Energy: no time for delay

By Richard North - August 31, 2022

The good news is that gas prices are on the slide, with UK wholesale prices 24 percent down on last week’s peak. This is partly due to Germany having filled its gas storage sites more quickly than planned, allowing a target of reaching 85 percent storage capacity by October to be met by the start of next month.

The bad news is that prices are still “extremely elevated and volatile” so there is no certainty that this isn’t just another blip in the upwards spiral – especially as Russia has decided to cut its gas deliveries even more to French utility Engie after a disagreement over contracts.

Nevertheless, there is another bit of good news, sort of, in that the Oaf – who wasn’t going to commit to any big financial projects, leaving the new prime minister to make all the big decisions – is poised to give the go-ahead for the building of Sizewell C, at a projected cost of some £30 billion.

One sometimes loses track of precisely where we are with the nuclear programme, as Sizewell C was apparently approved by Kwasi Modo in July as an estimated cost of £20 billion (at 2015 prices) for the 3.2 GW plant.

Now that the Oaf is set to approve it all over again, the bad news is that it will still take at least 12 years to build although, to judge by the recent track record of new-build nukes, 12 years is more of an aspiration than a firm commitment. Sometime never might be a more certain timescale.

Either way, neither this nor any other of the nuclear projects in various stages of planning or construction is likely to have any impact on the current energy crisis. In fact, the only plant actually being built is Hinkley Point C in Somerset, another 3.2 GW monster which was listed by the government in 2010 and given a nuclear site license in 2012.

Due to start producing electricity in 2020, it is already two years late yet is not expected to be commissioned until 2027, at a cost now estimated at £25-26 billion against the original estimate of £18 billion. From inception to completion, it will have taken 17 years, on the tenuous assumption that the project will meet the new schedule.

So far, the outlook is not promising. The first of the third-generation EPR designs to be built in the UK, the immediate model is the Flamanville 3 reactor in Normandy. There, construction began in 2007 and, after a series of delays and safety concerns, fuel loading will not be completed until the third quarter of 2023, with no date given for the commercial production of electricity.

Without taking account of planning and approvals, that already makes for 16 years which possibly suggests that the operational date for Hinkley Point C may be optimistic. It also suggests that Johnson’s Sizewell C is unlikely to be producing any electricity much before 2040.

By 2028, we will have lost four of the existing five nuclear plants, taking out over 5 GW of capacity, with another 1.25 GW lost when Sizewell B closes in 2035. With 6.5 GW nominal capacity lost, we get back 3.2 GW if Hinkley Point C ever comes online, leaving an irreplaceable gap of 4 GW base load.

That, however, is for the future. Right now, we have just enough capacity but increasingly we can’t afford to pay for it, as long as the currently inflated price of gas is setting the price for electricity. And, since most of the generators have not experienced significant rises in their own costs, some operations, somewhere, must be making a shed load of money.

According to Bloomberg (via Reuters) Britain’s gas producers and electricity generators could be making excess profits of up to £170 billion over the next two years, if current price levels are maintained.

This figure, apparently, comes from an unpublished Treasury analysis showing the scale of excess profits, defined as the difference between predicted profits and what the firms could have been expected to make based on price projections from before Russia’s invasion of Ukraine. About 40 percent of the excess profits would be attributable to power producers.

Mysteriously, the Treasury says it doesn’t recognise this analysis, although it has not been shy in raiding energy industry profits to help pay for the £37 billion support package on its way to households. But, with only £5 billion so far contributed, it seems the government has plenty of scope to make further raids.

If we actually had a government in place, though, a more fruitful activity might be to find a mechanism to curb the spiralling energy costs and, in particular, to decouple electricity prices from gas prices.

Filling the UK vacuum of [political] power, and ready to put British politicians to shame is the EU Commission, which has commission president Ursula von der Leyen planning a “structural reform” of the electricity market, to break the price linkages.

Rather than just passively seeking to compensate consumers for increased prices, therefore, it appears the European leaders – with the help of the EU – are actually preparing to address the problem at source.

Polish prime minister Mateusz Morawiecki states that the marginal price for energy should not determines energy prices for the entire market. In such a situation, he says, [all] citizens suffer through high prices.

Czech industry minister Jozef Síkela, representing the EU’s rotating presidency, says: “We must fix the energy market. Solution on the EU level is by far the best we have”. An emergency meeting of EU energy ministers is now set for 9 September, when a spokesperson for the Czech government said a European price cap would “definitely be on the table”.

With nothing of this ilk coming from British politicians, we must wait until the end of next week, at the earliest, before the new prime minister is in a position to offer something which approximates a coherent policy response to the crisis. If Miss Trussed is the winner, hopes are not high that we will be seeing an end to our woes.

Her big thing for the moment is a promise to ramp up North Sea oil drilling if she becomes prime minister. Discussions, it is said, have already been taking place and it is expected that as many as 130 new drilling licences will be approved this autumn.

As with the Oaf’s nuclear initiative, though, these are unlikely to bring immediate relief and are not calculated to address the pricing imbalances which are currently causing such havoc in the markets.

What might have to happen though, is Trussed having to junk some of the “net zero” ambitions. Producers are hardly likely to commit funding to expensive drilling projects, which typically require investment over many decades, it consumers are to be banned from buying their products in a series of steps from 2035.

Sadly, if that is the best that Trussed has to offer, it isn’t going to be anything like enough. What is coming over loud and clear is the urgency of the situation and the rate at which finances are deteriorating. As inflation rampages through the system, it isn’t only energy costs which are doing the damage.

And for those already hard pressed, finding the money to buy food and other essentials, an increasing numbers are turning to credit card borrowing.

According to Bank of England figures, the nation has just experienced the biggest year on year rise since October 2005, rising by £740 million month-on-month, 13 percent higher than the year before. Analysts say, we are told, that the spike in inflation to 10.1 percent in July and the threat of an escalation in energy prices rises during the winter, lifting inflation to 22 percent, indicates that the situation is likely to worsen.

Yet, without some form or borrowing, it seems, most people are going to be in serious trouble. The Mail reports that the average working household would run out of money in just 19 days if they lost their income, while 2 million households are so close to the bone that they end each month with no cash reserves.

Separately, food banks are warning of a “completely unsustainable” surge in demand that will prevent them feeding the hungriest families this winter. Organisations representing 169 food banks say that the number of people seeking emergency help had already grown “dramatically”. They are predicting “bleak and disturbing” weeks ahead.

All this points to a dangerous lack of resilience in the population at large, which is mirrored elsewhere, including manufacturing industry where insolvencies have soared by 63 percent since last year, largely as a result of increased energy bills.

The stresses building up will have significant implications for the new prime minister. There is little time to work up solutions, as almost immediate action will be needed. And even within the space of a week, the situation could have deteriorated further, as the war in Ukraine hots up.