Today (Sunday, October 10th) Business Secretary Kwarsi Kwarteng was doing the rounds of the politics talk shows, trying to pour renewables (rather than oil) on the troubled waters of the badly overheated natural gas market. Wholesale prices, which started at 60p a Therm in January recently rocketed as high as £4.00, before settling back at £2.40.
Households are, to some extent, protected from immediate rises in their bills by a “cap” that is adjusted each October and April, above which suppliers may not raise their prices to consumers. As the cap is set two months in advance, the true impact on consumers will only be revealed in February.
“I am convinced the UK will not suffer gas shortages in the coming months and that the price cap on consumers’ energy bills will not be moved this winter.”—Business Secretary Kwarsi Kwarteng, Trevor Phillips On Sunday Show
Of more immediate concern is the fact that industrial users have no such protection. Ceramics, glass, fertiliser, brickworks and steel mills are only a few of the many industries that may be forced to stop production as uneconomic, or pass on price rises that will hit consumers other than in their energy bills. But even the “Big Six” gas retailers will be unable to absorb much of such rises as they will be tasked with supplying customers of a dozen smaller energy retailers who have collapsed.
Other than putting out soothing words that supply is not an issue and homes will continue to be heated, Secretary Kwarteng made it clear there would be neither adjustment of the consumer cap process, nor extension of it to business, nor any government bale-out of gas retailers who went to the wall. Unlike many other issues besetting the UK economy like trade impediments, shortages in key workers and erratic supply chains, it would be wrong to assign the blame for this to Brexit.
What it does, however, have in common with the repercussions of Brexit is that both can be ascribed to the lack of long-term thinking and strategic planning on the part of the government, especially the department of which Secretary Kwarteng is the minister.
- Reduced North Sea Production. While the gas once seemed plentiful, 40 years of relying on it has depleted stocks; but 2019 only 40% of UK gas consumption was coming from territorial waters, with another 33% coming from Norway. The rest arrived indirectly from Russia or LPG ships.
- Control of Production went out the window early with the sale of BNOC. But even British companies now account for barely one quarter (BP 12%; Shell 12%). The two largest are US-owner Harbour (23%) and French-owned Total (17%).But all are private international operations outside UK government control. But all these companies (and a half-dozen smaller competitors) are about to pocket a serious windfall in profits, made at our expense in UK territorial waters.
- Overoptimistic Projections. For the last decades, Tory governments have consistently projected that fracking, nuclear and renewables would reduce UK dependency on the North Sea in general and gas in particular.
- Insufficient Storage. It is good practice not to live hand-to-mouth and have reservesto buffereither interruption in supply or price hikes, such as we are now experiencing. As examples, Germany stores 250 Terawatts; Italy 195 Tw and most other European countries have more than the UK’s 20 Tw. If this seems low, that’s because in 2017 the government chose not to replace 70 Tw in Centrica’s offshore storage, cutting the UK’s buffer down to less than a week’s of demand.
- The Wholesale Market. While the government largely blames this for the price paid in the UK, they are being disingenuous. What they are referring to is the spot market, where price fluctuations are a way of life. The way to avoid this is by “hedging”, which is negotiating a price for future delivery at an agreed fixed price. Most of the “Big Six” are hedged into 2023. Russian suppliers recommend this approach and countries like Germany use hedging as a matter of course. Which is why they are paying €137 per unit while Britain is averaging €245.
- Global Demand. Gas storage was emptied last winter due to strong demand, exacerbated by relatively weak renewables generation and strong underlying power demand. Power and gas demand has also been strong in Asia which pulls LNG away from Europe. This has combined with a global supply crunch and limited injections this summer, resulting in record-low stocks as we enter the heating season.
- The Impact of Covid. Dealing with lockdown caused delays to new projects and maintenance, notably to maintenance of the Forties Pipeline System in the UK central North Sea, which was postponed from 2020 This resulted in the shutdown of supply from all connected 67 offshore fields, while further work on other parts of the system throughout the year meant field clusters such as Elgin/Franklin, Shearwater, and ETAP were all offline for longer.
- Departmental Musical Chairs. The UK Department of Energy and Climate Change, created in 2008 to focus on this sector. It was the latest of five incarnations since 1964. It was replaced in 2016 by the Department for Business, Energy and Industrial Strategy has a much wider brief, and therefore less focus. There have been four different Secretaries since 2019. Secretary Kwarteng has clocked jut 9 months in the post.
None of the above points lead directly to the present untenable situation. Even taken all together, they need not have led to this situation. But what is clear is that none of them were unknowns several months ago, and that a plan to anticipate rocketing demand should have been a priority. The idea of Secretary Kwarteng meekly following Boris Johnson’s wheeze of “letting industry tough it out” and hoping the cap will hold down consumer discontent until the Spring, when it will all have blown over seems optimistic at best and irresponsible at worst.
We have been gas-umped and there is little we can do about it. But that makes it all the more urgent that a coherent plan of transition to renewables for the long term and more sensible management of energy for the medium term to avoid getting gas-umped again.