‘No quick fix’ to solve worsening energy crisis
A year ago, a typical British household was paying £1,042 a year for its energy. By April this year, soaring wholesale gas and electricity prices are expected to push that bill to £2,000.
As ministers try to mitigate the crisis in the cost of living, the immediate focus is on how to ease financial hardship for people this spring — but with analysts warning that high wholesale costs could be here for several years, questions are mounting, too, over what, if anything, can be done to address the root cause.
Gas prices surged worldwide in 2021 as demand recovered from the depths of the pandemic and amid disruptions to supply. Britain’s gas market is linked to that of Europe, where low pipeline supplies from Russia have exacerbated the problem. With low gas storage levels after a cold winter, the UK and countries on the Continent have had to compete with Asia for scarce cargoes of liquefied natural gas.
Although prices have risen globally, Tory MPs point out that they are still far cheaper in America thanks to its plentiful domestic gas supplies. They have called for Britain, which imports more than half its gas, to bolster domestic production.
Experts are sceptical. “The North Sea is in decline, it’s a case of eking out what you can from that,” Guy Newey, director of strategy at Energy Systems Catapult, said.
Richard Howard, of Aurora Energy Research, thinks “it is very unlikely that the UK becomes self-sufficient in gas, even if we had a major rise in production. This means that we will still be reliant on imports from pipe or LNG, which set the price most of the time.”
With new fields taking years to develop, even Oil & Gas UK, the industry body, admits that there is “no easy, short-term fix” for high prices, although it says it is doing what it can to maximise North Sea production this winter. It has warned that without urgent investment in new fields, gas output will drop by 75 per cent by 2030, leaving Britain “even more exposed to global markets and volatile prices”.
Backers of fracking say that huge volumes of gas lie under northern England, but this remains untested. Newey estimates that it would take 15 years to develop an industry at the kind of scale in America, even if it could overcome the local opposition that has stymied efforts to date. “There is definitely no supply side silver bullet that’s going to make a difference in the next three years on this,” he said.
It’s a similar story for gas storage. In 2017 Centrica shut Rough, the UK’s biggest gas storage facility, as it was uneconomic, but lately the company has lobbied for the site to be revived, with substantial government support, before becoming a hydrogen storage facility. Yet even Chris O’Shea, Centrica’s boss, has conceded that this would not make “a massive difference to the current price issue”.
Howard said one option was that “in the medium term the UK and Europe could think about more strategic procurement of gas” by signing more long-term contracts, reducing their exposure to spot prices. That could entail deals with LNG providers or Europe negotiating deals with Russia, which has honoured contracted supply volumes even while declining to send extra. However, Newey said: “The risk is always that we’d lock in high prices: if we set it now and prices fell, we’d be stuck with it.”
In electricity markets, wholesale prices have been pushed up by the high cost of gas, which is burnt in power plants. Periods of low wind output and nuclear plant shutdowns in Britain and Europe have further increased the reliance on gas-fired generation.
Greg Jackson, chief executive of Octopus Energy, has called for Britain to go “hell for leather” building more renewables, telling Times Radio: “Every single wind turbine we build reduces our need for gas . . . which means we’re more insulated from these costs.”
Newey cautions that the government’s push for renewables must be accompanied by “urgent” reform of the power market to better match demand to variable renewable supply, or else risk even greater wholesale market volatility. However, non-intermittent low-carbon options would take far longer. “You can’t knock up a nuke in a couple of years,” he said.
The Times
Tory rejection of windfall tax on energy firms ‘beggars belief’, says Ed Miliband
Ed Miliband has said it “beggars belief” that the government is opposing a windfall tax on oil and gas companies on the grounds that they are struggling, after Labour proposed a £1.2bn levy on producers to help households and businesses with soaring bills.
The shadow secretary for climate change and net zero and former shadow business secretary said there was “no greater proof that this government’s incompetence and weak leadership is costing millions of hard-working families”, as energy producers have been making near-record profits because of soaring wholesale gas prices that are driving up bills.
Rachel Reeves, the shadow chancellor, set out her plan over the weekend for a £1.2bn tax on producers to fund a £200-average cut to household bills, plus £600 of targeted support for those most in need, but on Sunday the government dismissed this as a solution.
