Thoughts on the energy-cost crisis.
We are fortunate to have alternative means of heating our house, with a log-stove and open fire in addition to the gas central heating. We also have a solar thermal panel providing hot water when the sun shines, even in winter, although I have to admit that a January shower relying solely on the solar panel is a little more bracing than might be wished for. We are not therefore completely dependent on gas, although electricity is more difficult to sidestep as the millions of British citizens who are totally reliant on electricity alone for space and water heating know only too well. In our own small way, it’s comforting to have some resilience.
One of the first obligations of a responsible government is to ensure the resilience of the systems necessary for the welfare of its citizens and the working of its economy. It’s now apparent that European governments have failed in this respect and have all become overly dependent on imported gas. Unfortunately, as will become clear later in this blog, our UK Government has failed more than most.
We hear very little from the government about the looming energy-price crisis – a crisis, not just for millions who are strapped for cash, but for business. If businesses go bust then unemployment will rise, the tax take will diminish, and benefits will rise, all in an exponential dynamic.
Why are high gas prices leading to high electricity bills?
Windfarms are now common throughout much of UK, particularly in the north of England and in Scotland and it is the case that wind energy produced in Scotland is equivalent to almost all of that country’s consumption.
This is not to say, as it often is, that Scotland is totally self-sufficient in wind power. Power delivered to consumers is derived from a mix of generation – renewable, coal, gas and nuclear - according to what is available day to day. Output from Scotland just goes into that mix, to be supplied to consumers wherever they are in UK. It’s the mix that leads to the first omission.
UK has comparatively little storage capacity for renewable energy, although investment in storage is now increasing. This means that when the wind ceases to blow, we have to rely on the other components to manufacture the electricity Britain needs. With nuclear and coal being wound down this leaves only gas. We are therefore failing to capitalise on the abundance of low fuel cost, but capital investment heavy, wind power generated in UK and are instead still heavily reliant on gas, the wholesale price of which is determined on the international market.
Which brings us to omission number two: Successive UK governments have permitted energy companies to retract from domestic gas storage facilities in favour of purchasing gas on the international market on a short-term requirement basis. When gas prices were low companies preferred to rely on purchasing to meet immediate needs rather than investing in maintenance of existing storage facilities and construction of more. Distributing profits as dividends rather than applying them to investment also kept shareholders happy of course. As a result, we have storage for about 2% of our annual requirement compared to about 25% across the EU – now being rapidly increased to 80%. We are therefore completely at the mercy of international markets for the cost of our electricity. Why government didn’t drive a strategy and was content to allow producers to take this line is not clear, but it demonstrates a laisez-faire attitude to diligence and robustness. Recent events have led UK to now invest in the mothballed Rough gas storage facility, which should double capacity.
The pricing structure of the UK electricity market is complex and contains something of an anomaly. The cost of the various fuels from which power is derived varies, from a fairly nominal value for renewable energy to staggeringly expensive for gas currently brought on to the wholesale market. Due to a long-standing agreement between government and the electricity industry the cost of production is tied to the cost of the most expensive component in the mix. There is more detail on this, and an illustrative example, here. This was rooted in a need to “kick start” the renewables sector some years ago but, whatever the logic behind this, the reality is that the price we pay for “free” renewable energy is governed by the price of gas. Surely it’s time to reconsider this? Allowing renewable energy to flow to consumers at the true cost of production plus operating profits seems a comparatively easy fix. The current structure seems to unduly favour the hydrocarbon sector by preventing open price competition with renewables.
The impartiality of Ofgem is also questionable. The energy regulator has an obligation to have due regard to the impact on elderly people, children and people with disabilities before confirming the price cap increase. You may be aware that Good Law Project, Fuel Poverty Action and the Highlands & Islands Housing Associations Affordable Warmth Group are suing Ofgem over its failure to carry out this very obligation.
The UK Government’s regard for the interests of the hydrocarbon sector appears to influence strategy unduly and I think questions need to be asked as to why this is so. It is a matter of record that oil and gas firms donate large sums to The Conservative Party and that Liz Truss, who I strongly suspect is being manoeuvred into position by the Tufton Street wing of the Conservative Party assisted by the mainstream press, is being lobbied by the US fossil-fuel industry.
Back to our own domestic situation, we have considered installing a solar PV array on the garage roof to defray some of the increased costs, but the small size would bring only a marginal gain and it seems to me that a national strategic approach to the problem is needed rather than those who can afford to do so following up their own individual solutions.
