Sam Hall is the Director of the Conservative Environment Network.
With Ofgem’s price cap review weeks away, political attention is turning to an inevitable hike in energy bills and the rising cost of living.
Conservative MPs were right last weekend to highlight that affordability is a critical energy policy goal and that steep bill rises should be curbed. But this can and must be pursued in tandem with our net zero goal, which insures us against much greater economic costs and national security impacts in the future due to dangerous levels of climate change.
There is little disagreement among experts on the root cause of the current price spike: rocketing wholesale gas prices, which increased by more than 400 per cent across Europe last year.
It’s important not to conflate security of supply and cost. The UK will keep the lights and the heating on this winter. The issue is that we are having to pay over the odds for gas because it’s in high demand, particularly in Asia, and supply to the European market is being strategically constrained by Vladimir Putin.
Some commentators have argued that the UK is in a poor position to manage this global price rise due to climate change policies which prevent us exploiting domestic fossil fuel reserves.
But the fact is that climate policies have not constrained gas production from the North Sea, as gas production has been roughly flat for a decade according to the latest official statistics. The main constraint on North Sea production is the relatively high cost of production compared to other gas basins.
In fact in 2015, seven years after the Climate Change Act, the government passed legislation to give the oil and gas regulator new duties and powers to maximise the economic recovery of oil and gas from the UK Continental Shelf. Arguably, this should be amended now to include a Net Zero duty, reflecting the faster projected falls in fossil fuel demand and increased risk of stranded assets, but the maximising economic recovery duty remains in law and Ministers have been clear that North Sea gas will be needed during the transition.
Climate policies are not to blame for blocking fracking, either. Despite the Government removing multiple regulatory barriers to fracking in the 2010s and expending huge political capital in the process, shale gas companies were unable to frack without exceeding legal limits on earthquakes and alienating local communities.
It was the regulator’s report on seismicity which led to the government’s decision to impose a moratorium, not any climate policies. I’m sure the fact that only 19 per cent of the public support fracking made the decision easier still.
But even if we’d offered more tax breaks to North Sea producers and somehow overcome the various economic, environmental, and political barriers to fracking, it is highly unlikely that the UK could have produced sufficient gas to make a significant dent on the 400 per cent increase in natural gas wholesale prices currently being experienced in the European market to which we are connected via multiple pipelines and whose prices we therefore follow.
The fact is that if we’d had more renewables on the grid, and had put in place a long-term set of financial incentives for homeowners to insulate their homes, we’d have lower demand for gas for heating and power now and therefore be less exposed to the current price rises.
Yes, more variable wind power on the grid would have reduced aggregate demand for gas over the course of the past year, enabled gas power stations to be used more as back-up on calm days rather than as baseload all year round, and reduced our exposure to European gas prices.
And yes, clean technologies already exist, from hydrogen and battery storage, to interconnectors and demand response, to keep the lights on when the wind doesn’t blow.
But rather than relitigate past debates, we must deal with the current acute situation and look to our future energy policy.
First of all, the Treasury should consider providing some short-term relief – with options including targeted support to vulnerable households via Universal Credit or existing schemes such as the Warm Homes Discount, or wider measures such as funding some of the legacy environmental and social levies on bills out of general taxation on a temporary basis.
Funding some of the levies from the Exchequer would be expensive, but would also support Net Zero by making lower-carbon electricity cheaper relative to higher-carbon gas, which the government has already committed to doing in the Heat and Buildings Strategy.
Long-term funding could come from a carbon tax on gas, once prices stabilise. In the short-term, this would offer a de facto tax cut to the many businesses and middle-income households who will struggle with rising energy bills, as well as the fuel poor. While none of these proposals would be sufficient to halt the rise entirely, this is a key opportunity for the Chancellor to burnish his tax-cutting credentials and alleviate some of the cost of living pressures this spring.
In the medium-to-long-term, though, the focus must be on reducing our dependence on gas, by insulating more buildings, improving industrial energy efficiency, and investing in new home-grown energy generation that delivers reliable, clean, and affordable electricity, as well as creating jobs and export opportunities in sectors that are forecast to grow rapidly.
As we do so, we must be extremely cautious about adding further costs to energy bills through future policy choices. As ministers commission a new fleet of nuclear power stations, for example, the industry must demonstrate it can achieve significantly lower costs than Hinkley Point C. Bioenergy should do more to prove its positive climate impact and reduce costs before it gets new subsidies. And when establishing support schemes for nascent technologies, such as low-carbon hydrogen, the Treasury should opt for taxpayer-funded mechanisms rather than bill levies.
Ultimately, we need to break away decisively from this cycle of fossil fuel price shocks, which have been weaponised for decades by unsavoury regimes to advance nefarious geopolitical objectives. Russia provides a third of Europe’s gas, and this is unlikely to change any time soon due to Nord Stream 2.
With Russian gas exports to Europe around six times total UK gas production in 2019 (the last ‘normal’ pre-Covid year), there is no plausible scenario for increased domestic production which would insulate us from Putin’s grip on the European gas market.
The solution to a global gas crisis is not to deepen our dependence on gas. For the sake of our bills as well as our security interests, we need to double down on homegrown green energy instead.