Last month, I gave Reaction readers my thoughts on what the British government could do to manage its way through the energy crisis as we head into winter. Today, I want to look at how our new government is getting on and what progress it has made.
First, they have put together an energy package for households and businesses that is universal and incredibly generous or expensive – depending on your point of view. They have also managed to get absolutely no credit for it as it’s been overshadowed entirely by the death of The Queen and the reaction to the mini-Budget. I am not here to comment on the wisdom of the package or how it’s been structured.
But, alongside this energy package, the Truss administration appears determined not to ask consumers to use less energy and reduce demand. It’s very hard to understand why this is. It is possible that part of the reason is that it’s no longer quite as necessary as it was. Despite Putin’s best efforts, gas prices have fallen substantially over the past month – although the forward price for Q4 2022 remains very high – since Europe finished filling its storage and demand has fallen both through government measures and some demand destruction. However, it seems just as likely that Truss and her coterie, as high-minded economic liberals, don’t want to be seen telling consumers what to do. Except that this doesn’t work when, as high-minded economic liberals, they presumably also want to keep public spending down as much as possible; something that could be done by asking consumers to act responsibly in a time of war.
For example, according to a study by Uswitch in 2020, 2/3rds of UK households heat their homes to over 20 degrees with 1 in 10 going past 25 degrees. A “20 is Plenty” campaign, which would tailor nicely with the speed limit advertising (Oh Nanny! You again!), could make a serious dent in gas demand and reduce that enormous bailout substantially. And homes are where it’s at. Businesses can turn down heating and air-conditioning as they have in Germany. Shop illuminations can be turned off at night. But it’s heating and washing where households can have the biggest impact. You can use lights, TVs, phone chargers, games consoles, kettles, microwaves as much as you like but it’s the thermostat, the tumble dryer and the dishwasher that are the new Enemies of the State. The good news is that it’s still September and it’s definitely not too late for the government to swallow their qualms and remind people that jumpers aren’t just for Christmas.
Separately, it doesn’t help that the new PM doesn’t seem to know that the £2,500 figure that she quotes is for an average household and depends on how much energy they use. The government has capped how much energy companies can charge per kilowatt hour; they have not capped people’s energy bills. She also needs to remind us that £2,500 per household still represents a massive increase on previous bills. Another good reason to reduce domestic demand.
Second, they are looking to increase domestic oil and gas production. This is a justifiable response to the current crisis and a good way of showing that the government is “doing something”. The only problem with this is that their chosen vehicle appears to be fracking. I can assure you that as an oil and gas man of many years there is nothing designed to cause more eye-rolling than the British government, of whatever hue, talking about the need for onshore fracking in the UK. This is because the fracking debate is just an adjunct of the planning debate. Yes, we want fracking but not here. More importantly, if onshore fracking for gas in the UK was sensible, viable or necessary on a large scale basis (whisper it very quietly but there’s quite a bit of onshore hydrocarbon production in the UK already) we would have done it and made a success of it by now. Instead, the government should be putting rocket boosters behind discoveries that have already been made offshore. We need more places like the Culzean field operated by Total which came onstream in 2019 and now meets 5% of the UK’s gas demand and was the largest gas development in the UK in 25 years. But note, it took 11 years to go from discovery to production and it’s hard to wonder how stable a fiscal regime the UK feels right now after recent events.
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Third, I can’t see any evidence that the Truss administration is working in partnership with either the oil and gas companies or their international partners in a coordinated way. This may be unfair: Kwarteng has gone to the Treasury from the Business & Energy department and should be well aware of the energy situation across Europe currently. Not very many people will know that, right now, the UK is the man of the match in European power: through our three LNG terminals, we’ve been busy pumping gas across into Europe ahead of the winter and, at the same time, we’ve been producing excess electricity (15.2% at time of writing) that’s been sent via interconnectors to Ireland, Norway, the Netherlands and, in particular, to France. This is not an unusual phenomenon in the summer and autumn but it is very often completely reversed during the winter when we need assistance, and from the French in particular.
We’ve done our bit for them; what guarantees do we have that they will do the same for us? If I had to guess, I don’t think we need to worry as French nuclear power is gradually coming back on stream but the problem with this situation is the unknown unknowns. It wasn’t until I had dinner with a Norwegian friend recently that I realised that the summer drought in Norway has had a dramatic effect on their ability to produce hydro-electric power which means they need to use more gas and they have specific provisions to make sure that, in times of emergency, their gas comes to them. Are we as ruthless as they are? I’m not sure. Norway also provides a good example of where international co-operation would help: this crisis is making the Norwegians a lot richer than they already are – which is saying something. Where’s the pressure from the UK – a vital defence partner for Norway – and the co-operation with the EU to say to the Norwegian Government, “can you give us a break?”
Fourth, a Reaction subscriber got in touch after my last article to say that rough storage and Rough storage are not the same. This is true: Rough is a former gas field in the North Sea that was used for gas storage (around 10 days’ worth of supply) until 2017 but is now being recommissioned again whereas rough storage is a term that I would use (and I checked this with my colleagues) to describe gas storage in former reservoirs more generally. I am not sure the subscriber and I will agree on this though. That said, the UK’s lack of storage is a bit of a red herring. It’s wise for the UK to have some storage but France and Germany have massive gas storage facilities for one very good reason: France has no indigenous gas supply; Germany has, by my reckoning, a sixth of the UK’s supply and we have an excellent arrangement with Norway too. And those LNG terminals too.
As you can probably tell, I am underwhelmed by the new regime. They’re missing the most important and lowest hanging fruit for, as far as I can see, reasons of dogma and nothing else. This doesn’t feel very sensible but there are suggestions that it’s a live conversation in government so perhaps they will change policy. Maybe the campaign around energy demand will finally take off as the need for fiscal rectitude asserts itself? After all, following the fortnight he’s just had, I’m guessing our current Chancellor could do with energy bills, the bailout and borrowing all being lower.
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Providing practical advice on energy saving during a gas crisis and war could at best avert disaster and at worst save people money. Opposing it on libertarian grounds is deeply childish.
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Ofgem, the UK’s energy regulator, has warned that there is a big risk of gas shortages occurring this winter.
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© Copyright 2022 Reaction Digital Media Limited – All Rights Reserved. Registered Company in England & Wales – Company Number: 10166531.