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UK households may experience increased energy bills this winter due to a disagreement between the government and British Gas owners regarding a crucial fuel storage facility, sources indicate.
Centrica, an energy conglomerate, operates the Rough storage site in the North Sea, situated 18 miles from the East Yorkshire shoreline.
This facility accounts for half of the UK’s natural gas storage capacity, capable of sustaining the national energy grid for nearly a week. However, concerns are rising that the discord between the corporation and ministers could result in inadequate reserves for the approaching winter period.
Typically, the company initiates the process of filling Rough with gas at the start of April in anticipation of the colder seasons.
Recent figures reveal that Centrica has not yet commenced injecting gas into the installation, prompting anxieties about potential shortages to satisfy the UK’s energy demands by winter.
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Consequently, the UK might be compelled to procure imported energy to power its electricity grid. This scenario would expose households to the unpredictable fluctuations of international natural gas prices, potentially leading to elevated bills. Industries, notably the struggling British steel sector, could also face escalating expenditures and heightened instability.
Stalemate: Centrica chief executive Chris O’Shea at the Rough site in the North Sea
Dispute Over Gas Storage Facility
The postponement of Rough’s refilling is a consequence of a disagreement between Centrica and the government concerning the site. The energy firm asserts that ongoing losses are unsustainable without government endorsement of a price stabilization mechanism.
Centrica is seeking a £2 billion investment to enhance Rough, which is aging and currently unprofitable, to accommodate hydrogen storage alongside methane, thereby increasing its capacity fourfold.
In exchange, Chief Executive Chris O’Shea is advocating for the government to implement a ‘cap and floor’ pricing structure to ensure the site’s financial viability. He contends that this system would offer substantial benefits to the nation, estimating that Rough at maximum capacity during the energy crisis could have saved UK consumers over £5 billion in two years.
Understanding the ‘Cap and Floor’ Model
The ‘cap and floor’ model functions by establishing a baseline price for energy purchases. Should the market price dip below this level, the government supplements it with a subsidy. Conversely, profits are also limited, with any surplus funds redirected to reduce energy costs for consumers. This mechanism is designed to moderate variations in energy prices.
Centrica maintains that without this model, Rough will remain financially unviable. The company has previously projected that operating the facility would incur losses ranging from £50 million to £100 million this year alone.
‘The company cannot bear a loss-making asset without this arrangement,’ stated a source familiar with Centrica’s position.
The source further cautioned that failing to refill the site imminently would make it ‘extremely difficult’ for the UK’s gas storage infrastructure to be adequately prepared for the winter season. If a resolution proves unattainable, Centrica might opt for the complete closure of Rough.
Rough’s History and Current Impasse
Rough was decommissioned in 2017 after the government declined to provide financial support. It was partially reactivated in 2022 at the government’s request following Russia’s invasion of Ukraine, which triggered a surge in global energy prices and domestic energy bills.
Another surge in bills this winter would severely impact households already grappling with increasing energy expenses. The Ofgem price cap was recently increased by £111, pushing average annual energy bills to £1,849.
‘With gas prices remaining unstable, now is not the moment to jeopardize our energy security,’ asserted Simon Francis of the End Fuel Poverty Coalition. ‘Households will bear the brunt this winter if prices rise and supplies dwindle.’
Centrica stated: ‘We have not yet secured the necessary regulatory framework to unlock the £2 billion investment. However, as communicated in February, we are engaged in constructive discussions at the highest echelons of government. Currently, we have no definitive update regarding Rough’s future, but we intend to provide clarity on our plans in the coming months.’