This month, I returned to familiar territory when asked to write an overview of UK energy policy as part of a wider European project. Energy policy can be quite parochial, particularly in Scotland, so it was interesting listening to European colleagues who link the issue to broader strategic issues, such as the Russian gas pipeline.
The impact of rising energy prices is a common concern across Europe. UK customers have had some protection due to tariff caps, but these caps increased by 12% in October 2021 and are set to increase in April 2022. The Bank of England expects the cap to rise from its current level by 20% for electricity and 35% for gas, leading to year-on-year energy inflation rates of 31% and 58%, respectively, in April. Others, including energy specialists Cornwall Insight, have predicted even steeper increases. The £2000 plus annual energy bill looks inevitable.
As the IFS highlight, this would lead to a mildly regressive pattern of overall inflation because lower-income households spend almost three times as much of their budgets on gas and electricity as the highest-income tenth on average (11% versus 4%). To this, you can add the impact of benefit cuts and tax rises, all of which disproportionately hit the lower paid. So much for levelling up!
A failing energy market is also not unique to the UK. New entrants have been collapsing like flies, not least because they were ill-equipped to cope with rising gas prices. Even more prominent players like OVO Energy (the third biggest supplier) are in trouble. They announced 1700 job losses today, which is unlikely to do much for their customer service. Already tarnished by advising customers to keep their heating bills low by “having a cuddle with your pets”, eating “hearty bowls of porridge” and “doing a few star jumps”. Ovo took over SSE’s retail operation a couple of years ago.
Reliance on expensive gas imports is another common position, driven by the ‘dash for gas’ in the 1990s by the privatised energy companies. In Europe, that may be addressed by the Nord Stream 2 project, which will bring vast amounts of extra Russian gas into the European market. However, the implications for Ukraine and Russian power more generally is clearly a concern. Brian Wilson reminds us we are paying the price of action and inaction over the past 20 years, “Those whose mission in life was to get rid of nuclear power knew that gas was the realistic alternative, regardless of cost or where it came from. Those who preached renewables and pretended there was not a problem with intermittency that needed to be addressed with equal vigour made the same unspoken assumption.”
This should all be a wake-up call for further renewable generation and energy efficiency. However, that won't address the immediate challenges. The energy industry has suggested a £20 billion fund to subsidise bills, repaid over ten years. This, of course, assumes prices will return to previous levels, which may be a gamble the Treasury is unwilling to take. Removing VAT and transferring 'green levies' from bills to the taxpayer would save £250 a year for the average householder. Helpful, but just a dent in the projected price rises. A windfall tax on energy producers profits could fund an expansion of the warm homes discount and the winter fuel allowance and reversing benefit cuts and tax increases.
Fossil fuel producers exploit the crisis to warn against a rapid move away from fossil fuels. For environmentalists, the situation highlights the need to accelerate the move away from expensive and volatile fossil fuels. This highlights the failure of COP26 to tackle the fossil fuel status quo. More green investment is required to ensure the future falling fossil fuel production is compensated for by improvements in energy efficiency and rapid growth in clean power generation. Despite some limited actions by the financial markets to discourage fossil fuel investment, producers do not believe demand will disappear.
The Scottish Government continues to bury its head in the sand over nuclear power. It argues, “Significant growth in renewables, storage, hydrogen and in carbon capture are, in our view, the best way in which to secure Scotland’s future energy needs and to meet our net zero objectives.”. This might be a strategy, except that three out of four elements are some way off at best. Little is happening on storage, which is, in any case, expensive when the alternative is to import English gas and nuclear power when the wind isn't blowing. Hydrogen is not really an option for electricity, it's a better bet for heating and transport, but even that is small scale so far. Carbon capture is a sensible option for industrial processes, but again we have barely reached demonstrator projects.
Meanwhile, Hunterston is closing, leaving us with just one time-limited nuclear plant. Nuclear does have cost issues, but we subsidised other forms of renewables. I have given up explaining on Twitter (well, not quite!) the misleading energy statistics that are so often bandied about. Not least the First Minister claiming almost all electricity used in Scotland comes from renewables. In fact, in 2020, 56% of the electricity consumed in Scotland came from renewable sources, 30% from nuclear (which is also renewable) and 13% from fossil fuels.
There is no shortage of energy issues to be tackled in Europe and the UK. The short-term solutions are all expensive and are the inevitable consequences of a failure to take a sensible long-term approach to energy policy. They are coupled with too much reliance on market solutions. We need a planned and balanced energy policy.
