Readers will have to excuse my long lay-off from posting comments on energy and climate. This has been only partly due to diversions – storage issues in the context of a forthcoming Royal Society report, reading up on “solar refinery” technology, and collaboration with an Oxford colleague in reviewing the failure of the neo-liberal consensus on electricity markets.
But it’s also partly due to the fact that much of what I write has been about alerts to the dangers of climate change and the importance of action. The last year has seen much more emphasis on these issues in the mainstream media. But with a new government stuffed with climate science denial, I fear there will be more to write about.
MEETING THE ENERGY PRICE CHALLENGE WITHOUT BANKRUPTING THE UK ECONOMY
The UK now faces multiple, closely linked, economic and energy challenges:
· poor economic performance, manifested in low growth and falls in real incomes
· the highest inflation since the 1980s (when Mrs Thatcher was PM)
· escalating prices for gas, which dominates the cost of both heating and power generation in the UK
· managing the UK role in transition to a global low carbon economy
Poor economic performance and inflation are among the worst in the G20. While many factors contribute to this, it is at least partly driven by the trade and cost issues resulting from Brexit. The OECD says the UK is unique in simultaneously grappling with high inflation, rising interest rates and increasing taxes.
But today’s immediate issue is managing the massive escalation in gas prices. There is a real risk that, in politics as elsewhere, the urgent drives out the important. In this case the crisis of fuel affordability, undeniably important, risks diverting us, at least temporarily, from what is in the long run a much more serious challenge, the existential crisis of climate change.
Gas prices are obviously driven, in the short term at least, by events in Russia and Ukraine. But there were already reasons to suppose that the previous disconnect, between low prices in Europe and much higher prices in the Far East, would not be sustained indefinitely. It would be a mistake therefore to imagine that gas prices will eventually revert to the low levels to which we had become accustomed. This immediately casts a shadow over what appear to be the new PM’s policy choices to deal with the crisis – a blanket freeze on prices, paid for by borrowing which will be paid back by future consumers through higher bills over (perhaps) the next twenty years. If fuel prices are not going to drop any time soon, this seems foolish.
First we need to dismiss the fallacy that today’s global energy crisis is a clean energy crisis.
This is an absurd claim. To quote Fatih Birol, Executive Director of the International Energy Agency:
“I talk to energy policymakers all the time and none of them complains of relying too much on clean energy. On the contrary, they wish they had more. They regret not moving faster to build solar and wind plants, to improve the energy efficiency of buildings and vehicles or to extend the lifetime of nuclear plants.”
The government’s renewed interest in fracking is therefore an irrelevant diversion, an observation I made in a post in 2019, quoting the views of professionals in the gas sector. Its near term impact would be trivial.
So what would a good strategy look like.
Trying to insulate all consumers from any impact of the rising price of gas is both impossibly expensive and potentially encourages wasteful use of an increasingly scarce resource. Among other objections it would involve a cross-subsidy from taxpayers as a whole to some of the wealthiest citizens who are also high users of energy. Targeting those most in need of help ought to be one of the objectives
A good practical strategy that avoids excessive expenditure might involve a multi-faceted solution which includes measures along the following lines:
· capping fuel prices at current levels for households, but only for a limited level of consumption per household. For electricity this might be the first 1000 or 1500 kWh in a year.
· high levels of usage would pay something much closer to full cost (this could of course be done in steps)
· paying for that support partly through windfall taxes, to reduce the impact on public expenditure.
· simultaneously encouraging reduced energy usage, particular examples being reduced levels of heating in public buildings, and unnecessary illumination of office buildings at night.
· some additional targeted support for vulnerable households through the social security system.
· some additional targeted support for sectors of business most at risk, although it will be hard to separate small business problems from the impact of the expected recession..
No solution is likely to be perfect. There will be plenty of special cases, for example in households locked into electric heating. Some poor households will be high consumers, and some wealthy people low consumers.
But at least this is an approach that stands a chance of being affordable, given the other strains on the public purse.
 GDP – International Comparisons: Key Economic Indicators. House of Commons library
 Writing this week in FT of 5 September