Although I hate being a Jeremiah, some things are worth worrying about. The UK’s potential energy position over the winter is very vulnerable to a crisis, especially if the weather is colder than average. Although long-run forecasts suggest the winter is likely to be wetter than usual rather than colder than usual (at least compared with recent years), it is still the case that cold snaps could bring serious problems for the UK’s energy grid.
Here’s why: lack of capacity, low reserves and the cumulative effect of little long-term planning in the form of dependence on imports, renewable energy and ageing nuclear plants.
One factor was not in the government’s control: a global pandemic. After the lockdown ended earlier in 2021, the subsequent recovery in consumer demand and production has outpaced the capacity of supply to respond. So, freight costs, raw materials and energy are seeing sharply rising prices – international shipping freight costs were up 289% in 2021, and something similar occurred for energy and food prices and a range of other commodities to boot.
Problems go deeper than Covid-19
However, the UK has specific issues due to its policies over the past decade and recent problems with energy plants. More specifically, the accidents and shutdowns to the energy links with France and Norway this year have created a loss of capacity.
But the key reasons are related to a lack of long-term strategy, composed of two separate strands. First is the lack of storage capacity. Shutting down the Rough gas storage facility in 2017 (it formed part of the Rough Field, some 18 miles off the East coast of Yorkshire) was seen, at the time, as a mistake by many, and certainly now. It needed significant amounts to be spent to keep it running safely. However, at the time, Centrica – the owner of British Gas –judged that this was a waste of money.
Now we know, in retrospect, that it would have been money well spent, though credit is due to those that did point this out at the time. Why? The UK only holds 1% of Western Europe’s gas reserves relative to demand. In terms of Terawatts hours of gas in storage, the UK has 8.8, compared with France, 113.2, Germany 146.5, Italy 165.8, the Netherlands 76.1, and Spain 27.8.
Building up renewable capability is all very well, but what happens when the sun doesn’t shine, and the wind doesn’t blow? Answer: use reserves. But when they are this low, that’s a problem.
Moreover, the UK does not have the same access to EU reserves as before Brexit, so action is needed to rebuild capacity. Hence, recourse to the undersea cable to France for nuclear-generated electrical energy and Norway for gas via the pipeline link is urgent but limited by repairs resulting from recent accidents.
In other words, a return to a pre-Covid-19 energy supply situation is unlikely until after this winter, maybe by Q2/3 of next year, so a crisis for gas markets could loom over winter.
Second, are ageing nuclear plants that should have been replaced years ago. Longer-term solutions are to build nuclear capacity, but with China on the sidelines, the focus will be on Modular designs – smaller, safer reactors (like those in atomic submarines) – led by Rolls Royce expensed to consumers in bills before they come on stream. Upfront subsidies from the public purse – likely agreed any time now – are required to kickstart the private sector investment process to deliver the plants.
Going nuclear will deliver a long-term solution to stable energy supply and meet the UK’s commitment to attaining net zero by 2050, underlined by the recent agreements at COP26.
While nuclear energy will help meet UK net zero commitments, it will have to be explained to voters. Such a course will put even more costs on UK consumers, already under pressure from un-costed net zero carbon targets. Oh, and add greater reserve capacity to renewables and reduced dependence on the spot market – as the global financial crisis over a decade ago showed wholesale markets tend to shut down when everyone tries to access them at the same time.
The results may be felt in increased prices, reducing real incomes and perhaps slowing UK economic growth as consumers save by cutting back on non-essential items in their spending basket. A slowing economy is not usually susceptible to rising inflation for very long unless wage inflation stays high. That still seems an improbable outcome in the UK, with real incomes squeezed by tax rises, withdrawal of government shutdown support, and supply-chain-driven food and energy prices.
Finally, weak productivity means low wage inflation growth in real terms, which appears to be what we see in the UK. In this economic environment, only a modest rise in the Bank rate is likely. Too much will lead to inflation falling below target in future years as the spasm of price to Covid-19 era lockdown ends, and the economy weakens sharply from current growth rates. Recent rapid growth (6% this year) reflects a rebound from a sharp fall rather than the rates the UK can sustain once it regains its previous output level.