* Rising import dependency requires new gas storage sites
* Volatile renewable capacity creates need for flexible storage
* But current market conditions fail to provide investment case
* Industry calls for government incentives
By John McGarrity
LONDON, Dec 20 (Reuters) - Britain needs to provide more incentives to draw investment into additional gas storage capacity, analysts say, as the country builds new gas-fired power stations fuelled largely by imported supplies.
Britain has a relatively small gas storage capacity because it has so far been able to rely on its own North Sea reserves, but domestic supplies are dwindling fast and analysts point up the need for more storage to meet demand during times of potential import interruptions.
They also say that gas storage sites are needed to fill supply gaps caused by sudden falls in renewable power capacity, which makes up an increasing share of Britain's power mix.
"There are two major issues at stake here. Will we have enough available gas to supply power stations that come online when the wind isn't blowing? And can we rely on domestic supplies when there are outages to pipelines or disruptions to LNG (liquefied natural gas) shipments?" said David Odling, a consultant with Oil and Gas UK.
Persuading companies to spend billions of pounds on new storage infrastructure will require a mixture of market-based incentives and government intervention, according to consultancy Frontier Economics.
"Under a semi-regulated approach, developers are more likely to invest in the type of storage preferred by policy makers," Frontier said.
A storage facility could receive financial support in the form of a top up payment whenever summer-winter price spreads fall below a certain threshold, the company said in a report.
Scottish and Southern Energy, one of Britain's leading utilities, said government support is required to make potential investment into storage attractive.
"We are working closely with government to explore what this support may look like," it added.
Other leading utilities declined to comment on the issue.
A consultation on new gas storage will run until April next year.
Britain was a net exporter of gas until 2004, but steady domestic production drops of 7 percent per year mean that the UK now has to import more than half of its annual needs, data from National Grid shows.
Despite the fall in domestic reserves, National Grid says that gas will play an important role in supplying future British energy needs, requiring additional gas storage capacities.
It says Britain's gas storage space has only increased by around 1 billion cubic metres (bcm) in the last 10 years, comparable to just 1.1 percent of annual demand, to a present level of around 4.6 bcm.
"No further investments have been triggered, but ... reinforcement will be required to support new storage projects," National Grid said.
Analysts further warn that the country's future energy mix will need more flexible storage capacity than current facilities.
A UK parliament report says that Britain will in future need smaller, so-called "quick-in, quick-out" storage facilities, which are designed to meet variable demand patterns at short notice, rather than large sites that serve a more strategic reserve purpose.
Britain's biggest storage site is currently Centrica's North Sea facility at Rough, off the coast of Scotland.
The facility can store around 3.6 billion cubic metres of gas, equivalent to 40 days of supply, accounting for around three quarters of Britain's total storage capacity, according to figures from National Grid.
Utilities typically use times of low demand and prices, such as summer, to buy gas and inject it into storage sites for sale in winter, when cold weather pushes up demand and prices.
But the economic slump of the past years and low gas demand due to coal being more profitable for use in power generation have resulted in small differences between winter and summer gas prices that makes large investment into new storage sites uneconomic.
DECC said that gas accounted for 28.2 percent of Britain's electricity generation in the third quarter of 2012, its lowest third quarter share for 14 years, while coal accounted for 35.4 percent, its highest third quarter share for 14 years.
The Department of Energy and Climate Change (DECC) said on Thursday that offshore wind production increased by 54 percent in the third quarter of 2012, compared with Q3 of the previous year, while onshore wind power generation up by 38 percent, further highlighting the need for additional flexible storage.