Energy Crisis

At the moment most if not all Western countries are facing an energy crisis. (The exception seems to be the US which is big enough to have its isolated market and Russia, who is largely but not totally responsible for it in the first place.)

Certainly in Europe governments and companies are scrabbling around desperately trying to find some answers before the heating season hits in a few weeks time. To give three examples. In Germany they’ve made the mistake of being over reliant on Russian gas. In France they’ve capped price increases across the energy board to 4%, but technical problems with large numbers of their reactors plus warm water and low water levels in rivers have meant they’ve had to shut down their nuclear and rely on imported electricity. There is talk of rises in prices and power cuts this winter. In the UK as we’ve almost stopped using coal, closed nuclear, massively increased our wind power and solar capacity we’ve become more dependent on gas. The graph below shows the issue. Most of our (leaky) homes are also heated by it. Prices of electricity and gas are going to increase by another 80% after 50% this spring. Along with huge increases in food prices and general inflation, millions of people won’t be able to afford to heat and eat. Perhaps 44 million people will technically be in fuel poverty in the UK (defined as paying more than 10% of your income on energy). At the moment with a leadership race to become prime minister no decisions are being taken and they need to be – fast. This blog will cover some of the solutions suggested in the UK to the energy crisis – although many of them are relevant and touted in other countries.

1) Tradeable energy quotas – the so called carbon ration. If the last labour government had introduced these we’d be in a very much better place. They thought about it (a bit) and chickened out. However whilst I mention this as a solution as a matter of principle, we literally have weeks to put something in place so sadly this is not going to happen. I’ve written about how this works before.

Pros – pretty fair and simple in principle, ticks lots of boxes and sorts out lots of problems. Cons – difficult to set up.

2) Increase supply of gas from the North Sea and fracking. Whilst not at all compatible with net zero of course, this is being talked about and some action on the North Sea is taking place. About 40% of our gas is produced here (exact percentages quoted varies slightly). Whilst we’re a lot less dependent than Germany on imported gas, the price here is still driven by international market prices. This would apply to fracked prices too. Fracking was very unpopular in the areas where it was trialed and most Tory MP’s don’t want it back. There’s talk of giving people near it reduced gas prices, but the cut-off point geographically would cause issues even if overcame objections.

Pros – not many. Cons – Neither of these solutions will make any difference this winter. Most people think even if fracking could be made to work here there, there would be little if any gas for 10 years. Small increases in supply will trade at whatever the going rate is internationally. Its also like giving an addict more drugs, we need to kick the gas habit, not add to it. So what other solutions are there?

3) A cap on prices. Labour/Liberal democrats/SNP suggest simply not allowing the increase on the 1st of October. This is basically what the French have done. The problem is, even if your energy companies are nationalised (the French government is trying to fully nationalise EDF), it still has to be paid for. Labour suggests a windfall tax on the energy producers who are making huge profits (unlike the supply companies – loads of whom went bust last winter (30!)) and using the cut in inflation that would result as an accounting trick, since it would result in lower government borrowing. This is great politics, but terrible practically. The energy crisis looks set to last years and the sums even for 6 months like eye watering. There are other objections covered below in 4).

Pros – covers everyone at a stroke and easy to administer. Would cut inflation or at least stop it rising. Cons – see 4)

4) A variation on 3) but this time the energy suppliers borrow the money and we pay it back over 10 – 20 years either in higher bills or through general taxation. The government would guarantee the loans. This has been done in a very small way for part of the April increase. To me this idea raises a number of objections. The main drawback is its licence to pollute. We need to cut consumption especially as we might actually be facing power cuts this winter. The higher prices make energy efficiency and micro-renewables very cost effective. It also raises issues of moral hazard. I’ve no objection to borrowing for Covid or wars, but this to me feels different. In 20 years time I may be dead. Plenty of other people certainly will be. Is the debt on a supply basis? Or a personal basis? How much you owe depends on how much you use, or does it? I’ve no objection to covering the usage debts of those whose who have to heat their houses for health or other valid reasons – but what about those who just waste energy?

