Over the past two years, energy costs in the UK have spiked, partly due to the war in Ukraine, but also partly due to a lack of planning and foresight on the part of the government (leading to higher bills for consumers). That’s according to Clive Moffatt, energy analyst and founder and chairman of the UK Energy Security Group.
In the 2013 Electricity Act, the government committed to decarbonising the UK electricity network, but policymakers have charged ahead without putting in place “appropriate energy security safeguards,” which has ultimately “increased significantly both the frequency and magnitude of our exposure to the volatility in the global gas market and eroded the flexibility and reliability of the electricity market.”
Government policy is pushing energy bills higher
Supporters of the government’s progress on decarbonising the grid might point to the UK’s successful adoption of wind energy as a marker of its progress but Moffatt argues that all policymakers have done is shift the grid’s dependence from one unstable energy source to another, and increase the UK’s exposure to global market volatility.
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“It was apparent over ten years ago that because of the long-term decline in North Sea gas production the UK would remain heavily dependent on imported gas for domestic heating (70%) and to compensate (between 40% and 60%) for the variability of wind and solar power,” he says.
And yet the government has failed to take action to put in place long-term solutions to this problem, using expensive short-term fixes to try and plaster over the cracks. These have included “payments to both industry and domestic consumers to reduce consumption at times of peak demand and emergency imports of power from the EU” costing up to £1,000 per MW, ten times more than the current average price.
“There are no cost-effective and viable options to ensuring reliable supply” of energy apart from gas at present Moffatt says, so the “government’s decision to continue with North Sea oil and gas development should be welcomed because it will reduce UK dependence on LNG imports.”
But the UK will likely remain an importer of gas meaning it’ll “remain vulnerable to the vagaries of the international gas market” as the “scale of the proposed decarbonisation will add far more to energy costs without increasing security of supply.”.
The government has spent billions on subsidies for the energy industry over the past decade to try and drive the development of renewable energy capacity, but the key problem with these power sources remains - they’re unpredictable and intermittent.
The hidden cost of wind power
“When the wind is blowing the marginal cost of power at that moment is zero – but when it is not blowing gas sets the marginal cost of power,” Moffatt explains. “This is why capacity auctions and subsidies were introduced across the EU ten years ago to ensure additional flexible gas generation to compensate for the intermittency of renewable energy,” he adds.
Unfortunately, EU competition rules meant “existing baseload nuclear, fossil fuel plants, interconnectors and small-scale micro-generation and DSR were allowed to bid into these capacity auctions and the auction price never reached a level required to stimulate essential new investment in OCGT peak load gas generation.”
As a result, the UK is now “desperately short of reliable, flexible generation,” and as a direct result of this, the National Grid is once again planning to pay consumers and businesses to reduce their consumption over the winter.
A key part of the debate on energy, which is often overlooked, is the true cost of renewables. As Moffatt is keen to point out, “Wind power is not a free or cheap option.” The levies added to consumer bills to support subsidies, plus the cost of new infrastructure, plus the “cost to consumers of special market balancing measures required to compensate for intermittency such as payments,” make this an expensive source of energy generation.
To make matters worse, policymakers, including the government and regulator Ofgem, have opted “to support suppliers at the expense of customers,” by capping retail energy prices.
“The [energy price] cap has been reduced but is still fixed at a high level relative to the current wholesale gas price so as to enable remaining suppliers (mainly the “Big Six”) to recoup the costs of acquiring the customers of those companies that went under and ensuring that they have enough liquidity to survive any further sudden escalation in the wholesale gas price,” Moffatt explains.
“Since it was introduced the energy cap has probably resulted in consumers currently paying on average more than is justified,” he adds while it has also contributed to a “massive increase in public sector borrowing” following the introduction of the Energy Price Guarantee last year.
The main takeaway from the UK’s energy market debacle is “you cannot control retail prices if you have no influence on the wholesale market” while “price capping is a blunt and blanket mechanism.”
A “targeted grant support policy” aimed at those genuinely suffering from “fuel poverty” would have avoided the pitfalls of the energy price cap. If it were now removed, it would give suppliers the freedom to compete more aggressively on price and service.
A focus on green energy
The country should also move away from going it alone on green energy as this is not only leading to higher costs for consumers and businesses, but it’s also likely to have a negligible impact on global emissions anyway. “Even if the UK were to achieve Net Zero by 2050 it would make no significant difference to the trajectory for global warming given that the UK accounts for only less than one per cent of global emissions,” notes Moffatt.
Instead of chasing an impossible goal, the UK should be pushing the rest of the world to focus on developing a “climate change support fund” to help those countries that will be most affected by the changing climate.
“More needs to be done to examine this option at the G20 level before the next COP meeting later this year,” he adds.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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