Gas pressure - why the Government is warning about a difficult winter

There is no doubt about the Government’s main short-term economic concern — that a cut off in gas supply from Russia sends gas prices sharply higher, knocking on here to electricity prices as well. An additional serious squeeze in the energy crisis this winter would put big pressure on consumers and businesses and could even cause gas supply shortages. So how is Ireland set for this potentially difficult winter?

1. Warning signs: There are two key — interlinked — warning signs. One is political concern about Russia shutting off gas supplies to the EU completely — it has already reduced them. The immediate reason for nervousness is the closure this week for annual maintenance of the Nord Stream 1 pipeline which carries gas from Russia to Germany. It is meant to reopen next week, but there are fears it will stay shut, or that Russian president Vladimir Putin will cut off supplies coming into the winter.

This would almost certainly plunge the euro zone into recession as big economies like Germany would he hit hard. These concerns are being reflected in the second warning sign — wholesale gas prices.

Wholesale markets allow buyers to lock in purchases for various dates in future. The worry is that not only are prices for short-term delivery very high now (€180 a megawatt hour on EU markets from less than €100 a month ago), but the market envisages pries remaining at this level right through to next spring at least.

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If this is correct, prices to business and consumers will head even higher than they are now. All depends, in the short-term, on the course of the war and on Russian gas. Europe is seeking new sources of energy and, while reserves can be built up, structural changes take time.

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2. Gas prices: The Government is already planning its budget package to respond to the energy crisis. A key political reason it has held off earlier action — beyond the measures over the winter and spring — was to see just how bad it would look by the autumn. Ministers will now be worried.

Wholesale prices at current levels, if maintained, will lead to further significant rises in gas prices to consumers and in electricity prices — given that close to half of Irish electricity is produced from gas-fired stations.

“Even if gas supplies remain available, the prohibitive price means Ireland’s energy security is effectively under threat"

For heavier energy-using businesses, there would be significant pressures, potentially threatening some plants with closure and leading to cuts in less profitable product lines. At risk would be big manufactures in sectors like food, engineering, electronics and other heavy energy users. The Government is understood to be planning a new business energy support programme which would provide short-term support to offset pressures and allow companies to keep operating.

Business sources point out that, even if gas supplies remain available, the prohibitive price means Ireland’s energy security is effectively under threat. A key issue in terms of business supports — and additional payments to households — would be uncertainty about how long really high prices could last. If the crisis was likely to pass in a few months, significant measures could be put in place, but the concern will be longer-term pressures on prices. It is unclear how far the Government would go in short-term supports, or whether measures like effective price caps might come into play.

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3. Gas supplies: Germany is bracing for a big cut in gas supplies, given its reliance on the Russian market. Ireland doesn’t import Russian gas, so are we okay? It’s not straightforward. Three quarters of our gas comes from the UK — the rest is from the Corrib field — and so we are reliant on gas coming largely from the North Sea and from Norway.

What could go wrong? Norway could come under pressure to redirect more gas to continental EU markets and away from the UK. The fact that the UK gets supply from a direct pipeline from Norwegian fields may offer some protection here, as could the limited capacity of pipelines going from Norway to the Continent. Still, UK shortages are possible in a prolonged squeeze and Ireland could be hit.

Ireland gets three-quarters of its gas supply from the UK via two pipelines connected to Moffat in Scotland and this is governed by two legal agreements put in place when these pipelines opened in 1993 and 2004. These agreements say that frameworks will be put in place to govern what would happen in the event of supply disruption. These appear to have developed as protocols between the two network operators.

A spokesperson for the Department of Environment, Climate and Communications said that in the event of a supply disruption to the UK, supply to the UK market and the interconnectors — which supply Ireland, Northern Ireland and the Isle of Man — would be curtailed equally. The UK National Grid has confirmed that this is also its understanding.

Could UK politics undermine this in the event of a crisis? It is hard to know and presumably the UK would want to maintain supplies to Northern Ireland. The UK’s exit from the EU — which has wider responsibility for energy security — does complicate things as it is no longer part of the single energy market. Ongoing co-operation between the EU and UK on energy supply and security is referenced in the Brexit agreement, but the details are not spelt out.

“Households and vital facilities like hospitals would be the last to be affected in any shortage situation”

This leaves Ireland in an unusual position, as our only gas link is to the UK which then has pipelines to Belgium and the Netherlands. There is much to play out here in the event of a gas supply shortage.

4. What happens if the gas runs short?: Ireland has an emergency programme co-ordinated by the Commission for the Regulation of Utilities (CRU) in the event of supply shortages. Part of this is a “load shedding” agreement co-ordinated with the UK which specifies where supplies would be cut first. There is a graduated response programme which starts with reduction in supply to the biggest industrial users, moving down to medium sized businesses — with strong legal enforcement powers.

Gas-fired electricity plants would also be affected — so electricity supply could also be threatened though efforts will be made to support the electricity system. These plants are obliged to carry other fuels to allow them to operate for at least five days without gas. Emergency planning may try to stretch this a bit, but a key problem for Ireland is the lack of any gas storage.

The public would be encouraged to reduce consumption. Households and vital facilities like hospitals would be the last to be affected in any shortage situation, with attempts also made to protect SMEs that have no ability to switch fuel sources. Prices for any gas that was available would be very high. Supply from the one indigenous source — the Corrib field — would be maximised.

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5. Longer-term questions: The crisis raises significant longer-term issues for Ireland. These centre around energy security — or the lack of it given our reliance on the UK — and how Ireland manages the energy transition to cleaner fuels over the next decade and beyond.

The role of gas in this transition and Ireland’s lack of gas storage as the Corrib field runs down has all been underlined. The Government is due to publish a paper on energy security this autumn but the crisis has put one thing into sharp focus. Energy security depends not only on physical supply but also the price at which it is available.

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