The Government has indicated that it is preparing a new white paper on energy security, which is now expected to be published later this week. It is widely expected to include a renewed focus on nuclear power and exploitation of the oil and gas resources on the UK Continental Shelf. There are also calls for the moratorium on fracking to be lifted, and early signs are promising with a lifting of the requirement for Cuadrilla to cap its test wells in Lancashire, and a newly commissioned geological feasibility study.
However, lobbyists are all over the media calling for more of their preferred solution to be funded as the “solution to the energy crisis” and the “route away from fossil fuels”. Few of these are credible, and the Government faces some hard choices between balancing its strongly held net-zero commitments and the need to address crises in both affordability and security of supply.
No doubt later this week I will critique the white paper, but ahead of that I would like to outline my wishlist for the policy.
Shift the focus away from de-carbonisation to sustainability more broadly
Net zero is all about carbon. More specifically it is about the UK’s territorial carbon emissions. That means that the carbon emitted in the production and transportation of goods to the UK are excluded from current targets – the fastest way to de-carbonise our economy based on the current targets is to close all our manufacturing and import everything. However, in real life, that would almost certainly increase emissions: not only would we lose control over the emissions from production processes, we would also create new emissions in the transportation of those goods to the UK. Aside from the other detriments around employment and the balance of payments, this is not environmentally desirable. Therefore, my first wish is that we re-set our targets to include all emissions and not just territorial emissions.
Being all about carbon, net zero also ignores other types of environmental pollution, and while there are some efforts to control nitrous oxide and particulate emissions (within the UK, ie still territorial), the wider pollution from supply chains are ignored, such as the degradation of water sources from the extraction and processing of lithium and cobalt for making batteries. It also ignores non-environmental harms such as the use of child labour in Congolese cobalt mines and forced labour in Chinese polysilicon manufacture.
Closer to home, it prioritises the potential harms to lives and livelihoods from climate change over those from other causes, specifically fuel poverty. Disgracefully for a developed nation we have thousands of excess deaths each winter as a result of people being unable to afford to properly heat their homes. The lives of these people are not worth less than the lives of people that may be affected by climate change. So my second wish is that our targets focus on reducing all potential harms associated with energy and not just those directly relating to climate change.
Rather than a policy of net zero carbon by 2050, I would like to see a more nuanced approach which puts people and sustainability at its heart and not just the single metric of carbon, however seductive that simplicity may be. It might therefore take longer to de-carbonise, but we should not create harms, including putting people’s lives at risk, for the sake of an arbitrary target (eg why 2050 and not 2047 or 2053?). The Government should amend its existing climate legislation to qualify its net zero target to make them best efforts subject to avoiding these other harms.
Gas security of supply
The gas crisis is the trigger that generated the need for a new energy security policy. UK gas supplies are not insecure in that there is no real risk of us being unable to buy gas as a country. The risk is that it can become very expensive, to a point that renders heavy industry unviable as we saw in September when the Government was forced to extend a subsidy to the country’s largest fertiliser producer, CF Industries, since its decision to cut production in the face of high gas prices threatened the food industry since the company was a vital source of – ironically – carbon dioxide needed in pretty much the entire food value chain.
In recent years, our gas policy has been based on global just-in-time supply chains as domestic production has fallen. Excluding the decision to stop buying from Russia, the world has enough gas supplies to meet current demand, so as production ramps up after the pandemic, gas availability should not have been under long-term threat. However, the reduction of domestic production alongside very limited storage capacity and a lack of firm supply agreements left the country fully exposed to short-term price volatility…as prices rose, so do our gas costs.
The policy was predicated on an assumption that these periods of high prices would be short-lived (weeks or months rather than years) since global output would adjust and supply disruptions would be short-lived. However, the illegal war in Ukraine and the desire by many countries to end their reliance on Russian gas changes this considerably. There is not currently enough gas in production globally to displace Russian gas, nor is the current pipeline of new LNG projects sufficient. If Europe wants to replace Russian gas it needs to bid that gas away from existing buyers, generally in Asia, which will just push up prices for everyone. Possibly some Asian markets such as India and China will be happy to buy Russian gas (at a discount no doubt) releasing some demand for non-Russian gas, but probably not for the entire volumes currently sold.
Britain has low dependence on Russian gas but higher dependence on imports, although most of these are from Norway. The obvious solution is to increase domestic production, and in a higher price environment, more sites on the UKCS will be economic to exploit. This is my third wish: incentivise increased activity and production on the UKCS.
At the same time, we should explore the possibility of shale gas. It may be that we do not find commercially viable shale resources, but that does not mean we shouldn’t actively seek them out for evaluation. Currently the seismic limit for shale drilling is 0.5 on the Richter Scale, whereas the limit for geothermal drilling is 2.5. My fourth wish is that we lift the moratorium on shale gas exploration and lift the seismic limit to parity with the geothermal limit.
In addition, we need to re-evaluate the economics of bulk gas storage. We have multiple depleted gas fields such as Rough that could be converted to use as a storage facility, but they are expensive to develop. The Government should commission research into the economics of creating strategic gas storage facilities similar to the legacy oil reserves introduced after the oil shocks in the 1970s – my fifth wish.