Pros – as 3) above. Cons – The more I think about this the more complicated it seems. Both and 3 and 4 would allow people to waste energy. Another big drawback of 3/4) is the prices are likely to rise further anyway next year. Then what? Will cost £100 billion at the moment – how much then? Government would be desperate to keep it off the books. Can this be done? Also time would be need to get it set up. I have fundamental concern about the government subsiding peoples energy costs.

5) Social tariffs. Allow those on low incomes to pay less. Those who can afford to pay more. This exists in other countries such as Belgium and is easier to administer than you’d think. This was a suggestion floating around a month or so ago. The advantages are its targeted on those those need it most. The problem is this could be quite a lot of people including much of the middle class. There was talk of two rates – a low income rate and a middle class rate, then a top rate. This starts to get very complicated. Pro’s – potentially targets those who need it most. Cons – means the government has to share some social security information with the energy companies and may not meet all needs. Could mean people on middle incomes, or even above are in trouble still. Allows those on low incomes to waste energy in theory, though most probably won’t because of other cost of living pressures.

6) Another variant on 5) floated by one energy supplier recently. You get (an as yet unspecified number of units) for a low cost (also unspecified) then you pay more (also unspecified). This idea has some merit. It does incentivise consumers to save and invest in modest energy efficiency measures. It would need more though. People at the bottom of the income literally can’t afford to put anything on at all. Quite a good idea in the long term though, as is the social tariff,

Pros – very simple to set up to administer and quick (which we need). Cons – not enough on its own.

7) Increase benefits. This was the original solution touted over the summer. Most of his it proponents now think its not enough. Plus we have a government that doesn’t like them.

Pros – would target those most in need. Cons – but not those who don’t get them. The computer systems believe it or not, would have needed adjusting months ago.

8) Tax cuts. Liz Trusses solution (to everything). Most people who really need help don’t pay tax and for those on middle incomes the cuts would have to be significant. Cutting VAT on energy bills would help a bit. The treasuries said not to be keen since they don’t think it would ever go back on. Cutting green levies would only knock £150 off and would be a disaster if not paid for out of general taxation. These pay for all sorts of things – such as help those on low income pay their bills, energy efficiency measures and the Feed in Tariff. This last one is interesting. Is she really going to upset 3% of UK households plus a whole heap of business’s, farmers etc. with PV/microwind/micro-hydro by cutting this?

Pros – can’t think of any. Cons – to many to mention. Best summed up as it doesn’t add up to much help except for the very rich.

9) Decouple the energy market from gas. At the moment the electricity market is set by the price of gas. Renewables (even offshore wind) have been cheaper than gas for years. With high prices renewable generators on the old renewable obligation certificate (ROC) system are coining it in. If you could diminish the effect of gas on the system you’d lower prices. Its more complicated than that though. First gas still accounts for rather too much of our electricity generation as I I’ve said, so how much effect can you have? Second you’d have to bail out the gas generators since in an open market the suppliers would choose renewables and nuclear. Lastly the contracts are multi-layered and would take time to prise apart. There is also mention of a wind-fall tax on the ROC generators. To be fair as someone who was in receipt of ROC’s they weren’t very generous and some of these systems will have taken a long time to pay for themselves. All the recent stuff has gone in under ‘contract for difference’ so we’re not talking about the majority of capacity here – about 40%. In my view this would not harm the renewable sector in the long term since renewables are the cheapest energy source and is worth considering as a reform.

Pros. Could cut between £150 -£600 off bills. The higher figure does require everyone being forced into contract for difference. Cons -complicated and not a short term fix.

To conclude a very long post (but its a very large problem we face). There is no catch all solution. There are losers all round. One last point all the above is focused on households, not businesses. To bail them out (and charities which have business rates of energy pricing) we are taking a very large amount of money indeed. The figure bandied around is £280 billion for 2 years, but could well be more.

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