Sitrep on British energy policy

This year has seen energy policy rise up the public agenda. Concerns over a shortage in fossil fuel supplies following Russia’s renewed invasion of Ukraine have given way to a massive rise in the cost of living. Further volatility is certain: Europe is sucking up the international supply of liquefied natural gas (LNG), which chiefly comes from the United States (US), Australia, and the Middle East. However, 17% of US LNG export capacity[↗] will be offline for weeks, while competition for Middle Eastern and Australian LNG will intensify as the People’s Republic of China comes out of lockdown, driving prices higher.

The United Kingdom (UK) is heavily reliant on gas for power production and heat. Her Majesty’s (HM) Government published the British Energy Security Strategy[↗] (BESS) in April, with a forthcoming Energy Security Bill which will put that strategy on a legislative footing. The overall policy can be summed up as speeding up the clean energy transition to renewables and nuclear while developing more North Sea oil and gas fields to diversify Europe’s supply.

However, government policy still appears rather confused. Seven weeks after the BESS was published, the Treasury announced a windfall tax on oil and gas production, the ‘Energy Profits Levy’. It has been threatening to do the same to generators like nuclear power stations and wind farms. The BESS raised offshore wind targets to 50 gigawatts from 40 by 2030, including five gigawatts of floating offshore wind, as well as a doubling of the UK’s clean hydrogen production capacity to 10 gigawatts in the same year. 

Achieving these targets would be no small feat, which would be made all the more difficult by a windfall tax, as evidenced already by the new ‘Energy Profits Levy’: Equinor has suggested[↗] it may pull out of the Rosebank oil and gas field. This is despite the accompanying 80% Investment Allowance, which may have the net effect of dragging resources away from renewables: oil and gas giants like Shell and BP that are transitioning to clean energy are now incentivised to bring capital from their clean energy plans over to oil and gas to make the most efficient use of financial resources.

It is understandable that the Chancellor is anxious to find new sources of revenue to help fund the expanding relief packages, so far totalling £9.2 billion in February and £15 billion in May. But energy policy requires long-term thinking and, above all, stability. Creating an uncertain investment environment and inflating the cost of capital is the exact opposite of what HM Government should do, especially when the evidence from recent case studies has shown they are usually reversed – with further taxpayer concessions – later on. 

There are reports[↗] that the Treasury is rethinking a windfall tax on electricity generators, which is welcome. But those same reports suggest the Chancellor is pinning hopes on reform in the electricity market to delink the price of cheap, renewable power production from that made from natural gas. Natural gas currently sets the wholesale price of electricity, which is why consumers have not felt the benefit of the comparatively much cheaper power generated from wind and solar farms. However, the ‘review of electricity market arrangements’ will be impossible to deliver by this winter.

How to cope, then? Annual household energy bills are set to rise[↗] by another £830 to £2,800 this autumn, fuelling the cost of living crisis and tipping more into fuel poverty. It will require more bailouts from the Treasury, potentially reaching into the tens of billions. Thankfully, reports[↗] last week claim that the government is finally considering acting on energy efficiency, something which was bizarrely largely absent from the BESS.

Boosting cheap renewables to displace gas in power production is relatively new, but making more efficient use of the energy we consume is not. Following the second oil crisis of the 1970s, Japan focused on energy efficiency heavily and continues to do so today as it becomes more reliant on ever-more perilous supplies of LNG. If the response of David Cameron, a former Prime Minister, to the energy crunch of the mid-2010s had not been to cut insulation programmes and ban onshore wind, bill payers would be saving billions by now.

Cutting energy waste through insulation was always a good idea, even if it requires patience and investment. It is now imperative. Of the £2,800 some homes will be paying to stay warm and keep the lights on, £560 will drift straight through leaky walls and roofs. Wasting less energy on a national scale will mean freeing up more precious gas supply, cutting out our imports from Russia faster (washing Britain’s hands of President Putin’s war machine), and reducing the amount we pay Norway, Qatar, and the US.

It is undeniable that previous government-run insulation programmes, such as the Green Homes Grant[↗], became mired with difficulties. To avoid this, HM Government could opt for a new policy[↗] dubbed ‘ECO plus’, which is being championed among the energy industry and many environmentalist organisations. It would involve a £1 billion top up to the fourth phase of the existing, successful ‘Energy Company Obligation[↗]’ framework – which is implemented by industry and targeted at fuel poor homes.

It would be a misstep, however, to pay for this by pulling funding from other schemes that will help to increase energy efficiency. For instance, pulling the plug on the new £450 million Boiler Upgrade Scheme[↗], which is aimed at kick-starting the heat pump market, would only erode the government’s credibility and lock in the nation’s dependency on gas for heating for even longer. It would also be in stark contrast to policies among other like-minded nations such as the US, which recently invoked[↗] the Defense Production Act[↗] for heat pumps alongside solar panels, insulation, electrolysers, and grid infrastructure. 

Further, while ‘ECO plus’ would be welcome and necessary, it would not be sufficient to really drive insulation across the country. Households with more money will still require help, if not direct support, to invest in home upgrades. A potential method would be a salary sacrifice scheme, where people pay in tax-free instalments for their upgrades directly from their monthly pay packets. Sixty-three percent of homes need to spend no more than £1,000 to sufficiently upgrade their homes, which could be split into monthly payments of £42, while delivering lasting savings and a higher standard of living.

The goal should be to make our energy system match fit in the coming years. It is far too dependent on imported fossil fuels which we use inefficiently and cannot be displaced through supply side measures on oil and gas alone. Renewables and nuclear will help to reduce our demand and free up our dwindling gas resources in the long term. Insulation can help to cut waste immediately, while heat pumps and electrification can drive down our demand and thus our vulnerability to supply side shocks. These areas are where HM Government should focus ahead of the coming winter.

Jack Richardson is James Blyth Early Career Associate Fellow at the Council on Geostrategy. He is also Climate Programmes Manager at the Conservative Environment Network.