The cost of cutting the ‘green crap’

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by

Michael Bax

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We are in an energy crisis. All of us are looking carefully at our energy use as we prepare for a cold winter. The Russian war in Ukraine has been blamed as a cause for rocketing fuel prices.

Yet the UK historically only ever imported 4 per cent of its gas from Russia. So why are we in such a crisis that our government has just set out plans to borrow £150 billion to pay for a freeze on domestic energy bills and £25bn as a support plan for businesses?

The answer certainly starts with Russia’s war on Ukraine. Yet it touches other areas that have nothing to do with the war. These include our national policy on reducing greenhouse gas (GHG) emissions, our policy on insulation, our dependence on gas for heating and electrical generation, our interconnectedness with European energy markets, our failure to decarbonise electrical generation fast enough and Brexit — yes, I am afraid that one raises its head here.

To understand the crisis, it’s necessary to explore the roots of the problem and evaluate their consequences. Government has responded. As a spoiler, it can be concluded that the policies adopted by our government do nothing to address the cause of the problem and don’t include solutions that will cure it.

The effect of energy price rises is to at least triple the amount of money residents of CT5 pay to heat and light their homes, which will drain our community of its resources at a time of already great vulnerability.

There are things that Whitstable’s citizens can do to solve its own problems, however, by escaping dependence on gas, addressing energy poverty in our community, lowering our use of energy and adopting community solutions for carbon-free heating and power.

Firstly, the problems we confront come from two interrelated issues: the war in Ukraine and in Europe’s — and in particular Germany’s — historic policies of building links with Russia in return for cheap gas. President Putin started squeezing gas supply in mid-2021, which caused prices to rise (perhaps filling his coffers before the war). They then jumped sharply in February 2022 when he invaded. He has subsequently lowered supply to many of his clients through naked threats or pretexts that maintenance on pipelines has caused outages as he unilaterally changed the pricing terms on contracts to avoid sanctions. Germany was particularly exposed to his tactics. In 2020, Germany depended on fossil fuels for 64 per cent of its consumption.¹ Before the war half of its gas, half of its coal and a third of its oil² came from Russia. All this has had to be replaced, and the scramble to do so, whether in sourcing Norwegian gas or Qatari and US liquified natural gas (LNG) and changing suppliers for oil, has caused the huge increase in UK pricing.

Why does this affect the UK? We live in an interconnected world. We have gas and electricity connectors to Europe that, historically, flowed in both directions to balance our system. The gas pipes have been flowing entirely towards Europe for six months as it rushed to fill its gas storage before winter. Any producer in the North Sea with uncontracted gas has sent its excess to European clients willing to pay almost any price. Worldwide LNG producers have filled their ships and have used Britain’s efficient LNG terminals to import gas into the UK, which then heads straight out to Europe. We are not an energy island and, as gas is a commodity, so our prices have risen to match the price in Europe. That is why a market that had no real Russian dependence ended up paying a price caused by Russia.

Even the gas in our part of the North Sea has been repriced up to 10 times the historic level, although it costs no more to extract than before.

Those who own uncontracted gas are the main parties who have benefited, certainly not the electricity distribution and transmission companies and not so much the electrical generators. Gas generators that set the marginal price make almost nothing from the price rise as they don’t make a margin — their fuel cost is the same as their energy price. The price changes in gas have led to an enormous transfer of wealth from UK and European citizens to Russian, Norwegian and other gas suppliers. The rise in energy costs is equivalent to 7 per cent of UK GDP, more than we pay for defence and education combined and more than we pay for health.

How has it affected us so badly? We have an unusually high dependence on gas for heating our homes. Some 85 per cent of UK homes are heated by gas³, making up 17 per cent of our GHG emissions. About half of our electricity is generated with gas⁴.

We also have no storage, which is a national act of incompetence that is staggering. The UK has nine terrawatt hours (TWh) of storage. Germany has 217 TWh, France 122 TWH and Italy 162TWh. Ours is enough for a few hours and was closed in 2017 at the behest of Kwasi Kwarteng and Liz Truss at the Treasury. It has just been reopened. We have negligible storage and no protection to buffer our exposure to adverse changes in prices.

