‘We are in an energy war and need to build as fast as possible’

In the face of increasing volatility in power prices driven by the war in Ukraine, all eyes are on the Chancellor’s Spring Statement and the government’s energy supply plan to provide further support to mitigate future bill shocks. David Blackman examines the levers at the government’s disposal.

While Ukraine is engulfed in conflict, energy suppliers have found themselves on the frontline of the new economic Cold War between Russia and western nations.

Russia’s stranglehold over the European gas market provides its government leverage over the rest of the continent.

As British ministers constantly stress, the UK is less exposed to Russian supply than many of its Continental neighbours with just 4% of its total gas consumption coming from the country.

Alan Whitehead, Labour’s shadow energy minister, points out that the Norwegian gas supplies that help to cushion the UK cannot necessarily be relied upon in the event that the Russian government turns off the pipeline to Europe in retaliation.

However, the main problem for the UK is the soaring wholesale price of gas. An increase in the price cap “much higher” than £3,000 is a “plausible” prospect this autumn, Energy UK chief executive Emma Pinchbeck warned earlier this week.

This is the troubling backdrop against which Rishi Sunak will present his Spring Statement next week.

Barely six weeks ago, the chancellor of the exchequer unveiled his £9.1 billion package to help energy customers manage April’s 54% increase in the level of the energy price cap.

Already though this package, which will provide many households with £350 worth of relief via a mix of council tax rebates and a repayable discount, is looking inadequate in the face of what looks set to be an even bigger hike in energy bills later this year.

The impact of these rises will be “devastating” for households and businesses, says Simon Markall, deputy director of external relations at Energy UK, pointing out that the latter don’t even enjoy the limited protection that the price cap provides for domestic customers.

Josh Buckland, a former special advisor to ex-business secretary Greg Clark, believes that the Treasury’s instinct will be to avoid any further spending commitments until later in the year.

“They’re not going to another intervention on energy bills until there’s a bit more clarity on the future of the price cap in October.”

This may happen sooner of course with Ofgem opening up an avenue for more frequent price cap reviews.

But it is likely that the Treasury will have to act sooner, warns Adam Bell, the Department for Business, Energy & Industrial Strategy (BEIS)’s former head of energy strategy.

He says: “Even if we have a positive outcome in the short run, inflationary pressures are extreme.

“It is possible that Russia and Ukraine sign a peace deal and everything returns to business as usual but that feels unlikely. This has been a massive change in the economic circumstances of the entire globe that doesn’t feel like it will be unwound over night with an early peace settlement.

“Our relations with Russia are fundamentally poisoned.”

Acting sooner rather than later

Experts increasingly believe therefore that high gas prices will be baked in long term, as Europe seeks to wean itself off Russian supply.

This will require intervention, Markall says: “The government don’t want to spend money on this, but they have to.

“It’s two years to a general election and they are going to have to act. They have to get a handle on this and act fast.”

Buckland, who is now a director at public affairs company Flint Global, agrees. “They (the government) need to do something sooner rather than later.”

The wide-ranging nature of the cost-of-living crisis facing many households means that the government’s only feasible immediate option is to increase universal credit rates to keep pace with recent increases in inflation, he says: “It’s either that or a return of absolute poverty in this country.”

In terms of specific actions to alleviate energy bills, Buckland believes the “most obvious” course is to expand last month’s rebate to £750 alongside more targeted support for low-income households.

However, given that the current elevated gas price looks set to last a lot longer than previously envisaged, the question arises about whether the repayment period for the rebate should be extended or even whether it should have to be paid back.

One energy industry source speculates that if the government insists on the discounts being repaid, a claw-back period of up to seven years may be required.

Having such a long payback period begs further questions about whether the energy system requires a more fundamental shake-up than heftier subsidies for cash-strapped customers.

The prime minister has of course promised an energy supply plan which looks set to be unveiled next week.

Utility Week understands that Boris Johnson’s announcement last week was a surprise for officials at BEIS.

The lack of notice and need to act swiftly in response to the Ukraine crisis means that few expect radical departures in terms of policy.

On what was the most potentially contentious aspect of the current energy supply debate, BEIS ministers appear to have fought a successful rearguard action against attempts by backbench Tory MPs to unpick the government’s moratorium on fracking shale gas.

Briefing from ministers suggests that the core of the plan will consist of souped-up targets in the rollout of renewable and nuclear power, building on the direction of travel laid out in last year’s Energy White Paper.

“Everything is up in the air given the nature of the Ukraine crisis and the extreme impact it’s having on the market. They will be looking at everything and it’s right to do that,” says Buckland.

