What has gone wrong with the UK energy market?

Alongside most other European countries, the UK is facing its worst energy crisis in a generation.

A combination of domestic and geopolitical factors have driven up energy costs to record levels. Whilst this has resulted in bumper profits for oil and gas producers like Shell and BP, energy consumers are bracing for the toughest winter they have ever endured.

Following the most recent update to the Energy Price Cap, Ofgem announced that they expect an annual household energy bill in the UK to reach £3,500 from 1st October 2022. With families already squeezed by inflation and a rising cost of living, this dramatic increase to energy costs is expected to plunge millions into fuel poverty.

Even more severe is the pressure being put on businesses around the country as there is no price cap for commercial energy tariffs. In some cases, businesses have reported seeing their energy costs triple or quadruple in recent months. Consequently, there is a great fear that thousands of companies could be forced out of business as they cannot match the increased operating costs.

The Government's response to the energy crisis

Upon becoming Prime Minister one of the first things that Liz Truss announced was a package of measures designed to support families and businesses with overwhelming energy costs.  

On 1st October the Government will introduce an Energy Price Guarantee, which will reduce the unit cost of electricity and gas so that a typical household in Great Britain pays, on average, around £2,500 a year on their energy bill, for the next 2 years.

To protect businesses, the Chancellor Kwasi Kwarteng has launched an Energy Bill Relief scheme, which will see the Government provide a discount on wholesale gas and electricity prices.

In both domestic and commercial scenarios, there will be a maximum that the customer has to pay for unit rate and daily standing charge of their energy costs. The Government will pick up the difference between the cost the customer pays, and the total cost charged by the energy company. The chart below shows how the will work for the domestic Energy Price Guarantee. The energy supplier sets the unit rate for electricity at 55p. The customer pays 35p, and the Government pays the remaining 20p.

Combined, these measures are expected to cost the Government, and ultimately the taxpayer, at least £150 billion. This could end up being a lot more if wholesale energy prices continue to accelerate into 2023.

Whilst this approach offers respite for those worried about meeting the cost of their energy bills, it provides no meaningful long-term solution to the energy crisis. By stepping in and paying the difference between what it thinks people can afford and the total cost demanded by energy companies, the Government is subsidising the operations of the oil and gas producers and ensuring the continuation of their business model.

This intervention does nothing to address the UK’s energy security, nor anything to address the ever-deepening climate emergency.

What is truly needed to deliver long-term stability and security is a re-design of the flawed energy market and a revolution in the way we source and use energy.

How to get it wrong – The UK Government response to energy security

In a shocking statement delivered to the House of Commons, the new business secretary Jacob Rees-Mogg stated his desire to drill “every last cubic inch of gas” from the North Sea in order to guarantee Britain’s energy security.

Putting the glaring climate consequences to one side for a moment, it is evident that the business secretary does not understand the economics of commercial oil and gas extraction.

Granting licenses to oil and gas companies to exploit the resources buried in the North Sea does not oblige energy producers to sell their product to the UK, nor does it compel them to sell at anything below the international market price.

Not only will such new exploration take many years to come onstream, the energy resources extracted will simply be sold to the highest bidder on the international market. As such, this strategy would do nothing to lower prices or secure UK energy supply, and would come with an additional price tag of adding millions of tonnes of carbon dioxide to the atmosphere at a time when the world needs to be reducing emissions.

offshore oil platform inthe North Sea of the coast of the UK
The business secretary has stated the Government's intentions to 'drill every last cubic inch' of oil and gas from the North Sea. Not only will this do nothing to improve UK energy security or reduce costs for consumers, it will exacerbate the climate crisis. Photo - Grant Durr, Unsplash

Building on his fossil fuel fantasy, Mr Rees-Mogg announced plans to end the moratorium on fracking and introduce this controversial industry to the UK.

Fracking involves pumping water deep underground to fracture rocks that contain oil and gas. In addition to the obvious conclusion that we should not be extracting more fossil fuels at a time of existential climate collapse, fracking is also known to cause earthquakes and to contaminate local water supplies.

Furthermore, there is no evidence to suggest this would do anything to deliver energy security in the UK. Even the former founder of the UK’s largest fracking company, Chris Cornelius of Cuadrilla, said in a recent interview that the geology of the UK was unsuited to fracking, that fracking will be impossible at any meaningful scale, and that no sensible investor would back the industry.

