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  1. The Weekend Essay
5 February 2023

Running on fumes: how Britain squandered its gas wealth

The source of the current energy crisis goes back decades. How did the UK become so hopelessly hooked on foreign gas?

By Phil Tinline

Last April, Boris Johnson avowed that his government would ensure “secure, clean and affordable British energy for the long term”, an aim with which no one could disagree. As things stand, however, we are highly dependent on gas, not only for heating but for generating electricity, and we import half our supply. By November 2021, consumers had found their gas bills leaping by more than 17 per cent, and that was before Russia invaded Ukraine, and held back gas supplies to the West. Our various recent chancellors have had to fork out once unthinkable support for households faced with unpayable bills, while gas extraction companies have been making bumper profits. But how did we end up so exposed, through our meters and boilers and radiators, to the ructions of geopolitics? And what do we do about it now?

Over the decades, the role of gas has shifted repeatedly. In Patrick Hamilton’s 1938 play “Gas Light”, a Victorian husband exploited the technology of the day to torment his wife – leaving us our buzzword for manipulative trickery. But by the 1940s, electricity was brightening up our homes, and the main remaining use for gas was to heat and cook. When it was nationalised in 1948, Britain’s gas industry was the poor relation among the public utilities. It extracted “town gas” from coal in noisy, smelly gasworks, like the grim cylindrical cage that looms over the characters in the 1961 film A Taste of Honey.

[See also: Can Starmer take back control of “take back control”?]

But then, on 17 September 1965, 42 miles out in the North Sea, workers on a British Petroleum oil rig called Sea Gem made a surprising find: as the drilling fluid returned to the surface, it bubbled and frothed. Beneath Britain’s stretches of the seabed lay vast reserves of natural gas. As the historian David Edgerton has pointed out, the role of coal is so prominent in our history that we miss just how transformative this discovery was. Not that it was cost free. That December, Sea Gem collapsed, killing 13 people: a reminder of what securing our energy supply involves.

As investment in the North Sea boomed, more and more gas fields were discovered. They were given evocative, shipping-forecast names: Viking, Piper, Forties, West Sole. Along the east coast, new gas terminals appeared. In 1972, Edward Heath’s Conservative government brought “nationalisation” to fruition, replacing the old regional gas boards and their dreary gasworks with a new, state-owned national champion, British Gas, to supply the country with this new source of fuel: cheap, abundant and secure.

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
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Or at least it was cheap when it left the North Sea. In 1980, in a book called Public Enterprise in Crisis: The Future of the Nationalised Industries, a young City banker called John Redwood argued that public ownership had been intended to deliver greater efficiency and lower prices, but had failed to do so. While British Gas itself was doing well on productivity, a costly Whitehall cocoon had accreted around the corporation, duplicating its systems and blocking it from taking out private-sector loans. What was needed was the fresh air of competition.

Three years later, Redwood became director of Prime Minister Margaret Thatcher’s policy unit, where he began realising his vision of “privatising” state-owned utilities – and giving their employees and customers the chance to own a personal stake in them. In December 1986, British Gas was successfully sold off, turning millions of ordinary Brits, for a time, into shareholders.

The head of the gas division at the Department of Energy – the man tasked with devising how a market in gas would work – was Derek Davis. He told me that the postwar systems needed shaking up, but noted that privatisation was bolstered by the facts that Britain now had a high-quality natural gas transmission system and its own source of cheap, abundant, secure gas. This, he remembered, left him “comfortable that what was being handed on would last for a generation”.

When I asked John Redwood about this, he emphasised that he and his colleagues strove to ensure that the sale of British Gas would not weaken our energy security; they limited the proportion of shares that could be sold to foreign interests. Likewise Thatcher’s energy secretary, Peter Walker, stopped British Gas from leaning more heavily on importing gas from Norway, in the face of fierce opposition from the corporation. Davis, who was advising Walker, says it was important to incentivise companies to keep up the expensive process of developing the gas reserves in UK waters.

A few years later, the role of gas in the British economy was transformed all over again. The discoveries in the North Sea in the 1960s had changed how we sourced our gas, and so brought the nationalised industry to its apotheosis. In the 1990s, technical innovations transformed what we could do with it. It became possible to use gas to generate electricity at scale, in swiftly constructed new power stations. The privatised industry now enjoyed its own new dawn: the “dash for gas”.

An international gas market was blossoming, driven by intercontinental pipelines and the heady post-Cold War rush towards globalisation. The privatised British Gas monopoly was split up into its component parts and, alongside the newly privatised electricity companies, real competition between household energy suppliers arrived. Prices fell. The Treasury encouraged more foreign ownership of the old public utilities, to try to boost efficiency and competition even more. In the warm glow of 1990s optimism, everything seemed fine.

As Michael Bradshaw, professor of global energy at Warwick Business School, put it to me, “We got hooked on gas, and then we depleted our own reserves.” In 2000, UK gas production peaked, at over 110 billion cubic metres a year; by 2019, it had more than halved, to under 40 billion cubic metres a year. The companies operating in the UK’s portion of the North Sea did not keep up exploration. By 2004, less than four decades after Sea Gem’s discovery, Britain was no longer self-sufficient in gas. At the time, this did not seem to matter. The private sector had seen this coming, and had begun building the infrastructure necessary to import large-scale shipments of liquefied natural gas (LNG) from far beyond our coastal waters: initially from Algeria and Trinidad and Tobago. And if the international market was perfectly capable of providing our needs, was prospecting for more fossil fuel reserves really very forward-thinking?