It is important to be clear that renewables and the Green Levy have played no role in this. The chart above shows wind prices before the recent gas increases, and wind still beat gas. The most recent offshore wind supply contracts, called contracts for difference (CFD), came in at £37.5 per megawatt hour (MWh)⁵ — one MWh is enough to supply 2,000 homes for an hour. Electrical generation using gas at uncapped prices costs today about £260 per MWh. Anyone with a contract — and almost all wind projects have contracts — are capped in what they receive as revenue. While contracted parties get the full energy spot price for their energy they then have to give back the difference between the spot price and their contract price to the pool, lowering the price for everyone else. Offshore wind CFDs will return about £1bn to the pool this year.⁶ Renewables are up to nine times cheaper than current gas generation. The Green Levy (used for paying things such as insulation subsidies) represents only about 4 per cent of bills after recent price rises. There was no reason for its recent suspension or its vilification by ruling party MPs and ministers. Green energy is basically unsubsidised today and offshore contracts are effectively subsidising gas generation. Without renewables, the country would have had to spend a further £12.5bn on gas this year.⁷

The UK has some of the worst-insulated homes in Europe.⁸ A New Statesman article shows that the average home loses 3^°C in five hours. We used to have a national insulation programme. It was cancelled by Cameron in 2012 when, in the words of the Sun, we needed “to get rid of the green crap”.⁹ We were doing something sensible to stop one of our largest sources of GHG emissions and protect ourselves from price shocks on fossil fuels. We stopped doing so. That decision, matched perhaps by some others made by the same PM, has ended up costing this nation billions. The chart below shows how limits to onshore wind, new solar projects and insulation cost us upwards of £13bn annually!

And Brexit? What has that to do with anything here? Fossil fuels are traded in US dollars. Just before the Brexit referendum, the pound traded at $1.50/£1. Recently it is trading at $1.15. That is a devaluation of nearly 25 per cent. The euro has also fallen because of the cost of Putin’s war, but we have suffered more. The markets have judged us for shutting ourselves off from our largest market and this has cost our fuel bill significantly. Fuel cost is the biggest driver of inflation, and the UK has higher inflation than most of our peers. Policy reversals, poor national planning, failure to follow through on our climate change commitments, failure to modernise our homes and Brexit have cost us billions. It is not just Putin’s war.

Fossil fuel prices are, however, the major driver of high pricing. Renewables are not the cause but instead appear to be the cheapest solution. Green levies have precisely no effect on price rises. Gas owners are making all the money. So what has our government done?

First, they released limits on onshore fracking and stimulated offshore gas production. Then they suspended the Green Levy. They committed to place the country in debt for a generation by borrowing money — at historic high interest rates, Brexit again — simply to transfer it to gas companies. They chose not to temporarily cap the marginal cost market price of gas in setting pool prices. They chose not to claw back from gas owners the superprofits that they have made. They chose not to act to limit demand. They chose not to allow onshore wind or increase investment in heat pumps or insulation. Our European neighbours have done pretty much all of these. Not one of them has chosen to put the gas bill entirely on the national credit card.

Encouraging gas production is like trying to put out a fire by adding more fire. Any new gas produced will not be sold at a lower price but at the prevailing European price — and will take a decade to come onshore from the North Sea.

These acts are economically illiterate, incomprehensible as they relate to energy markets and directly against our climate change commitments. None of the measures taken address the cause of the problem. Given that, our only hope is that gas prices in Europe will fall as they fill up their storage. Otherwise the crisis will continue and the short-term patch will need to be reapplied, at the cost of further immense transfers of your and my national wealth to the gas companies.

It is worth a look at the impact of price changes on Whitstable. The government publishes energy use tables by postcode. Using these for 2019 and applying 2021 gas, electric and standing charges as stated by OfGem ^10/11 you can identify the expenditure on electricity and gas. These numbers are rough, but CT5’s average usage is very close to national averages. Some folks may have cheaper contracts than the Ofgem limit, but the exercise shows the effect on our pockets. In 2021, energy cost CT5 about £15.1m per annum. Gas for heating and hot water represented 46 per cent of the bill. If the Ofgem October price rise had gone through, that would have risen to £64.3m with gas at 54 per cent of the bill, an increase of 325 per cent in the year.

