20 September 2021

With a gas supply crisis looming, UK energy policy needs a wholesale rethink

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UK energy policy has been a mess for decades, not least in its undue – indeed, almost inexplicable – neglect of natural gas. Cans have been kicked down the road again and again. Unfortunately, it looks like we’re going to be reaching the end of that road this winter, with soaring wholesale gas prices already putting energy suppliers, factories and food producers under intense pressure. There are short-term factors at play, but to understand how we got to this point, and what could be done, it is also useful to take a step back and look at the broader context.

If the 19th century was the century of coal and the 20th century the century of oil, then the 21st would be the era of natural gas – that at least was the conventional wisdom until relatively recently. Natural gas – methane, CH4 – was going to be the “bridging fuel” to a low-carbon future, a key element in a gradual and smooth energy transition. 

This assumption was promulgated by the authoritative International Energy Agency (IEA) and guided many energy companies’ strategic planning, leading to colossal M&A deals. At the same time, the shale revolution was transforming the energy landscape in the US, unlocking an abundance of cheap gas, toppling king coal and turning the country into one of the big three seaborne liquefied natural gas (LNG) exporters, alongside Qatar and Australia. Gas was going to be the new oil.

The UK government was nominally on board with this at one point, hence the 2012 Gas Generation Strategy. But as a Centre for Policy Studies report noted back in October 2017, the UK was falling well short of its goals for new gas electricity generation capacity – and crucially, as it turns out, for attendant import, storage and pipeline infrastructure. Meanwhile, gas production in the North Sea had fallen by 60% since 2000 and the nascent shale gas industry had been kneecapped by NIMBY legislation.  

Then in 2019 came the paradigm shift of Net Zero 2050. Instead of a gradual transition, the pace of change was to be accelerated according to political targets. Natural gas was a hurdle to be leapt over in the sprint towards renewable energy. It was mentioned only once in the 38 pages of the (otherwise laudable) Ten Point Plan for a Green Industrial Revolution – and only then as something to be phased out. But while wind, hydrogen and batteries are major growth sectors, they have not yet achieved scale (and the nuclear sector is a whole other problem).

In other words, UK energy policy is geared towards the long term while neglecting a smooth transition in the short-to-medium term. With Gazprom playing geopolitics in Europe, supply chains snarled by Covid and electricity interconnectors to the Continent down (or at risk of French retaliation following AUKUS), that means the UK could be in for a bleak winter. 

Of course, supply diversification would be a good thing. The UK’s wholesale price of natural gas is currently around $23/mmBTU – having already doubled since the summer – whereas the US equivalent is just $5/mmBTU. But taking advantage of regional pricing differences is not really an option, as most LNG import terminals have been mothballed. Otherwise, companies could take cargoes from the US Gulf Coast, where shale-driven export projects have underpinned the emergence of a liquid spot market in LNG (in contrast to the traditional long-term contract used by the Qataris, for example). The Government could work with utilities companies to prioritise chartering Floating Storage and Regasification Units (FSRUs) – basically mobile LNG import terminals – if any of the fleet are available at present. But by now, that would probably only make a difference around the edges. 

Other mooted options include bailing out failing energy suppliers or subsidising the survivors to take on household customers at a loss. The first of these – rewarding failure – should be taken off the table. The second of these, although unpalatable, might be the least worst option in the short term. The root of the problem here is price caps, which force energy companies to sell to consumers at a loss and so distort the price signals that modulate consumption according to scarcity. But it’s hard to see the Government removing caps this winter, given the political backlash that would ensue (shivering pensioners are not going to do anything good for the NHS backlog either).     

Assuming the Government isn’t going to just let people freeze, the other approach might be to support household finances directly. But lest the Government be minded to boost winter fuel payments, it should recall that, as with the Universal Credit uplift, clawing that money back later is likely to be a mighty battle. A better idea would be to suspend the green levies that make up about 25% of consumer electricity bills.

Unfortunately though, given Europe-wide gas shortages and soaring electricity prices, and without the infrastructure to plug into other gas markets, there’s not much prospect of the supply situation improving this winter. In the longer term, a combination of nuclear and renewables, as per government targets, should prevent this sort of energy supply crunch. But the looming energy crisis shows the need for a new Gas Generation Strategy, bridging the gap between Net Zero in 2050 and the cold, hard realities of the 2020s.  

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Karl Williams is a Senior Researcher at the Centre for Policy Studies.