Ed Birkett is Head of Energy & Climate at Onward.
With National Grid warning of energy shortages this winter, the Government is looking at emergency measures to boost supply, including signing long-term contracts with gas producers such as Norway.
These contracts could have major long-term implications for UK energy bills, potentially saving money in the short term but raising bills in the long term.
The Government appears to be planning to sign deals without setting out a detailed strategy to Parliament to define the parameters of its extraordinary market intervention. But while ministers may not be obliged to involve Parliament at this stage, given the long-term implications for UK billpayers, MPs should expect to be able to scrutinise the plan.
And if the Government doesn’t offer that opportunity, then MPs should find a way to demand it.
The Government is planning a radical response to Europe’s energy crisis
Readers will be aware of the deep energy crisis facing Europe this winter. Russia, which normally supplies 40 per cent of the EU’s gas, has dramatically reduced supplies in retaliation for Western sanctions imposed following Russia’s invasion of Ukraine.
The UK doesn’t import gas from Russia, but our energy system is closely linked to the EU, with gas and electricity flowing back and forth across the channel depending on market conditions. This means that the UK is exposed to shortages in the EU.
At times of peak gas demand, the UK often imports gas from the EU. The Prime Minister is rightly calling for European countries to keep energy flowing across borders this winter, something that would benefit both sides. But the cold arithmetic is that there might not be enough to go around, whatever price we’re prepared to pay.
In response to the crisis, Liz Truss’ Government is considering radical proposals. The Government is negotiating with UK-based nuclear power stations, wind farms, and solar farms, asking them to accept a lower price now in return for a long-term price guarantee.
It is also negotiating long-term gas supply deals with countries including Norway and Qatar, and has appointed a civil servant from the much-lauded Vaccine Taskforce to lead the negotiations.
The Government has also, at various times, floated radical proposals to cap wholesale gas prices and to reform Great Britain’s electricity market by splitting it in two or by introducing localised pricing at warp speed.
These proposals have two major weaknesses.
First, the Government is reaching for long-term reforms when it should be taking emergency steps to get us through this winter. Energy policy is complex and needs stability to bring forward private investment. Knee-jerk reforms to market rules will scare off investors, increasing the returns that they will demand on future projects.
Instead, the Government should implement targeted and time-limited measures like a windfall tax on renewables and an energy-saving campaign, two things that Onward proposed weeks ago and that the Government continues to rule out.
An energy-saving campaign won’t just reduce this risk of blackouts, it will also reduce government borrowing. The Government’s existing intervention to cap domestic energy prices means that, for every pound a household spends on gas and electricity, it is paying around 50p.
An energy-saving campaign would also have to cut energy use by a tiny fraction of a percentage point to break even for taxpayers. This makes it even harder to understand the Government’s decision not to implement one.
Second, current high prices mean there surely can’t be a worse time to negotiate long-term energy supply contracts, as producers know that they have the upper hand.
There are good arguments for seeking long-term energy supply deals. For example, Norwegian energy companies could be encouraged to produce more gas in return for a long-term, fixed-price contract with the UK. But a knee-jerk approach risks locking British billpayers into higher prices for years to come.
It is also not clear that long-term energy supply deals will improve British energy security in the short term. In response to high prices, Norway is already pumping as much gas as it can to the UK and EU. A long-term contract between the UK and Norway might see them sending more gas to the UK this winter, but only at the expense of the EU. Given the close links between the UK and EU energy systems, this is unlikely to substantially change the UK’s energy security position.
Given the long-term nature of these contracts, it’s vital that the Government’s strategy is scrutinised.
The Government currently appears to be planning only limited opportunities for MPs to scrutinise the value-for-money of these arrangements. This would be a contrast with the approach taken to so-called “green energy levies”, which were only added to energy bills with the explicit consent of Parliament.
The same argument applies to the cost of long-term energy contracts: Parliament deserves to have its say.
Negotiations with energy companies are understandably taking place behind closed doors, but the Government has given scant public details of its plans. The Prime Minister announced a new Energy Supply Taskforce in early September. But there are no public terms of reference, and the only details of its work are a few sentences in government press releases and the Treasury’s Growth Plan.
There are few public details about what legislation the Government might need to enact these contracts. It would be better for ministers to set out their plans clearly in legislation, rather than trying to stretch existing powers to sign contracts with only limited parliamentary scrutiny.
This is because parliamentary scrutiny is likely to improve the Government’s contracting strategy, and will also give them greater political legitimacy in the medium term. The worst outcome would be for the Government to sign long-term contracts that turn out to be bad value, and which no one feels like they signed up to. Outcry over the Private Finance Initiative (PFI) for NHS facilities is a good example of this risk.
The energy crisis requires urgent action, but that doesn’t mean that Parliament can’t be involved.
The Government’s proposals will have a long-term impact on energy bills, running into the tens of billions of pounds and lasting long beyond this Parliament. It is therefore critical that Members of Parliament from all Parties are given the right to scrutinise the plans.
If the Government won’t offer the opportunity for scrutiny, then MPs should demand it.