We also need to build gas into our trading agreements, and secure long-term firm gas supplies from friendly producing nations such as the US, which is my sixth wish. Alongside this we would need to place limits on diversions and re-loads to ensure that we receive those supplies when we need them – at the moment our long-term agreements such as the ones with Qatar do not guarantee delivery as the seller has diversion rights.
These measures will not make gas necessarily cheaper – gas increasingly trades on a global basis and British production increases are unlikely to move the global supply needle. But it reduces the need for us to engage in bidding wars with Asian buyers, and reduces the risk of delays in supplies. And because domestic production is taxed, increasing this brings in additional revenues to the Treasury that can be used to cushion the impact of higher wholesale prices on end users.
Electricity security of supply
The looming risks of electricity shortages are largely independent of the gas crisis. Electricity prices have risen dramatically because gas is the marginal fuel for generation most of the time, but in the background capacity margins have been declining as a result of de-carbonisation policies. For the first time there was a shortfall in the capacity auction for next winter, and as a third of the assets that secured contracts have yet to be built, there is some significant delivery risk.
At the same time, our nuclear fleet is aging. There is no information as to whether the problems identified in the French nuclear fleet might also be present in British reactors, but even without that, the availability of British reactors is falling, leaving winter capacity margins under severe threat. As I write this, a quarter of the UK’s remaining reactors are offline. EDF has indicated there will be further delays at Hinkley Point C as well as additional cost over-runs, with a new schedule expected to be announced in the summer.
The decision by BEIS to increase the procurement target for the T-1 auction for next winter may be a sign that the Government has woken up to the precarious condition of the electricity market in winter, and there as signs that it is discussing with EDF the prospect that its West Burton A coal plant may be kept open past its planned closure date in September. This brings me to wish number seven: allow the remaining coal plant to remain open at least until Hinkley Point C opens. The amount of emissions that would result from this would not be high because utilisation rates would remain low (particularly when we think in global terms), but if we are at risk of losing 4 GW of nuclear power we should avoid voluntarily closing a similar amount of coal capacity. The harms from electricity shortages far outweigh the marginal increase in harm from delaying the closure of these remaining coal plants.
But this is only a sticking plaster on the wider problem: replacing dispatchable fossil fuel assets with intermittent renewable generation without also deploying bulk seasonal storage leaves us very vulnerable to adverse weather conditions. Unfortunately, the type of weather in question – cold, still winter days – are not uncommon: in Winter-20 saw 12 consecutive days of low wind output and this winter saw a similar period. Since these weather patterns can extend across very wide areas, as seen in September when there was low wind output across Northern Europe for several consecutive days, interconnectors are of limited help. Of course, the sun sets before the winter evening peak, a fact that seems to pass a depressingly large number of renewables advocates by.
This problem cannot be solved by building more windfarms. It also cannot be solved through the use of chemical batteries: the entire installed base of batteries last winter could only back up those 12 windless days for 10 minutes. It is not feasible that we could install enough batteries to fully replace lost wind on still days – not only would it be unbelievably expensive but there is not enough physical space available in the UK.
We need to break this up into two time periods: short-to-medium term and medium-to-long term. In the short-to-medium term we must accept the ongoing use of gas and ensure that sufficient gas capacity is connected to the grid to provide security of supply. There is simply no other available technology that can be deployed immediately. Gas power stations can be built quickly and relatively cheaply, and they are a reliable and well understood technology. They are also far cleaner than solid fuel plant, so if the addition of more gas allows us to accelerate the closure of coal plant that would be beneficial, and we could also finally close Drax, whose biomass burners emit more carbon dioxide than its coal burners. Therefore, wish number eight is that we accept the vital role of gas in our grid and ensure we secure the necessary capacity.
In the medium-to-long term we need more nuclear power. We should start, as I have said before, with proven technologies, and the top of my list is the Advanced Boiling Water Reactor that was initially proposed at Wylfa Newydd. Neither the newly proposed Westinghouse AP1000 nor the troubled EDF EPR has any sort of good track record and can only guarantee a build time of at least 10 years. ABWRs were built in Japan in around 4 years before Fukushima, and while they are supposedly less advanced than the AP1000 and EPR, they actually managed to get built which seems like a significant advantage. Possibly the proposed EPR-2 will resolve some of the problems seen to date on the EPR, but we should not bet on this. Wish number nine: procure an ABWR for Wylfa Newydd and negotiate to build one or two more plants of this type elsewhere in the country.
However, technology diversification is desirable, so wish number ten is that we explore other nuclear technologies – the EPR-2 if EDF is able to successfully demonstrate its capabilities (or underwrite its performance) and small modular reactors as well as molten salt reactors. Fusion is worth developing but it is not sufficiently mature to be more than an innovation project at this stage.
Wish number 11 is that we instigate a serious programme to develop more bulk energy storage. There are some viable pumped hydro sites that could be exploited, and other technologies such as compressed air and cryogenic storage show promise. Funding should be made available to small-scale thermal storage projects as an alternative the chemical batteries in the home. To date the Government has had no strategy in relation to electricity storage other than hoping something happens – its time to get proactive to make some of these technologies a reality.
