EU Referendum


Energy: not even trying to succeed


08/10/2021




Not for the first time am I regretting dropping my monitoring of and commentary on energy (and particularly electricity generation), in preference to covering Brexit.

But the complexity of energy as a subject has always presented a challenge and even had I given it more attention over the last decade, there is no guarantee that I would be much further forward in my understanding of current events, and especially the hike in gas prices that is causing so much concern.

Back in the day, though, when Cameron's idea of an energy policy was to turn a crisis into disaster, one prominent critic in the field was Oxford University's Dieter Helm, whom we followed closely.

While the piece to which I have linked was written in February 2010, a year earlier, Booker was writing on energy policy and, in particular, of the latter-day "dash for gas" which all the experts agreed was "crazy" when we were "fast running out of our own gas and prices are likely to soar".

In my my own blogpost, I noted that the shortfall in generating capacity was being made up by new-build combined cycle gas turbine (CCGT) plants, observing that:
… in the absence of any strategic planning and coherent policy, the generation industry is getting on with the job, making up the shortfall in the best way it knows how. But it is taking a short-term view, with massive price implications and long-term penalties – although the increased capacity will probably ensure that at least the domestic lights are kept burning.
I then added:
This, of course, presupposes that we have security of supply on gas deliveries which, given the Russian situation and the political instability of our major LNG producers, is somewhat optimistic. It also depends on the provision of additional storage capacity, as we rely more and more on gas-fuelled generation. Again, that is by no means certain.
Helm joined the fray two months later, expressing reservations as to whether a supply of gas could be maintained. And, if it was, he suggested that there would be a very significant price penalty as more and more nations compete for available supplies.

Over the years, he has stayed the course and has recently been active on Twitter. Now he is complaining that the gas price hike represents a "big regulatory failure". For more detail, he directs us to a piece by John Authers on Bloomberg.com.

Authers long piece is headed "Gas Market's Wild Ride Shows Some Machiavellian Traits", with a sub-heading which asserts that: "The extraordinary surge in futures prices is a dangerous crisis that’s been fuelled by Russia and policy mistakes in western Europe". Illustrated by copious graphs, it makes compulsive reading if you're that way inclined.

Predictably, Helm is quoted extensively in the piece and, as a media-favoured pundit, he also features in an article by Ben Wright in the Telegraph which refers to yesterday's National Grid Winter Outlook Report which is being interpreted as warning that Britain is facing a greater risk of blackouts this winter.

It turns out though that Helm's input is covered in far more detail elsewhere, firstly in an independent Cost of Energy Review, published in October 2017, and then in a piece he wrote on 4 October, published on his own website, headed: "The gas and electricity crisis – causes, consequences".

In a quote used by Bloomberg's Authers, Helm writes of the failure of nine (so far) gas suppliers, who have bought gas on the spot market and are now unable to cover their costs as retail prices are capped. He says:
… it is remarkable that any supplier could hold a licence whilst being unable to meet its contractual obligations with customers under the price cap in the event of commodity price rises. There has been a big regulatory failure, and behind this lies the core issue of the reliance on spot real-time pricing and the relative absence of long-term contracts. This bears a remarkable resemblance to the failure of Northern Rock, which relied on spot market funding. The socialised cost of supplier failures may cost over £1 billion. The state – in the guise of the regulator – has to step in to make all customers pay. So much for the one-way bet of supplier competition.
But Helm also adds:
It is easy for ministers to pretend that the current gas price crisis is a shock that will go away, as demand responds to higher prices. Closing down a fertiliser factory does indeed reduce demand and in the process make other customers a bit more secure. But this simply illustrates that the distinction the Secretary of State makes between physical security of supplies and price is wholly bogus. There is always a price that makes supply equal demand. But that price is not necessarily optimal, and currently we are discovering how seriously suboptimal it can turn out to be.
As to the cause of the price rise, Helm disputes ministers' claims that this was the result of the "unexpected" global bounce-back from Covid-19. The "bounce" was anything but unexpected, he says.

As to the proximate cause, which has been attributed to Russia withholding supplies to Europe, he asks: "Did nobody see what was going on, as storage in Europe remained unfilled, the German election approached, and Biden engaged with the Ukrainian government?" He continues:
The Russian motivations surrounding Nord Stream 2 have always been in plain daylight for all to see. There have been repeated attempts to manipulate supplies through Ukraine since Putin came to power, and the Nord Stream pipelines have all the hallmarks of a Russian–German project bypassing the Baltic States and Poland, and deliberately isolating Ukraine. The EU failed to centralise its buyer bargaining power, as Donald Tusk once proposed, and allowed Russia to divide up the market and exploit its market power. Nothing unpredictable about all this.
For the UK, Helm says, "there are obvious implications". Despite the claims of ministers and officials, we are not decoupled from European gas markets as we once were with North Sea gas and storage facilities like Rough. Fast-track depletion and the closure of Rough in 2017 have changed the game. We now need European supplies, notably from Norway, and Norway is part of the European gas market". Thus, the European supply situation matters, and European prices profoundly influence the UK.

Even more surprising, Helm notes, ministers apparently believe that LNG is a good substitute and frees us from such concerns. But while we have indeed diversified supplies, not all supplies are equally secure. It turns out few are on anything other than a spot price basis. Ministers, Helm says, should have seen Gazprom and the associated problems coming and taken precautions. They clearly did not.

Summarising these aspects, before going on to look at other causal factors for the price spike, he asserts that the shock was predictable, Russia's conduct was predictable, and (in the absence of longer-term contracts and with little storage) relying overwhelmingly on spot markets, successive ministers and officials have been asleep at the wheel.

As a summary, I would not disagree with that. And that makes it another avoidable crisis to add to the growing list for which successive governments are responsible and which Johnson is failing to resolve. As such, this is becoming the persistent feature of his administration, but with a novel twist. Far from merely failing in its endeavours, it isn't even trying to succeed.

Also published on Turbulent Times.