If one reads news around the world there is indeed a global energy crisis, much of it centred around a shortage of natural gas. Most of the shortages in Europe are due to the Russian “Nordstrom” pipeline which is putting pressure on other sources and raising costs. However UK energy costs are dramatically higher than those in Europe. This is thanks to a peculiar mix of poor decision making going back to at least 2014.
“Stultitia in abundantia” (Foolishness in abundance)?
Failure to maintain adequate pricing controls
The UK’s energy costs are rising due to failure to maintain adequate pricing controls via market access mechanisms. The UK has a complex energy supply economy with many players and is heavily reliant on the balancing of supply, to achieve that we buy (and sell when we can) using interconnectors. This topic has been well covered in an earlier article in West England Bylines which has identified that the UK is peculiarly exposed to price fluctuations.
Failure to maintain storage capacity for natural gas
To understand how government inaction has led to a lack of supply resilience, we have to go back a little further. Firstly the energy supply industry itself is a hybrid. Elements like Centrica, who owns British Gas, have the bulk of the infrastructure, but there are many ‘market only’ companies who merely package energy products.
They operate from offices and just buy and sell. Often these companies work to provide people with a product they prefer, like ‘green energy’. They do this by purchasing product from renewables and cleaner sources and charging the customers based on usage as normal. But they are ‘asset poor’ in the main. Some may have energy generation assets but this was never a requirement.
There is nothing wrong with this model but to keep costs down many such companies do not ‘insure’ or ‘hedge’ themselves against price hikes, as this would put up the nominal cost of energy. The market is quite competitive, so this to some may be perceived as an acceptable risk. “It is not the way to run a company” you may say but there is a bigger problem that the government in particular missed.
The UK eliminated most remaining bulk gas storage, which was only 9 days’ worth, in 2017. This was the UK’s largest storage facility and, even before it was removed, UK had some of the smallest gas storage capability in Europe. In 2013 an article in Carbon Brief stated:
“Britain is on the brink of running out of gas” announced the front page of Friday’s Times, after gas storage levels hit low levels – and over the weekend the paper reported that a tanker carrying gas from Qatar has been rerouted to top up the country’s supplies.”
In fact in 2014 the UK was already at the bottom of the storage list. So when Centrica closed the Rough storage facility in Yorkshire, storage capacity went down even further. The chart below is from the 2011 Geological Survey response to the ‘Energy and Climate Change Committee inquiry into Energy Security’.
Government ignores analysis
The government knew the problem existed before allowing storage to be cut without replacement. It appeared, although not confirmed, that it based supply security on gas interconnectors. However without adequate storage and an effective market access and control mechanism, the government had put energy security at risk. As before the governments ‘keep your fingers crossed and hope for the best’ technique has failed the British people.
What is a government for, if it cannot do the basics? It commissions a report, it gets warnings and does nothing even though the impact could be catastrophic. Sounds familiar?
UK energy costs skyrocket
It is plain to see that the two massive failures of not maintaining access to relevant energy markets and presiding over massive reductions in energy storage have led to the failure of multiple energy companies and a series of consequences that are now causing high energy costs and putting the food supply at further risk. It is like a Tom Sharpe novel without the humour.
Let us recap the series of events …
- Dramatic inaction over energy storage
- Failure to maintain appropriate energy market mechanisms
- Expected ‘unexpected event’ occurs
- Prices skyrocket
- Energy companies fail
- Fertilizer companies cannot afford prices also stopping CO2 generation
- Food and drinks companies do not get CO2 so production slows down
- Food preservation using CO2 at risk
- UK sources product from Europe and costs rise further
Last week it became clear that the government priorities are getting Latin back on the curriculum and re-introducing imperial measures. The latter will put up food costs and complicate exports. But it is what the people voted for apparently!
Next we will be having Christmas visits to Dover to peer at the EU lights as these may be the only ones still running.
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