Fuel for Thought – Feb 10th

10 Feb, 2012

European gas market tight: A second week of very cold weather and reductions in Russian gas exports has caused very high levels of volatility in spot European gas prices.  Despite generally robust supply conditions, European gas markets are still exposed to shocks given a dependence on several dominant sources of supply, Russian gas in particular.  This week’s price volatility is a reminder that the value of flexible gas assets is often realised under infrequent periods of market stress.  Prior to this shock, the pricing of gas flexibility across Europe had fallen to depressed levels reflecting complacency as to the risk of periods of market tightness.  Robust storage levels across Europe (e.g. greater than 70% in Germany) given a mild start to the winter, have helped ensure a more orderly market response to the spot market price signals than during the supply disruptions of 2006 and 2009.

The politics of unconventional gas:   The unconventional gas industry faces some tough political challenges, particularly in Europe.  Some of these are the result of public misperception, others the result of real issues with a maturing technology.  But in a world of higher energy prices and increasing political instability in the Middle East & North Africa, governments are likely to end up increasingly relying on unconventional gas as an energy source.  The scale and location of resources will be too big an opportunity to forgo in the context of energy security.  So it is important that, rather than fueling a polarised debate, politicians work with the industry and environmental groups to ensure that an effective regulatory framework is developed as John Kemp explores here.   If this can be achieved then unconventional gas will not only underpin energy security, but also play an important role in the path to decarbonisation, particularly by displacing new coal-fired generation in the developing world.

Greenest government ever needs a functional energy policy:  The replacement of Chris Huhne with Ed Davey represents an opportunity for the UK coalition government to repair its rifts on energy policy.  If the coalition wants to be the greenest government ever it needs to focus beyond superficial arguments around jobs versus renewable generation.   What the UK badly needs is a functional energy policy and some regulatory certainty.  To date, coalition energy policy has been tainted by conflicting political agendas and a lack of political leadership.  This has been particularly clear in the piecemeal approach to Electricity Market Reform which has resulted in untenable investor uncertainty.  Davey’s challenge will be to build an effective working relationship with the Tories, allowing the government to reassert its authority on energy policy. 

Picture of the week:

A Reuters chart of within-day and day-ahead UK NBP gas prices showing this week’s price spike in the context of relatively benign spot price volatility over the last two years.