7: The energy crisis and net zero
Other than the continued fascination with possible Covid lockdown breaches within Number 10 and other government premises, February’s news has been dominated by the potential invasion of Ukraine by Russia and the energy bill crisis. There are also a number of news stories blaming Russia for the energy bill crisis. Fatih Birol, the executive director of the International Energy Agency, directly blames Russia’s behaviour for the record-high energy market prices in Europe this winter, stating that the historic low European gas storage levels were mainly due to Russia’s state-owned gas company, Gazprom, sending a quarter less gas than usual to Europe in recent months notwithstanding the post-Covid pandemic surge in demand. But it’s also been suggested that the UK’s Net Zero drive actually plays a part in exacerbating the ongoing energy crisis. Is that correct? Or will Net Zero actually have a key role in alleviating the crisis in the medium to long term? Or, are both true?
Earlier this month Ofgem, the UK’s energy regulator, announced that the energy price cap (the maximum price suppliers in the UK can charge households) will increase from 1 April for 22 million UK customers. This will mean an average annual increase of £693 (from £1,277 to £1,971) for those on default tariffs (around 18m households) and an increase of £708 (from £1,309 to £2,017) for prepayment customers (around 4.5m households). Ofgem reported that the average price of gas increased from 49p per therm in January 2021 to 112.5p in November 2021. In the same timeframe, electricity prices per megawatt-hour increased from 53p to 112.5p. Even though a large proportion of electricity is generated from renewable sources, roughly 30% of our electricity is generated from gas, hence the similar electricity price increase. We, in the UK, are particularly affected by gas prices rises for that reason but also because ~85% of homes have gas-powered central heating. It also doesn’t help that our homes are exceedingly draughty and it’s very expensive to retrofit the necessary insulation (Chris Stark, CEO of the Committee on Climate Change was last Thursday).
Ofgem blames increasing energy prices on a record rise in global gas prices over the last 6 months (wholesale gas prices have quadrupled in the last year). Other than blaming Russia, the other main reasons for gas prices rising are:
- a worldwide (not just Russia) reduction in energy supplies;
- a cold European winter in Europe in 2020/21 increased demand for gas supplies, thereby reducing the amount of stored gas supplies;
- a summer of low wind in 2021 reduced the amount of wind-generated energy; and
- a big increase in demand from Asia for liquefied natural gas supplies (note: China is currently significantly cutting back on coal, in favour of gas).
Notwithstanding the evident gas price and supply issues, a newly formed group of Conservative MPs (including Steve Baker and former UKIP deputy leader, Craig Mackinlay) has formed – calling themselves the Net Zero Scrutiny Group (NZSG) – who are calling for a temporary end to the 5% VAT rate on energy bills but also for the ECO levy to be temporarily halted. The ECO levy, which is applied to energy bills, is a scheme that operates to fund household insulation improvements and alleviate fuel poverty. At present, the levy adds around £29 to the average annual consumer energy bill, and it is claimed to provide a circa £290 annual saving for the 200,000 UK households that have benefited from energy-efficiency improvements funded by the scheme. In a letter to the Telegraph in January the NZSG not only argued for the above changes but also for a cut to the Climate Change Levy on business energy use, but they also suggested that there should be an expansion of North Sea exploration and support for shale gas extraction, so as to help the security of our energy supply and reduce energy prices.
Removing insulation incentives that would reduce overall energy consumption, particularly for poorer households, seems fairly clearly the wrong way to go, but we can all agree that we should be reducing reliance on foreign gas supplies. Whether or not it’s right for there to be a short term increase in the extraction of UK gas and shale gas so as to offer security of supply and lower energy prices for the next 10 or so years, I’m pretty confident that the vast majority of people believe that we have no choice but to exponentially increase our investment in domestic renewable and nuclear energy generation projects to enable us to be completely self-sufficient once non-renewable energy sources are no longer available or affordable. The government’s own Net Zero Strategy published back in October, quite rightly states that implementing Net Zero energy strategies will not just help tackle climate change and allow us to be a more energy secure nation but they will also allow the UK to pursue a high growth, high productivity economic recovery plan focussed on renewable energy and world-leading innovation.
So, government policies, strategies and financial support to further encourage the massive investment needed in clean energy projects are absolutely vital. On that subject, it was announced by Business and Energy Secretary Kwasi Kwarteng last Wednesday that funding auctions through the Contracts for Difference (CfD) scheme will, from 2023, occur every year, rather than every two years, with the aim of boosting clean energy investment. I won’t explain in detail what CfDs but here’s a relatively simple explanation in a RenewableUK blog entry. Essentially, CfDs are used to provide price support (and predictability of future revenue streams) to emerging technologies and to encourage investment by industry in more sustainable production methods. By providing predictability of future revenue streams, they encourage investment in new technologies and methods which might otherwise take many years to be made or might not occur at all if solely reliant on market prices. CfD auctions that have taken place to date have acted to massively reduce the costs of UK renewable energy; the per unit price of offshore wind has fallen by approximately 65% since the first CfD auctions in 2014/15. Kwasi Kwarteng stated on Wednesday:
‘We are hitting the accelerator on domestic electricity production to boost energy security, attract private investment and create jobs in our industrial heartlands. [……] The more clean, cheap and secure power we generate at home, the less exposed we will be to expensive gas prices set by international markets.’
There may well be a few more years of increasing (or at least increasingly volatile) energy prices, but I would hope that this, or the next, government, will be able to implement policies to ensure that the financial burden of price rises are borne by those who can best tolerate them, whether individuals and / or corporates. Looking longer term, the only way to guarantee sustainable UK energy generation capacity and affordable energy bills for decades into the future is to back renewable energy in every sense: implementing ambitious environmental levies and taxation mechanisms; making the regulatory environment attractive and straight forward to attract international investors; and continually improving innovative funding mechanisms such as CfDs. So, a final message to NZSG – the transition to net zero will undoubtedly be expensive, but delaying climate action now will be far more costly.