In a similarly ill-informed strategic misstep, the Government continues to pin its hopes of energy security on nuclear power.

The UK has only embarked on one new nuclear power station this century, the much-maligned Hinkley Point C. With construction beginning back in 2018, the site is not expected to start generating energy until mid-2026, and development costs continue to soar, currently estimated at a spectacular £23 billion.

Clearly, when designing policies to mitigate against spiralling energy costs and a climate catastrophe, there is simply neither the time nor budget to entertain nuclear power as a legitimate option.

Delivering a real transformation in energy – what the UK could and should be doing

The most frustrating thing about the Government’s response to the energy crisis is that there is an abundance of alternatives available that could deliver a radical transformation of the UK energy system.

Furthermore, because of the hard times ahead facing energy customers, there is a genuine appetite from the public for transformational change.

Energy Market Reform

One of the quickest and most impactful policy options available to the Government is to re-design the UK energy market. Clearly our energy market is fundamentally broken and is not working in the interests of energy consumers or energy suppliers.

One suggestion would be to break the link between gas prices and electricity prices. The rapid increase in wholesale gas prices has driven electricity prices up for all suppliers, including those who generate their electricity from renewable sources like Octopus, Good Energy, and Ecotricity.

Reforming the energy market would ensure that renewable energy suppliers were able to offer electricity tariffs that were significantly cheaper than fossil fuel suppliers. In turn, we would expect to see an exodus of customers towards those offering affordable renewable energy tariffs, strengthening their market position and enabling further investment in more renewable generation.

A National Energy Efficiency Programme

The most cost-effective long-term solution for bringing down energy bills as a nation is to reduce the amount of energy we use as a nation.

The UK has some of the oldest and most thermally inefficient buildings in Europe. Introducing an ambitious national campaign to improve the energy efficiency of our housing and commercial properties would drive down energy costs and massively reduce our carbon emissions.

Furthermore, the beneficial health implications of such a campaign would achieve big savings for the NHS as significantly fewer patients would present with illnesses caused by cold, damp housing.

The UK Government did introduce a Green Homes Grant scheme in 2020 with the aim of upgrading 600,000 properties over a two-year period, but poor implementation meant that the campaign was stripped back and handed over to Local Authorities. A re-launch of the Green Homes Grant, with significantly more funding available and a provision for apprenticeships to boost the number of qualified energy efficiency practitioners, would help to drive down our energy consumption whilst creating thousands of new jobs.

energy efficiency insulation improvements in a cold home in the UK
A properly funded national energy efficiency improvement programme could simultaneously work to drive down energy costs, improve warmth and wellbeing, and reduce carbon emissions across the country. Photo - Erik McKlean - Unsplash

An ambitious renewable energy programme

In our opinion, the Government has got it totally wrong when looking to gas, fracking and nuclear power for energy security.

The best option for ensuring a reliable and affordable domestic supply of energy is to pursue a nationwide rollout of renewable energy generation and energy storage projects.

Solar power and wind power are popular with the public and can both be deployed at a significantly faster pace and lower cost than fossil fuel and nuclear alternatives.

By making funding available for communities and Councils to develop their own local renewable energy capacity the Government could unleash a wave of new energy assets across the country.

When people can power their homes, businesses and community buildings with locally generated energy then they can enjoy true energy independence and security of supply with complete insulation from global influence.

This is the vision that we wish the Business Secretary shared.

By replacing our fossil fuel powered lives with clean, renewable alternatives, then we can achieve long-term energy security in addition to reducing our impact on the planet.

Those people like Jacob Rees-Mogg who say that we have until 2050 to transition to 100% renewables and that we should stay with fossil fuels for the time being are missing the point. Relying on fossil fuels is not only a terrible long-term strategy because they will destroy our natural environment, it is also a terrible short-term strategy because they have become unaffordably expensive and completely unreliable.

With the next election not due until 2024, the best that we can do in the meantime is to lead by example, demonstrating how on a local level communities have the desire and the ability to heat and power our lives with clean, affordable, local energy sources.

Every loft that is insulated, every boiler replaced with a heat pump, every new solar panel put on a roof brings us one step closer to real energy security.

Whatever you do to reduce your energy demand and to meet that demand with renewable energy can be considered as a revolutionary act, breaking away from the fossil fuel age and ushering in a bright and sustainable future.

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