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Britain’s energy crisis has been decades in the making

By:   []

Date: 2021-09

“There's absolutely no question of the lights going out,” the business secretary, Kwasi Kwarteng, told the House of Commons this week. “There'll be no three-day working weeks or a throwback to the 1970s.”

When senior ministers are forced to give such reassurances, it’s usually a sign that trouble is ahead. With Britain’s economy already battered from COVID-19 and Brexit, the last thing it needs is another crisis – let alone one relating to something as vital as energy. But that is exactly what the country is facing.

In recent weeks gas prices have soared, with wholesale prices rising to more than three times the level they were at the start of the year. Analysts have attributed skyrocketing prices to a ‘perfect storm’ of factors, including depleted European stocks after a prolonged winter; delayed maintenance by domestic gasfield operators; lower gas supplies from Russia; and strong demand for liquefied natural gas in Asia and Latin America. This turbulence in global gas markets has been compounded by a fire on a major subsea electricity cable between the UK and France, which has slashed energy imports from continental Europe, and some of the lowest wind speeds since the 1960s, which has dramatically cut output from the UK's 11,000 wind turbines.

As well as squeezing energy suppliers, surging gas prices are rippling through the economy – hitting everything from farming and food production to steel manufacturing and soft-drink carbonation.

But while market conditions have certainly created new challenges for Britain’s energy supply, not everything can be put down to bad luck. In reality, Britain’s energy crisis has been decades in the making.

Uniquely exposed

Following the privatisation of the gas and electricity sectors by the Thatcher-led government in the 1980s, the newly profit-hungry energy companies embarked on a ‘dash for gas’ – transitioning the British electricity generation away from coal towards modern gas-fired power plants, fuelled by newly discovered cheap gas supplies in the North Sea.

Over time, Britain became increasingly reliant on gas to power the country. Today, 86% of British homes use gas for heating, and more than a third of electricity supplies come from gas power plants.

In the mid-2000s, however, domestic North Sea gas production began to fall sharply, while demand continued to rise. As a result, Britain became increasingly dependent on gas imports. In 2020, Britain imported around half its gas to meet demand – much of it via pipeline from Norway, the Netherlands and Belgium, with the rest imported by ship in the form of liquefied natural gas from Qatar, the US and Russia.

Given this reliance on imported gas, one might assume that Britain would have invested heavily in storage capacity to provide a buffer against market shocks. But the country’s largest storage site, the Rough facility off the Yorkshire coast, which previously accounted for 75% of all the nation’s gas storage, was closed in 2017 by its owner Centrica. Today less than 1% of Europe’s stored gas is held by the UK.

This lack of storage capacity left Britain’s gas supply at the mercy of volatile global markets, with few tools available to soften the impact of any future supply shock. This is the main reason why Britain has been among the hardest hit countries from surging gas prices: it is more reliant on gas for electricity generation than most other European countries, and its lack of storage capacity means it is particularly vulnerable to sudden price swings.

In a desperate attempt to plug some of the power shortfall, in recent weeks the UK has temporarily fired up its coal power stations – the dirtiest of all fuels. But with coal capacity a fraction of what it once was, it can supply only around 2% of Britain’s energy needs. In the immediate term, there is little Britain can do to escape the clutches of soaring gas prices.

A fragmented sector

Britain’s vulnerabilities to global supply shocks have been compounded by a fragmented energy system, which has evolved in recent decades as governments and regulators have sought to inject more ‘competition’ and market incentives into the sector. But in practice, competition in the sector is either largely illusory, or built on increasingly fragile foundations.

Once energy is are generated, it is transported around the country to homes and businesses via Britain’s transmission and distribution networks. Since privatisation, these networks have been owned and managed by a set of privately owned monopolies, including National Grid plc at the national level and a number of regional firms at the local level.

As natural monopolies with no competitors, the only safeguard to protect customers from exploitative practices is the industry regulator, Ofgem. In recent years, however, the regulator has been criticised for failing to keep network fees in check. A 2017 study from Citizens Advice estimated that customers were paying about £1bn per year more than what can be reasonably justified, enabling network operators to make significant excess profits.

Another study undertaken by the Energy and Climate Intelligence Unit estimated that around one-third of regional network operators’ revenue was being realised as profit, and at least half of this was being paid out to shareholders – leaving the system permanently. With network costs accounting for over a quarter of gas and electricity bills, these excess returns are a key reason why energy costs in Britain are higher than in many European countries.
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