The nuclear option

New nuclear power clearly forms an important plank of the government’s thinking about how to reduce the UK’s dependence on gas.

Ministers are understood to be mulling a fresh lifeline for a new nuclear plant on the Isle Anglesey, which its original developer Hitachi pulled out of in 2019.

Tom Burke, founder and chair of environmental consultancy E3G, urges ministers to resist being seduced by the siren voices of nuclear lobbyists.

Pointing to estimates that show a large plant commissioned today wont’s deliver power until the middle of the next decade, he says: “The idea you are going to build more nuclear power stations in time is nonsense. There is no credible case for that being able to help with the current and strategic problem.

“For an insurance policy on grid stability, there are an awful lot of things that the government can do cheaper and faster,” he says.

Wind and solar are the “absolute guarantors of energy security” for the UK, says Burke, adding that green hydrogen produced using excess renewable power is the UK’s best bet for keeping the lights on when these inherently sources of energy are in short supply.

Ministers are also reported to be examining an easing of the planning rules, introduced by David Cameron’s government in 2015, which make securing consents for onshore renewables very hard.

Labour has advocated trebling the UK’s onshore wind capacity from its current level of 14GW to 40GW by 2030.

Whitehead says onshore renewables offer the “quickest and cheapest” mechanism for securing a large amount of generation.

And with electricity bills at their current high levels, the payback periods for new onshore renewable development will be rapid, says Markall: “It makes sense to do it. This is where the government needs to ramp up quickly: every day delayed is a day lost. This has got to ramp up in two years to get scale investment.”

If the government unshackles onshore wind development, the economics of what is already relatively expensive nuclear power would be further undermined, says Burke: “The offer to consumers will be much better if you are doing onshore wind and gives more flexibility.”

However, as pointed out in a paper issued by the Tony Blair Institute earlier this week construction and planning lead in times for renewables projects means they will not provide an immediate fix with a substantial impact next winter, even though they are central in the medium term.

Buckland agrees “We have to be realistic that there are not a lot of options in the locker in the short term. There’s enough you can do to get through next winter, but you need a systematic plan for the next three to five years because that’s where the bigger opportunities are.”

The bigger opportunities are presented by a more consistent approach to the planning of infrastructure development, he says.

Any energy plan should go beyond supply and improve the grid’s ability to minimise the use of gas peaking plants by being better able to spot the contribution of micro solar generation to the grid, says Whitehead.

A supply and demand strategy

But what is really missing from the messages emanating so far from government has been anything on energy efficiency, says Bell. “It’s got to be a supply and demand strategy.”

Energy efficiency should be prioritised in any response because it is the single factor that the government has greatest control over, says Burke: “The fastest and cheapest way to reduce pressure on bills as well as to do something for the climate is to something on energy efficiency.

“If you are not doing that, the rest matters less.”

An accelerated roll out of energy efficiency measures could have an impact on individual household bills before next winter, says Buckland: “Demand reduction and energy efficiency can be deployed relatively quickly.”

Better insulation can have a meaningful impact on energy security, says Whitehead, pointing to figures showing that improving a home to EPC Band C standard can cut gas use by 20 to 25%.

With gas bills so high, investment in energy efficiency makes increasing sense in value for public money terms, as the Climate Change Committee concluded in its recent response to the government’s heat and building strategy, he says: “High prices are not going to fade away quickly. Even if the expense looks quite high, it looks like a very attractive proposition now.”

The government should introduce measures that will ensure as many homes as possible are upgraded by next winter, says Bell: “Summer is entirely right time to instal measures: not taking advantage of that is a missed opportunity.”

However the government seems reluctant to be pro-active on an issue that involves people’s homes, he says: “No 10 is nervous about telling people what to do but given the scale of the challenges involved, I suspect that is something that will not last the course.”

But it is “entirely the wrong time” to be worrying about such libertarian concerns Bell says: “The reason for not doing it seems almost entirely ideological and not practical.”

Given the wider sensitivities of many Tory backbench MPs and their constituents about  onshore wind and solar development, the government still needs to tread carefully, says Buckland: “It is important not to do that in a way that doesn’t set you back to square one on the politics.”

But Bell, who is now head of policy at consultancy Stonehaven, worries that the government’s approach risks being too conservative compared to the level of the threat that the UK faces to its energy security.

“Right now, for all the good things government are saying, they are on the high end of ambition for peace time and nothing as transformative as the situation demands now.

“We are in an energy war and need to build things as fast as possible.”