When Israel and the US attacked Iran, there were bound to be consequences for the countries that depended on Gulf oil and gas. Between them, China and India take more than 50 per cent of the oil going through the Strait of Hormuz, with Japan, South Korea and Taiwan making up much of the rest. The US doesn’t, because it is energy-independent – the largest oil producer in the world and the biggest exporter of LNG gas. Britain gets very little oil or gas at all through the Strait of Hormuz.
Why, then, according to the OECD and the IMF, is Britain getting the biggest hit? After more than 15 years of promoting renewables and building offshore wind, why is it so exposed? Why does it have so little resilience to this sort of shock?
To answer these questions, we have to go back to the position Britain was in before the attacks. Britain already had an energy crisis: it had the highest industrial energy prices of any of the G7 countries and among the highest domestic prices. British industry and British households were already in serious trouble, with large industry closures and an alarming growth of bad debt.
How could this be, since the Secretary of State for Energy Security and Net Zero tells us that renewables are nine times cheaper than gas? The answer is that the renewables are intermittent, whereas the existing and new industries demand firm power 24/7.
To meet a peak demand of around 45GW in Britain, we once had around 60GW of total capacity as insurance against shocks and outages so that the lights would stay on. The national electricity grid met the requirements to connect the big power stations. Now we need around 120GW to meet a slightly smaller peak demand, and because the wind is decentralised and of low energy density and in small units, we need to roughly double the size of the grid for the same 45GW peak demand. On top of this, we need lots more batteries and storage, and 10 GW of interconnectors and 35GW of gas running to meet periods of low wind and sun. Twice the capacity and twice the grid and the extra batteries and the interconnectors, and yet still 35GW of gas is what it will take if we meet the 2030 target for net-zero power.
The Iran war has made a bad situation even worse. Britain relies on gas for 35 per cent of its total energy supply, about the same for oil. The rest is nuclear (a small and currently declining share) and renewables. Britain has almost no coal to fall back on (unlike Italy, Germany and Poland and, of course, China, which burns more than 50 per cent of the world’s total coal). Britain is deliberately reducing existing North Sea gas production (through a windfall tax) and banning new gas licences (preferring Norwegian North Sea gas to British North Sea gas). At the margin, Britain is even forced to buy US LNG (liquefied natural gas), which is fracked gas that is then liquefied and hence much more environmentally damaging than local North Sea gas.
As to security, Britain has taken a just-in-time approach to gas supplies. Fields have been run down and, as the squeeze in aviation fuel indicated, Britain also has little stocks of oil. Britain has very little gas storage now. It has not taken a just-in-case approach. After the years of North Sea plenty, no serious provision has been made for what happens when our oil and gas are no longer abundant.
After the Iran war, gas prices (and oil) are highly likely to fall, and potentially sharply. That was what was to be expected this year before the Iran war. The irony is that the reduction in these prices will not bring much relief to households or industry. Why? Because the costs of offshore wind and nuclear are now being baked in for up to two decades into the future. We already know that British industry and customers will face high energy bills until at least 2045.
Energy and climate realism requires a rethink. Security is the priority, and is not an automatic consequence of building more wind and solar. Security requires firm power, not just intermittent power. Security means gas is needed in the short term and through to 2050. We are not going to “just stop gas” any time soon. That means deciding whether we want Norwegian North Sea gas or British North Sea gas, and pipeline gas rather than US LNG at international prices.
It is argued that what we do about North Sea gas supplies will make no difference to prices and bills. This is not strictly true. We could go back to the “bad old days” of British Gas when licences were issued in exchange for longer-term contracts and with flexibility in field depletion to handle storage in the wells. If the Secretary of State for Energy Security and Net Zero is so convinced that the future is high and volatile gas prices, just sign fixed-price contracts. Since the starting negotiating position with the oil and gas companies is no contracts, the offer of licences is an obvious place to start.
Next up is to address industrial prices. If industry closes down in Britain, as it has been doing, it makes no contribution to the energy system costs, and these system costs do not fall. As Grangemouth, refineries in Scotland and Hull, the steel industry, the fertiliser industry and the car industry contract and close, more burden falls on domestic customers. Time instead to set the prices to industry at levels that to keep it in Britain.
It is time to get serious about social tariffs. Every citizen should have access to energy, so that they can participate fully in society and the economy. It is not a nice-to-have extra. Short-term fixes, like temporary subsidies, are no more than sticking plasters.
Then there is the future energy mix. Britain is the first major economy to try out a system of wind and solar with a bit of nuclear potentially to be added. “Brave” would be a kind description of the consequences. Nuclear is one of those technologies that is best done either done at scale and properly, or not at all. Britain has managed to end up building one nuclear power station at a time, with the result that it is building two of the most expensive nuclear stations in the world, at around a cool £16bn per GW. To give a sense of how extreme this is, 1GW of gas costs around £1bn. Britain is becoming one of the few countries in the world without a baseload source of electricity. China has coal, as does India. The US has oil and gas, some nuclear and coal. France has nuclear. Germany, Italy and Poland have some coal as well as gas.
And what about climate change? Britain boasts fast and deep cuts in territorial emissions. It is illusory. Deindustrialisation has offshored emissions, disguising the carbon consumption we are all responsible for. As Britain closes its energy-intensive industries in the face of its very high energy costs, emissions are outsourced as we carry on buying the products with imported carbon. Britain’s energy policy is not leading us to no longer cause climate change.
It does not have to be like this. But it will be, without significant changes in energy policy. Instead of digging an ever-deeper hole, it is time to face the facts of our inevitable exposure on energy costs caused by our choice of energy policy and recognise that we are not on our way to becoming a clean-energy superpower. Other countries do not, as Boris Johnson once claimed, look to Britain to find out how to do it. They look to us with our high prices as a case study on how not to do energy policy.
[Further reading: The world energy shock is coming]
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Subscribe here to commentThis article strikes me as if it has been penned by a representative from the gas and oil industry and it caused me to try to find the writer’s affiliations or, even, who pays for him. Aside from a series of dissolved companies and an article in the guardian in 2012 which had a similar flavour to it (i.e. blame the state not the companies or god forbid the ideology behind allowing private equity to provide our water) I could not find anything. However, what I find is that the author deploys a series of sleights of hand which leaves one somewhat baffled as to how he arrives at the conclusions he does.
Some examples of what I mean:
“It is argued that what we do about North Sea gas supplies will make no difference to prices and bills. This is not strictly true”
What is not strictly true about it? How does one go from it not mattering (international markets, quality of gas etc) to “we could go to the bad old days”? Also what’s bad about those days exactly? What has the length of contract got to do with it making no difference to bills?
“Britain is deliberately reducing existing North Sea gas production (through a windfall tax)”
Right, so the existence of a reduction in profits following extraordinary profits because of the invasion of Ukraine deliberately reduces production? – Does it? Could it not optionally cause the money to be, I dunno, invested or provided to employees? This seems to be a thinly veiled ideological stance which is devoid of evidence.
The author also talks about baseloads and not having enough energy to cover these, but the evidence he does produce does look a lot like there is enough to cover shortfalls. Furthermore, he is wrong about the gains made on environmental damage being illusory, because he’s failed to take into account the fact that domestic demand (think LED lightbulbs replacing more energy hungry variants) has, per person, reduced.
So all in all, there’s a lot missing in this analysis and it is hard to conclude that this is an attempt by the industry to justify their quest for more drilling.