The UK’s energy crisis: no quick fix, but hope on the horizon

There are no easy answers to the energy crisis. This is a challenge for politicians who habitually deal in easy answers. Indeed, their resort to easy answers during the years of plenty, when the political weather was being made by environmental pressure groups, is one of the reasons we’re in the mess we’re in now. Our leaders, cheered on by large sections of the media, encouraged and subsidised renewable energy generation – good for the planet, but an unreliable source of supply – while discouraging hydrocarbons exploration and failing to revive the shrinking nuclear power sector.

One of the most dishonest aspects of British energy policy is the reluctance to understand and acknowledge the continuing reliance on natural gas in power generation and domestic heating. In 2021, gas supplied 42% of total national energy demand, and generated 40% of electric power production, more than all renewable sources combined.

But the UK’s own gas production is declining. In 2021 output from British gas fields was equivalent to 42.5% of national demand, the lowest proportion since 1970. From 1995 to 2003, the UK was a net gas exporter, but the real decline set in around 2008, the year that Ed Miliband’s Energy Act was passed, setting the scene for the rise of renewables and the turn against hydrocarbons. But Miliband was merely the trailblazer for the Coalition and Tory governments to come.

A key aspect of energy, especially in the northern hemisphere, is seasonal demand. Gas and electricity supply need to respond to wide swings in consumption as the temperature drops. In winter, gas demand averages three times the summer requirement. But that’s just an average: peak winter daily demand can be five or even six times the summer trough. Historically, the UK benefited from highly flexible offshore production, but these “swing” fields are nearly all worked out. Most UK gas is now produced at a fairly steady year-round rate, which means flexibility has to be found elsewhere.

The obvious source then becomes storage. European countries have large storage capacities because historically they depended on long distance suppliers in Russia, Norway and Algeria, and gas that travels thousands of kilometres can’t be delivered flexibly. But Britain had its swing fields, and as these declined it was able to depend on the international market. As a result, we have minimal underground gas storage. Britain pioneered gas trading across Europe, and also built a very large LNG import capacity, which has stood the country in good stead over the past 10 to 15 years.

But everything changes when there is an overall shortage of gas on the international market, as has now been caused by Russia’s invasion of Ukraine. Then it becomes a question of rationing by price. So if the UK market needs short-term gas – by pipeline or as LNG – it will have to outbid other players with recourse to significant quantities of stored gas.

Britain’s single largest storage site was Centrica’s Rough, a depleted offshore gas field. Centrica closed it a few years ago because its facilities were old and run down, and gas prices at the time would not support its overhaul without government assistance, which was refused. Now the Government is scrambling to help Centrica reopen the site, but even if Rough is brought back online, it is unlikely to be much help before the winter of 2023/4.

In the short term whoever occupies 10 Downing Street will have to subsidise household and probably also business energy bills. That is a real political, economic and moral imperative which will cost the country dearly for years to come and throw out many calculations. In the medium to longer term there will be various plans to reform the gas and power markets, extend Whitehall’s control, perhaps even renationalise all or parts of the gas and electricity sector. Most of the ideas around now are half-baked or nakedly ideological (or both), but some have merit: for instance, reforming the regulation of the power sector to eliminate perverse incentives and encourage timely investment.

What we actually see is politicians flailing around and announcing desperate and unrealistic measures which, they imply, will help us get through the coming winter. Let’s be clear: there is nothing our leaders can do in what remains of 2022, short of surrendering Ukraine to Putin and dropping sanctions in the hope that he will turn on the gas taps for Germany and the other big European consumers. The Russian President understands this very well, and is playing on European popular sentiment in the hope that Scholz, Macron and the rest will cave in. Indeed, Putin is one of the only world leaders who has a realistic grasp of energy market realities, as he showed a few years ago when he threw in Russia’s lot with OPEC, and helped that largely ineffective elderly cartel to move the oil price up.

Various short-term initiatives have been announced by Downing Street, involving appeals to big gas producers like Qatar, Norway and the US. Norway, in fact, has been pumping more gas since the spring, as befits a serious country that understands its customers and is on the Russian front line. No doubt British representatives will be received politely in other places, but everything comes down to price and availability – and everyone is in the same boat.

These appeals recall a (probably apocryphal) story from the oil crisis of 1973, when the newly assertive OPEC reduced supply to Britain and other western nations by 25%. Ted Heath, the Prime Minister, was also facing a miners’ strike at a time when most British electricity was generated from coal. Heath was advised by the Cabinet Secretary, Sir John Hunt, that BP and Shell, the “London majors”, would of course ensure Britain was fully supplied, and on this basis, he decided to take on the miners. But when he belatedly asked the two chief executives for assurances, BP’s Sir Eric Drake replied: “Of course, Prime Minister, so long as you can give me a letter of instruction with your signature on it that I will be able to show to the leaders of France, Germany, the Netherlands…”. At that point, Heath realised there would be no special favours for Britain. Shortly afterwards, in February 1974, he called a general election. He lost.

Boris Johnson’s swansong includes slightly tenuous encouragement for the Sizewell C nuclear power plant, though be in no doubt that the £700 million he promises is hardly enough to clear the site. Even if the next PM follows through, we are unlikely to see new power from the Suffolk coast much before 2040. And if nuclear power is to play a significant part in supplying the British electricity market, there will need to be several more Sizewell C’s. The British Government’s record on nuclear power, especially at the long-delayed Hinkley Point station, is not encouraging.

Nuclear power operates at baseload, and wind and solar are intermittent. Gas will continue to be needed in quantity for many years to come, both to meet peak demand and back up the renewables.

Then there is the prospect of fracking for gas onshore, especially in Lancashire. There is almost certainly a very large resource which could be brought on stream relatively quickly, in one to two years. That will take political courage, as well as clear thinking, but it is at least now being discussed in Whitehall.

Finally, it’s always important to remember that what goes up will eventually come down. After a difficult winter, and massive adjustments of demand and energy efficiency, oil and gas producers around the world will be investing in exploration at a pace and scale they have been reluctant to undertake in recent years. I don’t see a gas glut in 2023, but I wouldn’t be surprised if it happened in 2024.

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