In an attempt to persuade gas providers to build up sufficient stockpiles to help us through a major supply emergency, the government is planning to change the law with respect to the 'cash-out' rules.This should ensure that the UK foes not again suffer from price and supply volatility caused by temporary gaps in supply such as when the Russians switched off supplies to Europe due to a dispute with Ukraine.

The cash-out rules are in place to put financial levers in place to prevent supply and demand imbalances in the energy system.

"The gas and electricity transmission systems need to be kept in balance by matching supply and demand within prescribed technical limits which are different for each system. The System Operator (SO) for the relevant system (National Grid National Transmission System (NGNTS) for gas and National Grid Electricity Transmission (NGET) for electricity) has overall responsibility as ‘residual balancer’ for the relevant system.

As part of the electricity balancing role NGET may buy or sell electricity from or to generators and suppliers (or large customers who are quickly able to reduce their demand to bring the system into balance). NGET also contracts with generators and large suppliers to hold a “reserve” to keep the system in balance. For gas, NGNTS buys or sells gas to offset differences in inputs and outputs to keep the system in balance. Any actions taken by the SO for energy balancing purposes incurs a cost.

‘Cash out’ arrangements are operated in both the gas and electricity markets. These arrangements are designed to target the cost of energy balancing incurred by the SO to the parties who created those costs (i.e. those parties who do not balance their inputs and outputs within the relevant balancing period). As such, parties who are not in balance incur charges that reflect the costs incurred by the SO in addressing the imbalance. These charges are known as cash out prices.

Cash out prices are designed to provide market participants with strong commercial incentives to balance their contractual and physical positions and therefore avoid exposure to cash out prices. That is, by contracting for supply ahead of time or by maintaining the reliability of their generating plant." … ofgem

These rules look set to be changed as part of the coalition's Energy Security and Green Economy Bill so that energy companies will pay higher prices for gas when the country is running out. That will encourage them financially to build up a reserve of supplies.

This should not only be good for the companies involved, it might also give the end user consumer a bit of price stability too.

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