Will your electricity bill stay high forever? Simple question – simple answer. I don’t know. Forecasting is a mug’s game and I have no desire to be inundated by angry Reaction subscribers saying, “but you said…”
However, I do know what the parameters are that will decide whether the prices stay high. To cut a long story short, both this government and the next government, of whatever hue, have some decisions to make.
The UK continues to be dependent on gas and it’s the gas price, which is the most expensive part of our energy mix, that decides the price of our electricity. This is because we are charged at the marginal price for our electricity: the most expensive molecule of energy sets the price for every molecule we consume. When the gas price is high, it means our bills soar. It’s why the geniuses at Cornwall Insights are able to put the forward gas price into a very simple spreadsheet and scare the living bejesus out of everyone – including governments – with projections that might be anchored to reliable data but not necessarily to reality. The cost of gas in late August, early September – which was driven by European countries filling gas storage – and associated energy bill projections explains why the short-lived and unlamented Truss administration felt it had to offer an absurdly generous energy price guarantee. Whether the price was going to stay that high was always up for debate and clearly wasn’t examined, amid all the haste, by Liz Truss and Kwasi Kwarteng.
The guarantee has sensibly been watered down by Jeremy Hunt and the gas price has fallen dramatically to around 132p/therm: slightly higher than before Vladimir Putin’s invasion of Ukraine and roughly two and a half times the pre-pandemic norm. Reduced demand in Europe and the mostly mild winter has driven the gas price down and it will likely reduce further as we enter the spring and summer when energy demand can be as much as half what it is in winter. In the UK, in winter we often go past 40 GWs of demand; in summer, peak demand on warm summer days can be as low as 20 GWs. The mild winter has also obviated the need for European countries that have no indigenous supply to fill their gas storage rapidly, so we won’t see the same late summer panic as last year.
Finally, demand also drives supply: gas prices are so healthy at the moment, as the SuperMajors and their 2022 profits have reminded us, that finding, developing and selling gas looks to be good business for a few years to come. especially with Russian gas likely to be out of European markets for the next decade at least. So, as far as the long-term gas price is looking, it’s better than we might have hoped for a year ago. For our energy bills though, it’s a question of whether the price will return to that historic long-term norm of around 50p a therm but also, crucially, what the British government is going to do.
I think we can say with some certainty that the new Energy Department led by Grant Shapps doesn’t have enough time and the Conservative Party doesn’t have any inclination to deal with questions around energy seriously in the next 18 months. If they were serious, or indeed had been serious about energy over the past 13 years, they could take – or would have taken – some long-term decisions to settle the question of energy supply and security in this country. This would mean scaling up onshore wind, investing in nuclear power, incentivising North Sea investment rather than robbing it blind, examining alternative technologies and implementing a Net Zero plan that focused on both renewable power and base load power.
Base load power is the critical factor here: the UK is blessed with enviable renewable resources especially around wind and, as I have said in these pages before, we have done an excellent job with offshore power (OK, those 13 years haven’t been entirely wasted). It’s a very rare day indeed that wind contributes nothing to our energy mix: over the past year, wind has supplied 30% of our power vs 40% from natural gas and 16% from nuclear. These are world-leading figures but it’s not base load power that we can rely on day in, day out. So we have to have redundancy in the form of gas (and, on rare occasions, coal) fired power stations. It is possible that we could build enough offshore wind, and there’s still plenty of space, that wind could be close to base load power on the premise that in the British Isles the wind is always blowing somewhere but “close to” isn’t good enough in a world that requires constant access to power.
So the government has a choice to make: if it wants to phase out gas-fired power stations over the next 10 years, which is currently the case (albeit from Boris Johnson/pre-Ukraine times), then it’s going to have to create some very serious incentives, Singapore-on-Thames style, to make it happen. Given the UK’s current fiscal state, I don’t see the current government or a Starmer government getting anywhere close to that. It’s much more likely that we’ll continue to build offshore wind farms and wait for someone else to come up with the required technology whether that’s hydrogen, heat pumps, nuclear fission, wave power or anything that’s been tried so far but hasn’t quite made the grade. This is the key: a lot of our future energy hopes are invested in technologies that we already know a lot about and so far, alas, don’t do a better or a cheaper job than hydrocarbons. This leads to an obvious conclusion: that, for the foreseeable future, your energy bill and the gas price are going to remain very closely correlated. This reality will require the British government to make much more sensible decisions around the use of natural gas in the UK, how we use North Sea oil & gas and ensure that the UK has at least some natural gas storage. Given our indigenous supply, I think around a month’s worth of storage would be about right: we currently have two days which is patently not enough.
There is, of course, another reality: that the forthcoming Starmer government will have such an astonishing majority that it will be able to implement whatever it wants. In a way, this will be no bad thing for energy policy in the sense that it will be able to propose and impose a long-term energy plan that won’t be smashed to pieces by planning committees and NIMBYs (Please note I don’t say it will be a good thing for Parliamentary democracy – I too remember the Blair majorities of 1997 and 2001). It’s also hard to see Ed Miliband, Starmer’s likely Energy Minister, missing the opportunity to restructure our energy bills so that the most expensive molecule no longer sets the overall cost – and a braver Tory government would get on with this now. That said, the same Miliband is also likely, in the name of tax justice, to go after the SuperMajors and their profits in a way to ensure that they never invest in the UK or the North Sea again. And this is the point: that the future of our energy bills rests on government threading a complicated needle of demand, technology, innovation, Net Zero and, yes, the dreaded fossil fuels. There are no simple answers so if you do have any good ideas, I am pretty sure that Grant Shapps and Ed Miliband would like to hear from you.
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