The government’s recent intervention has lowered this to £41.4m, still an increase of 174 per cent on last year. This intervention is temporary. The change in the energy bill represents £16.3m that won’t be spent by us in our high street on food, and clothing, on travel or on savings.

The method chosen by the government is to transfer the funds to gas-owning companies without taxing them on the extra profit. The cost of the exercise will be paid by all of us. The national debt is our debt and repaid by our future taxes.

There were multiple methods of avoiding this tax on us. This is the one chosen by our government alone. And remember: energy bills carry VAT. The government revenues are increasing in line with energy price rises, again at our expense.

Presentation

So what to do? I will be giving a presentation for the Green Party at the Umbrella Centre on Friday November 25 to offer some thoughts.

Any solution needs to respond to several challenges. It needs to provide energy security free from external shocks. It needs to deliver low-priced reliable energy. It needs to end our reliance on natural gas for heating. It needs to offer a solution for energy poverty. And it has to be green and reduce our community’s carbon footprint.

Here is a foretaste. All solutions are planned as community-based and will require collective buy-in, but in my view, we can sit here and pass our money to the gas companies or we can use that money to build our own solution.

As an example, the difference between our collective 2021 and possible October 2022 payments would have built a district heating system powered by renewable energy sources that would fix our heating requirements for all time and left substantial change.

First, our town needs investment in insulation but has a housing stock that will not easily adapt to cavity wall insulation. Certainly we need help in changing windows and doors and improving attic insulation and cavity walls where feasible.

We could be exploring a communal municipal bond to support an investment pool to allow households to spread the cost of investment over time using common contractors and common qualifying standards.

We could create our own rooftop solar installation fund, again pooling resources to lower purchase and installation costs and working with the council to lower planning fees, which are an impediment to a cheap and quick process.

We could build a community energy purchasing scheme, either to build our own or invest in others’ wind or solar projects using a model such as ripple energy where all power from the project is routed through an energy supplier that blends the project’s power with other renewable sources to give 24/365 green electricity.

And finally, we could liberate ourselves from the gas companies forever by establishing our own district heating system, fuelled by renewable energy, to provide all heating and hot water needs for our community.

The models for all of these exist elsewhere. They are not speculative. Towns of our size in Denmark have not been affected by the gas price crunch as for more than 25 years they have heated their towns from biomass, biogas, solar thermal and ground and air-source heat pumps.

It is perfectly feasible to escape our ties to large energy companies, fossil fuels and government policy. But it will first take a desire for community engagement and agreement to jointly proceed.

Let’s see what we can do, for otherwise we will be paying dirty energy prices inflicted on us by others for a generation.

1 https://www.cleanenergywire.org/factsheets/germanys-dependence-imported-fossil-fuels
2 https://www.nytimes.com/2022/04/05/business/germany-russia-oil-gas-coal.html
3 https://www.theccc.org.uk/wp-content/uploads/2017/01/Annex-2-Heat-in-UK-Buildings-Today-Committee-on-Climate-Change-October-2016.pdf
4 https://www.nationalgrideso.com/electricity-explained/electricity-and-me/great-britains-monthly-electricity-stats
5 https://www.carbonbrief.org/analysis-record-low-uk-offshore-wind-cheaper-than-existing-gas-plants-by-2023/
6 https://www.current-news.co.uk/news/wind-farms-to-pay-back-660m-under-cfd-scheme-amid-high-gas-prices
7 https://www.carbonbrief.org/analysis-why-uk-energy-bills-are-soaring-to-record-highs-and-how-to-cut-them/
8 https://www.newstatesman.com/chart-of-the-day/2022/01/british-homes-among-the-worst-insulated-in-europe
9 https://www.carbonbrief.org/analysis-cutting-the-green-crap-has-added-2-5bn-to-uk-energy-bills/
10 https://www.ofgem.gov.uk/publications/energy-price-cap-increase-april-consumers-should-switch-save-money
11 https://www.forbes.com/uk/advisor/energy/energy-price-caps/

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Michael Bax

Michael Bax has had a career in renewable energy on three continents, heading major wind and solar development and operating assets. He is currently ambassador for sustainability for the Institute of Directors (Kent branch) and sits on the IoD national sustainability task force. He is a member of the Green Party and resident in Whitstable.

https://www.linkedin.com/in/michael-bax-9a9a52

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