Ed Birkett is Head of Energy & Climate at Onward.
With National Grid warning of energy shortages this winter, the Government is looking at emergency measures to boost supply, including signing long-term contracts with gas producers such as Norway.
These contracts could have major long-term implications for UK energy bills, potentially saving money in the short term but raising bills in the long term.
The Government appears to be planning to sign deals without setting out a detailed strategy to Parliament to define the parameters of its extraordinary market intervention. But while ministers may not be obliged to involve Parliament at this stage, given the long-term implications for UK billpayers, MPs should expect to be able to scrutinise the plan.
And if the Government doesn’t offer that opportunity, then MPs should find a way to demand it.
The Government is planning a radical response to Europe’s energy crisis
Readers will be aware of the deep energy crisis facing Europe this winter. Russia, which normally supplies 40 per cent of the EU’s gas, has dramatically reduced supplies in retaliation for Western sanctions imposed following Russia’s invasion of Ukraine.
The UK doesn’t import gas from Russia, but our energy system is closely linked to the EU, with gas and electricity flowing back and forth across the channel depending on market conditions. This means that the UK is exposed to shortages in the EU.
At times of peak gas demand, the UK often imports gas from the EU. The Prime Minister is rightly calling for European countries to keep energy flowing across borders this winter, something that would benefit both sides. But the cold arithmetic is that there might not be enough to go around, whatever price we’re prepared to pay.
In response to the crisis, Liz Truss’ Government is considering radical proposals. The Government is negotiating with UK-based nuclear power stations, wind farms, and solar farms, asking them to accept a lower price now in return for a long-term price guarantee.
It is also negotiating long-term gas supply deals with countries including Norway and Qatar, and has appointed a civil servant from the much-lauded Vaccine Taskforce to lead the negotiations.
The Government has also, at various times, floated radical proposals to cap wholesale gas prices and to reform Great Britain’s electricity market by splitting it in two or by introducing localised pricing at warp speed.
These proposals have two major weaknesses.
First, the Government is reaching for long-term reforms when it should be taking emergency steps to get us through this winter. Energy policy is complex and needs stability to bring forward private investment. Knee-jerk reforms to market rules will scare off investors, increasing the returns that they will demand on future projects.
Instead, the Government should implement targeted and time-limited measures like a windfall tax on renewables and an energy-saving campaign, two things that Onward proposed weeks ago and that the Government continues to rule out.
An energy-saving campaign won’t just reduce this risk of blackouts, it will also reduce government borrowing. The Government’s existing intervention to cap domestic energy prices means that, for every pound a household spends on gas and electricity, it is paying around 50p.
An energy-saving campaign would also have to cut energy use by a tiny fraction of a percentage point to break even for taxpayers. This makes it even harder to understand the Government’s decision not to implement one.
Second, current high prices mean there surely can’t be a worse time to negotiate long-term energy supply contracts, as producers know that they have the upper hand.
There are good arguments for seeking long-term energy supply deals. For example, Norwegian energy companies could be encouraged to produce more gas in return for a long-term, fixed-price contract with the UK. But a knee-jerk approach risks locking British billpayers into higher prices for years to come.
It is also not clear that long-term energy supply deals will improve British energy security in the short term. In response to high prices, Norway is already pumping as much gas as it can to the UK and EU. A long-term contract between the UK and Norway might see them sending more gas to the UK this winter, but only at the expense of the EU. Given the close links between the UK and EU energy systems, this is unlikely to substantially change the UK’s energy security position.
Given the long-term nature of these contracts, it’s vital that the Government’s strategy is scrutinised.
The Government currently appears to be planning only limited opportunities for MPs to scrutinise the value-for-money of these arrangements. This would be a contrast with the approach taken to so-called “green energy levies”, which were only added to energy bills with the explicit consent of Parliament.
The same argument applies to the cost of long-term energy contracts: Parliament deserves to have its say.
Negotiations with energy companies are understandably taking place behind closed doors, but the Government has given scant public details of its plans. The Prime Minister announced a new Energy Supply Taskforce in early September. But there are no public terms of reference, and the only details of its work are a few sentences in government press releases and the Treasury’s Growth Plan.
There are few public details about what legislation the Government might need to enact these contracts. It would be better for ministers to set out their plans clearly in legislation, rather than trying to stretch existing powers to sign contracts with only limited parliamentary scrutiny.
This is because parliamentary scrutiny is likely to improve the Government’s contracting strategy, and will also give them greater political legitimacy in the medium term. The worst outcome would be for the Government to sign long-term contracts that turn out to be bad value, and which no one feels like they signed up to. Outcry over the Private Finance Initiative (PFI) for NHS facilities is a good example of this risk.
The energy crisis requires urgent action, but that doesn’t mean that Parliament can’t be involved.
The Government’s proposals will have a long-term impact on energy bills, running into the tens of billions of pounds and lasting long beyond this Parliament. It is therefore critical that Members of Parliament from all Parties are given the right to scrutinise the plans.
If the Government won’t offer the opportunity for scrutiny, then MPs should demand it.