Nadhim Zahawi, the education secretary and a former oil industry executive, told LBC radio: “What Labour are putting out just doesn’t add up. A windfall tax on oil and gas companies that are already struggling in the North Sea is never going to cut it.”
The government has been holding talks with energy bosses before a decision by Ofgem due in February about whether the price cap on bills needs to rise from April to cover the cost of soaring gas prices. However, ministers currently favour some support targeted at the lowest-income families rather than a VAT cut for all, and now appear to have rejected the idea of a windfall tax.
Miliband told the Guardian: “This clear confirmation that the Conservatives oppose the windfall tax tells you exactly whose side they are on – and it’s not the British people struggling with their energy bills.
“It beggars belief that a cabinet minister believes that we should prioritise oil and gas companies making huge windfall profits that he says are ‘struggling’, rather than the British people who face the true struggle to pay their energy bills.
“It is fair and right to ask these companies to make a one-off extra contribution to help so many people who are facing appalling hardship.”
After the proposal for a windfall tax to pay for the VAT cut, Labour made a new call for a £600m government fund to help businesses deal with soaring fuel bills, also funded by the windfall tax. The party will on Tuesday force a vote in parliament on support for businesses hit by energy prices rises, calling for the government to scrap business rates, reduce the debt burden that firms are facing and create the £600m contingency fund.
The Guardian
Energy bills: Fix insulation to tackle cost of heating, PM told
The Energy Efficiency Infrastructure Group is calling on the prime minister to prioritise energy saving through home improvements.
It could save the UK £7.8bn a year, the group says.
The government is under political pressure to take action over rocketing gas bills.
Households have seen energy bills rise in recent months and further increases will take effect in April, when the energy price cap will be raised to take higher wholesale gas prices into account.
The government is exploring ways to support those on low incomes who will struggle to afford higher heating costs.
But the EEIG, which includes the CBI, Kingfisher, Energy Savings Trust and the green group WWF, says this and previous administrations are partly to blame for higher bills because they failed to ensure Britain’s homes are adequately insulated.
“The cost-of-living crisis is being driven by soaring gas prices,” said EEIG chairwoman Sarah Kostense-Winterton. “A permanent solution to lower bills is by reducing demand through energy efficiency measures.
“Emergency short-term measures for the most vulnerable households are crucial, but it’s fundamental for the government to simultaneously focus on the long term to avoid futures crises.
“Green home retrofits have significant social, environmental and economic co-benefits, and stand out as a ‘no regrets’ solution to the energy crisis, climate crisis, and levelling up agenda.”
Britain has the coldest and leakiest housing stock in western Europe, leaving residents particularly exposed to spikes in gas prices.
Successive governments have failed to implement policies to tackle the problem. The most recent insulation scheme, the Green Homes Grant, was scrapped after just six months.
The chancellor was urged by backbench MPs to use last autumn’s Budget to introduce a multi-year energy efficiency programme, but he declined.
In the short term the EEIG wants the government to provide additional support for vulnerable households to prevent a fuel poverty emergency.
This would include expanding the Warm Homes Discount, an option the government is discussing.
But the EEIG insists that ministers must also bolster the Energy Company Obligation (ECO) which requires energy suppliers to help low-income households to fit energy-saving measures.
The group fears that the chancellor may suspend the long-term ECO funding and shift the cash to tackle the immediate bills problem instead.
The EEIG is warning that cutting ECO would be damaging for households and industry, and would stall progress in making fuel-poor homes more energy efficient, risking green jobs and keeping households hooked on expensive gas.
BBC News
Treasury set for £1bn ‘VAT windfall’ from rise in household energy bills
HM Treasury is in line for a £1 billion “VAT windfall” from the expected rise in domestic energy bills in April, Tory MPs claim.
Conservative MPs are getting increasingly worried about the political impact of an expected increase in bills of around £700 per household in April, combined with higher council tax bills and a new 1.25 per cent increase in National Insurance.
The squeeze on household incomes will come just as MPs are due to be awarded a 2.7 per cent pay rise on April 1.
The Treasury normally receives £2.5 billion a year from five per cent VAT on domestic heating bills.
