fails to accumulate a set revenue target.

In a webinar on Nov. 10, National Grid reported that October revenue recovery was 36% below forecast, attributing this to "booking patterns varying from forecast, [which were] more evident across the daily capacity products."

This under-recovery could place even more pressure on storage and interconnection operations, as National Grid will need to increase the RRC -- permitted within Postage Stamp -- in order to increase revenues required for network operation.

"Should there be an anticipated under- or over-recovery, the methodology has charges that can be used to manage revenue recovery within year," National Grid said.

"The potential scale of the under-recovery has meant National Grid needed to act at the earliest opportunity to put into place necessary updates through updating available charges."