“Winter is coming.” That was Chris Whitty’s rather bleak warning that the Covid pandemic is not over. A very similar warning is also justified when it comes to the energy market. The complacency of ministers who assure us there is no crisis—although they have reached a deal to restart CO2 factories on Teesside and in Cheshire—demonstrates that there is no real understanding in Westminster or Whitehall about what has been happening, and what could happen next.
There are two reasons behind the sudden spike in gas prices and the physical shortages affecting businesses that are dependent on continuous supplies of goods produced using natural gas.
One is the situation in the world market. The other is the neglect by successive UK governments of the risks to the imported energy supplies on which our daily economic life depends.
At a global level, the demand for gas is outstripping supply. Asia has recovered strongly from the recession caused by Covid lockdowns. China in particular, which now accounts for more than a quarter of the world’s total daily energy consumption, has seen surging economic growth this year which has rapidly translated into rising energy imports.
Supply has not caught up. The last few years, during which gas (and oil) prices have been relatively low, have discouraged new investments. Without a steady stream of new projects the imbalance against increased gas use around the world widens. That is no surprise—but it has left importing countries, including the UK, vulnerable to any episode of price volatility.
The smaller energy retailers—many of whom took a bet that gas would always be plentiful, and sought customers by promising low prices over long contract periods—have been caught out by their optimism. Some have failed and others look likely to go the same way.
Customers caught up in this process will be offered supplies from other retailers but will not get the same cheap deals unless the government offers a large and expensive safety net. These consumers—especially the poorest, who also face a cut in universal credit—are victims not just of global trends but also of incompetent policy which has neglected energy security.
While hundreds—perhaps thousands—of civil servants and huge amounts of government time are being devoted to the transition to low carbon, almost no one in government has found time to prepare against the rather obvious risks facing the supplies on which the UK continues to depend. With production from the North Sea much reduced as old fields mature, Britain is more vulnerable to global energy market instability than at any time in the last 50 years. The failure to understand this basic fact is the fundamental reason why the current problem is so serious.
The climate agenda is vitally important but moving to a low-carbon economy is a slow process. The transition, which will take decades and billions of pounds of investment, has barely begun.
For the moment, we continue to rely on imported oil for transport and on gas for power generation, the heating of our homes and numerous industrial uses.
The production of renewables has grown, but the wind does not always blow. When it does not—as has happened over the last few weeks—back-up supplies of generating capacity which can produce electricity from gas is essential. In any complex system there must some spare capacity—in this case power stations which can be turned on quickly when anything goes wrong. The need for such back up also arises when Britain’s ageing nuclear power stations are offline for essential maintenance, as they have been in recent weeks. Again, none of this is secret, and ministers should never have been taken by surprise.
Many countries would deal with volatility of the type we have experienced in recent weeks by using stocks held in reserve. In Britain, however, in contrast to most of Europe, stocks have been run down to less than 2 per cent of daily consumption. The UK’s main gas storage facility at Rough has been closed, in the face of many severe expressions of concern by those in the industry who understand the risks involved.
With supplies short, prices have inevitably rocketed—something which will now be reflected in energy bills over the coming months, adding to already serious inflation pressures. Putting a cap on energy prices makes for a good political slogan, but in reality is no more than a meaningless gesture which will do more harm than good. The energy retailers are normal trading businesses. If they are unable to pass on price rises they will, before long, simply stop trading. That will do nothing to help consumers—especially the poorest, who can least afford rising bills. For them, winter is definitely coming, and it will be cold and miserable.
Beyond the short-term fixes of bailouts and support packages, the need now is to return to a rational energy policy in which energy security is given an equal share of attention alongside decarbonisation. That means building stocks and ensuring that companies offering low-cost deals have the resources to deliver on those deals.
The environmental case for reducing and eventually eliminating the use of fossil fuels is clear. But that process has barely begun. The government produces vague ten point plans but has still not put forward a credible strategy for the energy transition. That will require sustained investment in new infrastructure and the transformation of the way in which we use energy.
We should be reducing fossil fuel use, but simultaneously recognising that until they have been replaced we will need secure—if diminishing—supplies of oil and gas. For households and businesses, continuous supplies of energy at a cost they can afford is at least as important as reducing emissions.
The two strands of a good energy policy are complementary, not incompatible. Over time will they run together. But one cannot be allowed to squeeze out consideration of the other. Unless a new balance can be achieved, this will not be an isolated crisis but the forerunner of a new—and highly damaging—period of energy insecurity.
