Energy: muddle and solidarity

By Richard North - September 13, 2022

At least one pundit is asserting that the gas price bubble “has popped”. This is based on current European natural gas prices, which are now back to July levels and close to halving from the recent peaks.

According to this pundit, prices might very well halve again although they would still be 2-3 times higher than the pre-2021 highs. But, even then, Bloomberg is not so sure.

The agency cites Gilles Moec, chief economist at AXA Investment Managers, who says there’s still major “uncertainty on the price of gas. Beyond that, he says, there is the issue of the availability of gas. The market is awaiting details on the EU’s moves, which may have an impact on prices, but not so much if there’s a shortage of gas and power rationing.

Although European storage sites are about 84 percent full, slightly above five-year average, with European countries adding more facilities to receive liquefied natural gas, a cold winter in Asia and an economic rebound in China could intensify competition for cargoes and cut the supplies needed to make up for the shortfall in Russian deliveries.

Understandably, therefore, the EU is very much on the case, with Reuters reporting on a draft Commission proposal aimed at imposing levies on fossil fuel firm profits – the EU’s very own form of windfall tax.

The proposal, which has not yet been published, has been seen by Reuters. In typical Eurospeak, it is called a “solidarity contribution” and will be imposed by member states on oil, gas, coal and refining companies, based on taxable surplus profits made in the 2022 fiscal year.

“Those profits do not correspond to any regular profit that these entities would or could have expected to obtain in normal circumstances”, the draft plan says, which also includes a life-raft for power firms facing a liquidity crunch.

However, there is less agreement at EU level over the imposition of a cap on gas prices, with nervousness being expressed at Russian threats to cut all supplies if this action is taken.

Entertainingly, in complete contrast to the line taken by The Replacement, French finance minister Bruno Le Maire claims that consumers would be protected by new caps on energy as it would be “completely irresponsible to put the burden … solely on the state budget”.

Nevertheless, Norway – which has recently become the EU’s largest gas supplier – is unhappy about the idea of price caps. Norwegian prime minister Jonas Gahr Stoere says: “A maximum price would not solve the fundamental problem, which is that there is too little gas in Europe”.

But these are not the only shots in the EU locker. The Commission is also seeking to curb demand, proposing that each member state implements a cut in overall consumption, with additional requirements for cutting demand during selected peak hours.

Putting these measures in perspective, we have Anne-Sophie Corbeau, a research scholar at the Center on Global Energy Policy at Columbia University. She says =, “We are seeing a major energy crisis – but I still don’t see this being translated into facts in terms of energy demand reduction in our daily lives”. Thus, she adds, “it is important to reduce gas and power demand”.

Back in the UK, where a state of paralysis has descended in the body politic, The Replacement is under pressure to add more details to the vague outlines of her energy plan, originally published on the same day the Queen died and not embellished since.

However, muddle and uncertainty seem to dominate The Replacement’s plans. At some time in the near future, she is supposed to be sitting alongside Kwasi Modo when he delivers his autumn statement, aka emergency budget, when more details of the plan should be on offer.

But parliamentary business has been postponed until after 21 September and on the next day, The Replacement is jetting off to New York to play at the United Nations. By the time she gets back, parliament could be once again in recess, this time for the conference season.

Already, though doubts are being expressed over the government’s ability to fund the energy package, given that The Replacement has set her face against any form of windfall tax.

Paul Johnson, director of the Institute for Fiscal Studies thinktank, is cited by the Guardian, saying that the government will have to come up with a better version of the energy price guarantee next year because The Replacement’s plan is “incredibly expensive” and “totally untargeted”.

Even the egregious John Redwood has been driven to say something sensible on this matter, opining that: “After mourning a much-loved Queen and the state funeral, parliament should meet. The current plan for a long conference recess means a delayed return on 17 October. We need to tackle the cost-of-living crisis and energy shortage before then”.

Meanwhile, the only thing getting close to a coherent development in the UK is the voluntary initiative by British Gas owner, Centrica, and the French-owned energy giant, EDF, to cap their own booming profits.

The Guardian’s Nils Pratley is suspicious though. He thinks the companies may have volunteered for duty so speedily because they’re looking for something for themselves – like long-term price guarantees to cover them in the event of future drops in price.

Pratley has little sympathy, remarking that even if the size of windfall profits being collected by generators is currently unclear, nobody doubts the fact of outsized returns when current forward-selling contracts fall away.

“Absurdly”, he says, the wholesale price of electricity is tied to the price of gas, creating nonsensical outcomes in those corners of the generation market where input prices are virtually unchanged. Thus, we get the likes of EDF charging top dollar for its electricity, even though only 7.5 percent is generated by gas.

As to any organised attempt to manage a systematic demand reduction programme, this seems to be impaled on the parsimony of the National Grid. Keen to pay silly money to commercial generators for marginal supplies, it is showing a marked reluctance to pay the going rate to consumers willing to sign up to a peak demand reduction programme.

The Grid wants to get the scheme off the ground for November and December, but retail suppliers are warning that the maximum of 52p per kWh for electricity saved is not sufficient to incentivise consumers. Octopus, Britain’s fourth biggest supplier, which testled the scheme with the Grid earlier in the year, said it needed a “much higher price”, at least £1 to £2 per kWh”.

Given that, in July last, the Grid was forced to pay £9 per kWh to import power from Belgium to avoid blackouts in London, this larger sum is cheap at the price, especially if it eases pressure on supplies over winter, when the costs of avoiding blackouts could be even higher.

Perhaps we’re supposed to rely on the World Energy Council’s plea for Britons to develop a spirit of “radical generosity” to prevent lives being lost because of soaring gas and electricity bills this winter.

Angela Wilkinson, secretary general of the WEC, argues that while “pain relief” from the government over bills was needed, citizens needed to play their part. She said: “It should be a self-organised response to this energy crisis, not just a top-down government response”.

“We shouldn’t expect governments to tell us what to do all the time”, she adds. “Society can better prepare and we can organise for it. In the second world war, there were community kitchens, which provided food.

“Now schools are providing food for kids”, she says, “so there’s not just a shortage of community investment. There’s also a shortage of kindness and reciprocity” – evidently not realising that the wartime community kitchens were government mandated institutions, which could only operate under license.

It is an odd reflection on the times though, where naked profiteering by the energy companies is then heavily subsidised by the government, to which we are supposed to respond with “radical generosity”. For once, I think I prefer the EU’s idea of a “solidarity contribution”.