[See also: How UK imports of Russian liquefied natural gas have doubled]

And so today, fully half our gas is either piped in from Norway, Holland and Belgium, or shipped from the US and Qatar. We are not reliant on Russian gas, but we are enmeshed in a market that is. John Redwood is critical of the failure to encourage continued domestic gas exploration. And when Boris Johnson launched his government’s energy security strategy last April, he was similarly scathing about how Britain “drifted into dependence on foreign sources”, in part through “policy fudges, decision-dodging and short-term thinking”. The result, he wrote, “is all too obvious to anyone who receives an energy bill”.

Once state control no longer swaddled the industry in restrictions, the privatised gas industry had been freed to compete in the sunny, liberalising global economy of the 1980s and 1990s. But it is now taking a battering from unforeseen geopolitical storms. As Bradshaw points out, it is not much good relying on the robust diversity of the market to provide our energy if it arrives at “a price no one can afford”. So what is to be done?

Davis suggests the time has come to review the system he designed four decades ago, “and possibly make some adjustments”: in particular, the high prices that suppliers have been allowed to “nod through”. He regrets the discontinuation of offshore storage facilities designed to cope with winter demand spikes. The Rough facility off the Yorkshire coast was capable of holding around 3.31 billion cubic metres of gas, or nine days’ supply, but in 2017, Centrica closed it on cost and safety grounds, thereby removing 70 per cent of our storage. Five years on, the company has invested in reopening it, operating it over this winter at around 20 per cent of its previous capacity. There are many other ideas in play for tackling the immediate price crisis, from windfall taxes to decoupling gas and electricity prices.

At the same time, there are efforts to boost supply. Qatar is investing heavily in its terminal in Milford Haven to increase the LNG it exports into Britain by a quarter. The US plans to double its exports of LNG to the UK, to at least 9 billion cubic metres. In terms of new domestic sources, the Sunak government restored the moratorium on fracking that had been lifted under Liz Truss, but the gas crisis has been forcing a turn back to the resource on which our beleaguered model was founded. The government’s energy security strategy declares: “we must fully utilise our great North Sea reserve”; its North Sea Transition Authority has recently invited applications for new exploration licences, a submission round that closed in January.

But while, for now at least, we need an affordable, secure gas supply, there is a huge contrary pressure. We also need to transition away from fossil fuels to clean energy, whether through renewables, nuclear power stations or generating hydrogen – from electrolysis, or indeed from gas. The government insists prospecting for more North Sea gas is a transitional move which in no way contradicts its commitment to net zero. The invitation for licence applications attracted 115 bids. Bradshaw, however, argues it might be better to reduce demand for gas with insulation, retrofitting and heat pumps.

[See also: How to combat the energy crisis and keep the green transition on track]

Why, then, has more of this not happened already? Mathew Lawrence, executive director of the Common Wealth think tank, suggests that the system we have long grown used to is simply not suited to the harsh new geopolitical and environmental climate we face. The intense pressure brought to bear by the Ukraine crisis, he argues, has finally revealed a “deep structural problem”, linked to the question of ownership: private companies are not geared to pursue secure, clean, affordable energy, but to extract value and maximise returns. He points to research by Common Wealth published last January, which showed that the UK’s major energy supply companies distributed over £40bn to their shareholders in the decade to 2020. By contrast, the Norwegian state has maintained a direct financial interest in oil and gas production, allowing it to build a trillion-dollar sovereign wealth fund (which sold the last of its overseas investments in oil and gas companies in 2020). Lawrence argues that it is time to return core elements of the UK’s energy system to public ownership, focusing it on clean energy generation, while building a domestic green industrial base.

Until relatively recently, the idea of renationalising the energy system seemed unthinkable. In 2006, Tony Blair saw no need to block the Russian state energy company Gazprom making a bid for Centrica, the UK’s largest domestic gas supplier (the bid never materialised). In 2018, National Grid plc moved its UK gas and electricity transmission arm to Luxembourg and Hong Kong to shield it from a potential Corbyn government that might try to take it back into state ownership. But today, the ground seems to have shifted. True, 60 per cent of National Grid’s gas transmission and metering business is being purchased by Australian and Canadian companies, but in 2024, another element of the company is to be renationalised. And last August, a YouGov poll for the Times suggested that even 47 per cent of those planning to vote Conservative supported doing the same with the energy companies.

Lawrence talks with striking respect for the effectiveness of John Redwood’s influence campaign in the 1970s and 1980s, suggesting that, just as the “wheel of history” turned back then, it is now turning again. Common Wealth’s work has helped to shape Labour’s plan for “Great British Energy”, a clean generation company, publicly owned. Given the history of gas production in the hands of both state and market since the war, we will see if a return to public ownership will help achieve that elusive goal of “secure, clean and affordable British energy for the long term”.

Either way, the apparently contradictory pressures of net zero and the gas crisis appear to be forcing a new consensus into being. After Liz Truss, as prime minister, paused Johnson’s energy security bill in September 2022, Labour pressed her successor to revive it; it is now government policy once more. There is a broad sense that we are currently in a messy transition phase, moving out of the world built in the 1980s and 1990s on cheap gas and international markets. That, in a frighteningly unstable world, we need to limit our exposure. And that, once we have weathered our current crisis, the demands of net zero and national energy security must be merged, making our energy supply both as UK-based and as clean as possible. Given the importance of the English northern and coastal regions in all this, it might even help begin to realise that other elusive Johnsonian goal: levelling up. But all this will only fully come together when our current use of gas becomes a thing of the past.

Phil Tinline is the author of “The Death of Consensus: 100 Years of British Political Nightmares”. His documentary “The Privatisation of British Gas” will be broadcast on BBC Radio 4 at 8pm on 13 February

[See also: The authoritarian interlude]

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