Energy: the blame game

By Richard North - August 26, 2022

As the nation holds its breath, waiting to discover by how much Ofgem will lift the cap, driving thousands into penury, a step in the fractured debate on the causes of the current price shock has been lodged in the Guardian with a thoroughly dishonest piece headed: “Is net zero really to blame for soaring energy bills in Great Britain?”

Predictably, writer Simon Evans – deputy editor and senior policy editor at Carbon Brief – concludes that the argument that net zero is the problem, when reaching it could save 0.5 percent of GDP, is more than a little upside down. And, yet, he says, like the supernatural villain in Stranger Things, it keeps reappearing.

For a broader perspective, I thought I would look a little wider than the biff-bam arguments in the media and came across an article written in May by energy guru Dieter Helm, which looks specifically at the causes of the energy price rises.

Although I don’t always agree with Helm, in my decades of writing about energy policy, I have cited him frequently and have some respect for his views. And here, in particular, what he says makes a great deal of sense.

Witten in May, before the effects of the Ukraine war and Russian sanctions had impacted on the public consciousness, Helm was then focused on the one of the factors which had triggered the price raise – what he called the post-pandemic global supply constraints.

But, in a telling comment, he then went on to assert that British energy markets policy “has deliberately contributed to the price shock”, venturing that there were two obvious reasons for this.

The first, he said, was the fast-track closure of coal. Helm thinks this move was beneficial – a desirable part of achieving the net zero ambitions – but at least is honest enough to concede that it was not cost-free.

In fact, the move away from coal initially had political drivers – rehearsed in this analysis but, as we saw in high profile with the demolition of Ferrybridge C power station in March 2022, the abolition of coal had become the poster child for the Green lobby.

More by historical accident than overt policy, though, the UK in its march towards “carbon-free” generation did not jump straight from coal to renewables, but rather from coal to gas as a halfway stage. And the dangers of this were signalled as early as 2006 when MPs were warned of the fragility of our energy supply.

This has significant implications for the way we handle the current price shock where, compared with Germany, the jump has been a fast-track exit from nuclear to coal. That, at least, has given Germany the option of reverting to its still existing coal generation suite, boosting coal burning to hold down prices.

Even in the UK, Helm observes, the government finds itself doing a U-turn and pleading with the three remaining coal power stations to keep going through the coming winter. But, Helm says, the UK should never have got itself in the position of not having enough gas to back up the renewables.

The second reason for the price shock, Helm asserts, is that the UK sought to fast track to wind (and solar) without working out the consequences of the intermittency – and the low-density, disaggregated and peripheral characteristics of the offshore windfarms.

This is not an argument against wind, or indeed against accelerating the offshore build, he says, but it does have consequences, one of which is to render the gas power stations intermittent too, and to increase the system costs (and by a lot). This is why he calls the price shock, the “first net zero energy prices crisis”.

The scale of the intermittency problem, he says, will get much worse before it gets better. Where once the system required around 70GW of capacity, it now needs over 100GW.

Gas capacity will now be made intermittent too, and hence gas supplies will be more expensive since it will need gas suppliers to deliver whenever the wind does not blow, and as the wind has zero marginal costs, it destroys the revenue line for the gas power stations.

The government, as a consequence of its wind policy, has to come up with a gas policy, and so far it has not. Back in 2017, he proposed a mechanism whereby wind generators had to pay the costs of the intermittency they caused, which the government rejected,

Said Helm, that would blow an enormous hole in their claims that they are already cheaper than fossil fuels, and hence presumably, if this were true, would not need the subsidies they are so keen on receiving.

Where this now puts us in another league is Helm’s view that current price shock, although attributed by the idiot Johnson to Russian action, is not temporary, even if the gas price falls back.

We are not going to get out of gas anytime soon. Indeed, with the extra demand for electricity for transport, the digital technologies and heating too, the problem will get a lot worse before it gets better.

With or without Russia, the cost of energy will keep going up, and the energy strategy and other net zero problems will contribute to this rise in costs. Whilst the public have been led to believe that net zero is a free lunch (or at least a manageable one percent of GDP or less), it is very much not so.