Addressing affordability and the demand side
So far almost all of the efforts towards net zero have focused on supply, and specifically electricity supply. Unfortunately, poorly structured subsidy schemes have resulted in high costs to consumers – costs which are still growing on a per MWh basis despite the drop in CfD prices due to the inflation indexation on the Renewables Obligations and the fact that some schemes were awarded more than one ROC per MWh, creating an expensive leveraging effect. Consumers will not stop paying RO subsidies until the final schemes expire in 2037.
However the burden on consumers, particularly those on low incomes, can be eased by moving these subsidy costs into general taxation (wish number 12). Almost all industry insiders agree (and certainly all that commented in the recent House of Lords enquiry into Ofgem and net zero) that the current method of cost recover is highly regressive ie it falls disproportionately on low income households. Although a “polluter pays” argument seems superficially attractive, the reality is that people in fuel poverty have few means to reduce consumption, and they tend to be binary and harmful such as not cooking a hot meal or not heating their home. They generally lack the means to buy more efficient appliances, or install energy efficiency or micro generation in their homes (often they couldn’t do these things even if they had the money since they typically do not own the homes in which they live).
The only real way to address affordability against the backdrop of high wholesale prices is to deal with the difficult issue of energy waste. British homes are leaky, and a lot of heat is wasted due to poor insulation and draughtproofing as well as poor quality materials, poor construction methods and lack of maintenance. This is an incredibly difficult problem to solve, as there are no plug-and-play solutions. So my 13th wish is that a proper programme of home improvements is undertaken to reduce heat losses in homes. The programme should be set out at national level with the Government defining clear targets and milestones, with implementation being at the local level, led by local Government (and funded by central Government). I suggest the following approach:
Reform the EPC so it measures actual rather than theoretical heat losses, thereby taking into account the condition of the building and the quality of materials used;
All properties should have a thermal audit involving thermal imaging at the very least to identify which properties should be prioritised. Local authorities can do this without any input from householders since thermal imaging does not require internal access.
Classify properties in order of priority with the homes of the fuel poor with the highest heat losses as the top priority.
Engage with householders to carry out a detailed heat audit of those properties and identify appropriate remedies.
Facilitate the necessary works through the use of direct funding/grants and subsidies. Central Government should legislate to allow the cost of authorised heat loss reduction works to be set off against rental payments where landlords fail to engage in a timely manner – local government can certify such works to ensure they are genuine and to provide protection to landlords.
Local authorities certify completed works and repeat the thermal imaging tests to ensure that meaningful reductions in heat losses have been achieved.
This scheme needs to avoid blanket recommendations such as those embedded in the EPC: not every home should have wall insulation or external cladding for example. In some cases this may cause moisture bridging issues and in other cases it may not be permitted by local planning restrictions. However, planning restrictions should be re-drafted to facilitate sensible works. For example, double glazing tends to be prohibited in Grade 1 listed buildings, even products of a heritage type that are difficult to distinguish from the original fittings. In some cases, thermally efficient windows have been rejected on the basis they reflect the light differently. These types of finickity rules should be abolished.
My final wish is that we have reform of the retail energy market: the current market structure is inefficient with suppliers being responsible for many non-supply activities whose costs are passed on to consumers. These additional costs are outside the control of suppliers, reducing the scope for competition since only a small part of the cost base can be controlled or reduced through efficiency gains. The Energy Company Obligation would be made redundant by the home improvement programme described above, and the Department for Work & Pensions should be directly responsible for the Warm Homes Discount. Network companies should take over the stalled smart meter rollout and, as noted above, green levies should be moved to general taxation. Finally, the price cap should be abolished: it distorts the market and was never intended to protect consumers from the effects of wholesale price rises.
This simplification of supplier business models and the removal of the cap will allow suppliers to develop the new business models needed to support the energy transition. It will also make the market attractive to new entrants from other sectors with the expertise to enable some of these models – tech companies in particular. Few consumers are all that interested in optimising their energy use, but might be attracted by models such as those in the mobile telephony space, where flexible energy assets are provided as part of a multi-year energy subscription plan, which includes both supply and optimisation.
Missing from my 14-point plan is the mention of more renewable generation. That is because I think we need to pause the issuance of new subsidies for renewables, directing the funding to reducing heat losses in homes instead. Unsubsidised renewables should not be restricted other than by usual planning laws. This has the benefit of not increasing the generation subsidy burden on consumers (or taxpayers) as well as slowing the need for major changes to network infrastructure and the growth in reserve and balancing costs.
I believe this is a coherent plan for delivering energy security and tackling the current crises within our energy markets…high wholesale prices will probably be with us for a number of years, so we need to minimise their impact on consumers and prevent more people falling into fuel poverty. Directing significant funding towards reducing energy waste from heat losses rather than building more intermittent renewable generation has the benefit of contributing positively to each part of the energy trilemma: it reduces emissions due to lower energy use, it reduces risks to security of supply by lowering demand, and it reduces the cost of energy since less of it is required.