The Net Zero Scrutiny Group of Tory MPs estimated that around £2 billion comes from piped gas and electricity in most homes.
With the cap on bills from April likely to be increased by around 50 per cent when it is reviewed by Ofgem on February 7, this suggests a “VAT windfall” of around £1 billion for the Treasury.
Craig Mackinlay, who chairs the Net Zero Scrutiny Group, said: “This windfall should not be accepted by the Treasury or, if received, it should be targeted at hard-pressed families.”
However, a Treasury source said: “We don’t recognise VAT windfall receipts because as prices go up and consumers spend on energy bills, they’ll spend less on other goods and services. The loss of receipts there will end up netting out the gain of receipts from energy VAT.”
A HM Treasury spokesman said: “There has been no VAT windfall. High energy prices actually reduce VAT revenues – with receipts this year forecast to be £2 billion below the amount collected directly before the pandemic.”
The Telegraph
Energy crisis: Inflation could hit 7% without bill cap
Inflation could rise to about 7 per cent if ministers fail to cap an increase in energy bills due in April, internal government estimates suggest, risking a multibillion-pound hole in public finances.
Ofgem, the energy regulator, is reviewing the existing price cap, which is due to be revised next month after record breaking wholesale prices.
The cap, governing most retail energy bills, is likely to rise by more than 50 per cent on present estimates, raising the average cost of gas and electricity for a household from £1,277 a year to about £2,000.
Government projections are understood to suggest that such a rise could help push inflation up a further two percentage points in April from its level of 5.1 per cent in November. As well as exacerbating the cost-of-living crisis such a rise would pile pressure on public finances with further potential rises in interest rates.
Rishi Sunak has previously suggested that a sustained 1 per cent increase in rates could add £25 billion to the cost of servicing government debt. The internal government figures are similar to a projection by Goldman Sachs, the financial services company, which suggested that rising fuel bills would contribute to inflation reaching 6.8 per cent, its highest level in 30 years.
The Times
Britain’s largest ‘sea dragon’ fossil longer than a double decker bus found in Rutland reservoir
The fossilised remains of a ten metre long ichthyosaur – also known as a ‘sea dragon’ – have been found in a reservoir owned by Anglian Water in Rutland.
Dating back 180 million years, it is the largest and most complete skeleton of its kind found in the UK to date.
The discovery of the ‘sea dragon’ at Rutland Water Nature Reserve has been hailed by experts as a “highly significant” and “unprecedented” palaeontological find.
Ichthyosaurs are marine reptiles that resemble dolphins. They were common in Britain until their extinction around 90 million years ago.
“Britain is the birthplace of ichthyosaurs – their fossils have been unearthed here for over 200 years, with the first scientific dating back to Mary Anning and her discoveries along the Jurassic Coast,” said palaeontologist Dr Dean Lomax.
Ichthyosaurs are marine reptiles that resemble dolphins
The Rutland remains were discovered by chance in February last year, during a routine draining of a lagoon for re-landscaping. Measuring around 10 metres in length – longer than a double decker bus – and with a skull weighing around one tonne, the fragile skeleton took a team of palaeontologists two months to excavate last summer.
“Despite the many ichthyosaur fossils found in Britain, it is remarkable to think that the Rutland ichthyosaur is the largest skeleton ever found in the UK,” Dr Lomax said. “It is a truly unprecedented discovery and one of the greatest finds in British palaeontological history.”
Joe Davies, of the Leicestershire and Rutland Wildlife Trust which operates the reservoir in partnership with Anglian Water, was the first to spot the fossil. “The find has been absolutely fascinating and a real career highlight,” he said.
The fossil will feature on BBC Two’s Digging for Britain programme on Tuesday. Anglian Water said it is seeking heritage funding to preserve the fossil and enable the public to view it on site in Rutland. “We recognise the significance a find like this will have for the local community in Rutland,” Anglian Water CEO Peter Simpson said. “Our focus now is to secure the right funding to guarantee it’s legacy will last into the future.”
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Utility Week’s weekend press round-up is a curation of articles in the national newspapers relating to the energy and water sector. The views expressed are not those of Utility Week or Faversham House.