The Russian invasion of Ukraine has impacted energy markets around the world and, as winter in Europe approaches, unprecedently high costs threaten to make energy unaffordable for both large portions of society and many businesses in the UK.
One of the first actions of incoming UK Prime Minister Liz Truss has been to announce significant help for domestic consumers for the next two winters and a proposed cap to the amount that consumers pay for the energy they use while a similar approach is proposed for businesses but only for six months. This package is going to be expensive. The Institute for Fiscal Studies suggests the domestic cap alone will cost more than £100 billion just for one year and both schemes will ultimately be funded by the taxpayer. This is in contrast to the EU approach, which is covering some of the costs from non-fossil fuel power generators and other energy companies making excessive profits from the high prices, and goes against calls from the UN Secretary-General for ‘all developed economies to tax the windfall profits of fossil fuel companies.’
The UK government has also made clear its intention to seek to reduce dependency on energy imports. It has set a target that the UK should become a net energy exporter by 2040 and has established a new Energy Supply Taskforce. This is a momentous challenge as, in 2020, 28 per cent of its energy was imported. It also raises an important question about what energy will be exported – electricity or fossil fuels – and how it may relate to the UK and the EU’s target of being net-zero by 2050.
Truss has suggested that new supply can be obtained by the additional exploitation of oil and gas reserves in the North Sea and from non-conventional gas from ‘fracking’. Indeed, the UK government has said that it will award up to 100 new licences for offshore drilling and that ‘we will end the moratorium on extracting our huge reserves of shale which could get gas flowing in as soon as six months where there is local support’. However, even if local support was forthcoming, which it hasn’t been to date, the timetable is unrealistic.
Greg Hands, UK minister for energy, clean growth and climate change, said in March that ‘shale gas is not the solution to near-term issues. It would take years of exploration and development before commercial quantities of shale gas could be produced.’ The policy on shale gas is being used, in a similar way to the policy of sending asylum seekers to Rwanda, to demonstrate to potential voters that the UK government is willing to take unpopular decisions. From the outset, it is clear that both the timetables and objectives are unrealistic, yet it is likely that any delays or failures will be blamed on third parties rather than on the approach that the government is taking.
New supply is also expected from additional nuclear power plants and offshore wind although the cheaper and more rapid to build onshore renewables, such as solar and wind, are not prioritized which is surprising from an energy security perspective. However, in the Growth Plan published by the treasury, onshore wind was given a boost with the lifting on planning restrictions.
Equally absent, is any significant support for demand side action to help consumers reduce their consumption and change behaviour. This absence is key as it can crucially help with affordability and would also bring significant wider economic benefits by using local workers – for tasks such as insulation – to reduce the balance of payment deficits.
The UK government’s pro-growth agenda should go hand in hand with energy security and climate change mitigation. Only by reducing the financial risks of dependency on volatile fossil fuels and the socio-economic risks from climate change can there be a stable investment environment. The pathway to achieving this has already been laid out in the UK government’s Net Zero Strategy published in November 2021. While it is by no means perfect, it did propose a framework for decarbonization, including a requirement for a zero-carbon power sector by 2035, a phase out of natural gas boilers by 2035 and an end to the sale of new petrol and diesel engines by 2030 which all rapidly reduce dependency on fossil fuels whether imported or not.
However, the proposed expansion of the exploitation of fossil fuel reserves, alongside the suspension of a levy for green energy and energy efficiency, sends a negative signal internationally about the UK’s climate change commitments.
Concerns have been further raised with the announcement of a review to ‘ensure the UK delivers net-zero by 2050 in a way that is pro-business and pro-growth’. Anxiety about the direction of the UK has also been expressed from the private sector. In fact, this week, a letter was sent by over 100 major businesses urging the UK prime minister to continue to prioritize policies that will address the crisis within the framework of a robust net-zero strategy.
The review on the delivery of net-zero will be an important test for the Truss administration especially as the UK is still the president of the UNFCCC process until COP27 in November. The high fossil fuel prices and instability of energy supply that are now being experienced in the UK and around the world should be an accelerant of the clean energy transition and not an opportunity to pander to incumbent industries or, even worse, the anti-climate change agenda.
Antony Froggatt, Senior Research Fellow and Deputy Director, Environment and Society Programme.