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We look at the stocks which could be affected as the issue of energy security comes to the fore
Thursday 15 Mar 2018 Author: Tom Sieber

When the ‘Beast from the East’ was at its height, sweeping through the British Isles and bringing freezing temperatures and heavy snow showers, electricity and gas transmission utility National Grid (NG.) warned the UK was running out of gas. There was a genuine risk of industrial users seeing their supply disrupted.

Wholesale gas prices surged 74% on the day as the freezing temperatures led to a big spike in demand. This episode was the latest in a series of recent events to shine a light on the issue of the UK’s energy security – a situation which could get more complicated when the UK completes its exit from the European Union.

Recent data from the Office for National Statistics shows the UK fuel deficit swelled from £3.1bn to £5.4bn in the three months to January 2018 after the shutdown of the North Sea’s Forties oil pipeline in December 2017.

Problems with other key infrastructure have also had an impact of late. The Rough gas storage facility off the Yorkshire coast, the largest of its kind in the UK which could hold up to nine days of gas supply, was closed by British Gas owner Centrica (CNA) in August 2017 after it was determined it had reached the end of its useful life.

A more long-term trend has seen the amount of oil and gas produced from fields in the UK North Sea fall from the heights seen at the turn of the century.

WHERE DO WE CURRENTLY GET OUR ENERGY?

Around 50% of Britain’s gas supply comes from North Sea fields with the remainder coming from pipelines linking us with Europe and imports of liquefied natural gas.

Demand for electricity in the UK is currently met by a range of sources including interconnectors which are physical links which allow electricity to be transferred across borders. This is useful if demand spikes or there is an outage elsewhere in the network or when power prices are higher in the UK than in other countries.

Britain is currently linked in this way with France, Republic of Ireland, Northern Ireland and the Netherlands.

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HOW WILL BREXIT AFFECT SUPPLY?

As part of the European Union, the UK is a member of the Internal Energy Market. The UK Government has said it wants to ensure Brexit results in as little change to the current energy relationship with the EU as possible.

However, a recent House of Lords report concluded that it ‘remains unclear how this can be achieved without remaining in the single market, IEM and the other bodies that develop and implement the
EU’s energy policy’.

It cited conclusions from the Durham Energy Institute that: ‘Whatever the final detail of the EU exit terms the UK is likely to be more peripheral to EU energy markets which will mean higher prices and more unreliable supply.

‘Also supply risks will increase around issues such as importing gas through subsea pipelines or electrical interconnectors linking the UK
to other EU countries.’

WHAT DOES THIS MEAN FOR NATIONAL GRID?

In theory the investment case for National Grid, which also
has infrastructure in the US, should be relatively unaffected by changes to the energy market. It is paid a regulated price by energy suppliers based on the size of its asset base and not on the price or volume of electricity or gas.

In practice the shifting energy situation in the UK could have some impact after the end of the current regulatory period in 2021 and shareholders should keep close tabs on how this develops.

Due to the predictability of its returns and its generous dividend yield of 6%, National Grid is a constituent of many income focused funds.

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WHO COULD BENEFIT?

Brexit could increase the onus on the UK to further develop its own sources of energy. This could mean more generous incentives and sympathetic regulations for the development of oil and gas assets both offshore and onshore the UK.

This could be positive for shale gas operators like iGas (IGAS:AIM) and Egdon Resources (EDR:AIM), although it is important to bear in mind that these companies also face material technical challenges in exploiting these resources.

Infrastrata (INFA:AIM) is the only UK-listed company active in gas storage. It is attempting to develop a gas storage facility in a salt cavern at Islandmagee in Northern Ireland but requires external funding to meet the significant capital costs of such a development.

Investors may be sceptical as it previously struggled to advance a plan to build huge natural gas storage chambers in Dorset. Then known as Portland Gas, its ambitions were thwarted thanks to a lack of project finance.

Another name on the junior market linked to energy security issues is Plutus PowerGen (PPG:AIM). The company is looking to develop a portfolio of 20 megawatt power sites which can be switched-on rapidly in response to peaks in demand. It currently has six sites in operation and is in talk to roll out more. (TS)

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