Sleepwalking into disaster

My blog is 6 years old today!

Looking back over the past couple of years makes me wonder what the next year will bring…after a pandemic we now have a war, and while we in Britain may not be officially At War with anyone, we are absolutely in an economic war. With the news full of the horrors of Russia’s illegal and immoral actions in Ukraine, and a growing cost of living crisis brought about by a combination of the pandemic and the war, it’s tempting to wonder when the plague of locusts will arrive.

Since the start of my blog I have warned about the dangers of sleepwalking into disaster. Mostly I had in mind declining capacity margins – which are now so narrow that heavy industry in Britain fears involuntary curtailment next winter to protect domestic supplies – but the wider political context has also illustrated very clearly the dangers of failing to recognise and react to threats in a timely manner. The Russian invasion of Ukraine has been a possibility since the annexation of the Crimea in 2014, yet many European governments turned a blind eye to the risks, prefering to maintain their cosy energy relationships. The costs of that mistake are now being clearly felt.

Recent events have reminded us of the importance of energy both in our daily lives and to the economy. I recently wrote a blog about the true cost of renewables, and was a bit shocked to realise that we have now been subsidising off-shore wind for 20 years. And those subsidies are only for the construction of the wind farms themselves…consumers now pay two or even three times for capacity: subsidies to build intermittent renewable generation, subsidies to ensure the capacity needed to backup that intermittent generation, and then payments to curtail subsidised renewable generation when problems like network congestion mean it cannot be used. On top of this, consumers must also pay for the cost of connecting those new forms of generation which often cannot use existing infrastructure, and the costs of managing real-time intermittency through higher balancing costs.

Almost every type of generation on the GB system has received or been entitled to receive some form of subsidy, whether through the various renewables support schemes or the Capacity Market. The result was ever higher energy costs for end users, despite no corresponding trend in wholesale gas and electricity prices. Energy prices were considered to be expensive, with the Government and Ofgem selling a narrative that profiteering suppliers were to blame, with the retail price cap being introduced to control the “problem”.

Then, in the second half of last year, the wheels literally came off. Wholesale energy prices, despite being benign for years, suddenly took off as demand recovered from covid declines at a faster rate than the recovery in production. The price cap, being only adjusted twice a year, meant that suppliers were forced to sell at a loss, and around half of them failed, exiting the market. Huge increases in the price cap followed, which required the Government to introduce subsidies for consumers.

Now we have a crazy situation where consumers will be subsidised to pay for subsidies to renewable generators.

The obvious question is why does the Government not simply cut out the middle-men and remove green levies from bills, funding those subsidies from general taxation. There are signs that this may finally now be on the agenda with a broad consensus in the market that wholesale prices will remain high for years rather than months as the Ukraine war and resulting desire to remove Russian supplies from the European energy markets will perpetuate the imbalances in the market.

Annoyingly, some people are using these crises to push their particular agendas, the most damaging of which are the push for ever more subsidised renewables, and protests aimed at ending domestic hydrocarbon production. We really need to have a proper conversation about renewables subsidies, and the full costs renewables impose on consumers. I doubt that many people within the industry realise we have been subsidising off-shore wind for 20 years with no signs of that being able to stop any time soon – in fact, costs are now expected to rise as raw materials are becoming more expensive. How long is it reasonable to subsidise a new technology before it should stand on its own feet, particularly a technology which does not contribute to security of supply. I would much prefer generation subsidies to be directed towards nuclear power which is both zero carbon and reliable.

On the subject of hydrocarbon production, the protestors are getting it badly wrong and causing further harm to consumers. The energy transition cannot be driven from the supply side – the only consequence of restricting production would be increasing imports, meaning not only would we lose control of production emissions, we create additional emissions when transporting that imported energy.

Most suppliers are reporting sharp increases in customer bad debts/late payments, and are warning the Government of a major fuel poverty crisis next winter. I share these concerns, and agree with the idea of a social tariff for energy, which would allow those in fuel poverty to pay a subsidised rate for energy, funded initially through taxation or Government borrowing. It is literally insane to be contemplating further subsidies for renewable generation at this point in time, and yet the Government is not only committed to continuing this flawed strategy, it wants to increase it.

Each winter, thousands of Brits die as a result of cold homes. The Office for National Statistics does not tend to report the number explicitly, but it is likely that 6,000-9,000 people are affected in a typical winter. As both fuel poverty and wider financial hardship increase, we are likely to see many more excess winter deaths, particularly if the winter is cold. There are already reports of vulnerable consumers declining foods such as potatoes from foodbanks as they require too much energy to cook. This is a deeply worrying trend, as poor diet will certainly increase the risks presented by living in cold and often also damp conditions.

Energy policy has never been more important.

“It takes as much energy to wish as it does to plan”
– Eleanor Roosevelt

Thank you to everyone who reads and comments on my blog.