Writing back in May, in what now seems another age, although only a few months ago, the more permanent nature of the cost shocks, Helm says, is critical to the design of policy. He complained then that Kwasi Kwarteng was consistently making the mistake of seeing the energy price crisis as a short-term problem.

In this the Treasury has followed suit, and others have joined in making the same mistake. Kwarteng responded to the early failure of suppliers by saying that around five or six suppliers go out of the markets every year. He apparently had no idea that 29 would, and that all the rest will be close to bust if action is not taken over the bills – the bad debts will just overwhelm them.

When it comes to trying to ameliorate the gas price rises (the key period for which was autumn 2021, before Putin’s brutal actions), the belief in the temporary nature of the problem led to quick short-term fixes.

The customers would get loans, which they would pay back over several years, presumably easier to do as and when the prices fell back, as Kwarteng’s department and the Treasury must have assumed.

They refused to socialise the legacy costs of the renewables and the addition of the Council Tax adjustment and the further Warm Homes Discount Scheme adjustments are all examples of moving the deckchairs on the Titanic.

The enthusiasm for windfall taxes plays into this short-term temporary analysis of the problems of energy prices. A bad idea in itself; none of the advocates of windfall taxes explains what happens if the problem is still here in a year or two years’ time, or longer.

There is a good case, Helm says, for revisiting the structure of North Sea energy taxation, and the terms of the new licences, but very few reasons for an opportunist profit grab (and no offers of windfall subsidies if oil and gas prices fall).

It is slowly dawning that the cost of living crisis is not going away, that inflation is going to push towards 10 percent, that interest rates are rising, and that of all the bills which citizens face, the energy bills are the ones that really stick out.

The important point here is not the prediction that gas prices are going to stay high. There is scant evidence that this is going to be the case after the coming winter. Energy forecasters and consultants who confidently predict high gas prices persisting to 2030 are on very shaky ground.

The military and economic crises will probably pass, moving into new equilibria. The real threat is the sum of all the causes of energy prices adding up to increasing bills – or at least bills that are going to stay high.

Net zero and the related policies are what are going to push the prices ever higher, he warns. Though there are always the optimists, it is probable that the costs of offshore wind developments are levelling out, and indeed they are currently rising quite strongly as all the costs of materials and their manufacture and transportation are rising.

The costs of managing the increasing problem of intermittency are not going away – they will get worse before they might get better. Renewables will need subsidies for a long while yet.

From all this, Helm concludes that a temporary fix is unlikely to work, and if sticky plaster is applied, it will come off. What is more, he says, the clock is ticking: lots of people cannot pay their bills now, let alone those that are coming.

Even if they want to pay, he observes, and even if they are threatened by the suppliers with legal action, bailiffs and enforced prepayment meters, they just will not pay.

Faced with higher mortgage and rent costs, food costs and the general impacts of inflation, the household budgets will not be sufficient to cover basic needs for many households. The number of people in fuel poverty is already high. Those with pre-payment meters are going without.

The obvious conclusion he draws from the observation that the bills are not sustainable is that they will not be sustained. The choice for the government is to get ahead of this crisis and put in place permanent solutions now or wait and take lots and lots of ad hoc and panic-driven reactive steps.

In his piece, Helm makes some interesting recommendations as to how the crisis should be managed, but one just knows that (presumably) the Truss government will not be capable of doing anything other than taking “lots and lots of ad hoc and panic-driven reactive steps”.

Meanwhile, the Guardian – oblivious to the havoc being caused by the policies it so loves and supports – is reporting the claims of Sharon Graham (pictured), head of the Unite union. At a picket line at Felixstowe Port, she told strikers that workers’ anger at the cost of living is as strong as the time of the poll tax riots. People, she says, could rise up again as they did in the 1990s.

When even the sober Helm observes that when people, unable to pay their bills, are threatened by the suppliers with legal action, bailiffs and enforced prepayment meters, they just will not pay, we have reached a new level in this saga.

But, if Sharon Graham is right, and British workers are at breaking point, they will soon start breaking things. And who then will be to blame?