Is Britain being left out in the energy policy cold?

06 Apr 2022

Russia’s invasion of Ukraine has caused a rethink of energy policy in the EU, US and UK, with the most obvious shift being the decision to phase out imports of Russian oil and gas. Changes are complex, not least as energy security, affordability and decarbonisation objectives all need to be considered, and are deeply political. In this blog we critically examine some new EU policies, whilst also questioning whether the UK is being left out in the energy policy cold.

The EU’s new strategy, REPowerEU, involves an acceleration of many already well-known, as well as some new, energy policies. These include, at member state and/or EU level: subsidies and vouchers, regulated prices for vulnerable customers, temporary changes in EU State Aid rules and taxes on windfall profits, minimum gas storage obligations, efficiency improvements and demand reduction, more rapid roll-out of solar, wind and heat pumps, and a hydrogen accelerator.

In this blog we focus, however, on two specific new policies.

New policies: LNG imports & the EU common purchase platform

Firstly, a new liquified natural gas (LNG) supply deal commits the US to work to supply the EU with 15 billion cubic metres (bcm) of additional liquified natural gas (LNG) this year. The EU plans to reduce gas imports from Russia by two thirds by the end of 2022, and to phase out all Russian fossil fuel imports “as soon as possible”, or well before 2030. Deliveries of US LNG to Europe have already surged in early 2022 driven by record high prices in Europe. Of course, 15 bcm comes nowhere near replacing the 155 bcm, or 45% of the EU’s gas, that it imported from Russia in 2021, and the EU plans to import an additional 50 bcm of LNG this year from all sources. Finding these additional sources of supply will also be critical to achieving the target of filling storage to 80% ahead of next winter. A new US-EU task force is being established to ensure that EU countries receive about 50bcm/year of additional US LNG between now and 2030.

Secondly, and just as importantly, the EU has adopted a voluntary common gas, LNG and hydrogen buying strategy, to capitalise on the better negotiating and buying power of the bloc. Interestingly, the common purchase platform will be open for Western Balkan countries and the three associated Eastern Partners, but not the UK. Beyond the international negotiating power that this may lend the EU, this new approach more closely infers a common EU energy sector, whilst the energy mix of each country is currently determined nationally under European Law. It is also the case that it is companies, not countries, that orchestrate energy trade in the EU’s liberalised internal energy market. Thus, it is difficult to see how the strategy will actually be implemented, but doing so might infer more ‘state’ and less ‘market’.

Will these policies work? Security & decarbonisation issues

It strikes us that these EU emergency measures may not represent the security trump card that it imagines. Historically, Russia has earned far less from its gas exports than it did from oil. However, recent record high gas prices have turned that situation on its head. In order to guarantee supply, any LNG exports from the US to the EU will be paid for at a premium to prices available elsewhere in the world, diverting supplies away from other countries. It may even result in a bidding war sustaining high prices for longer and giving Russia an extra dividend. A more effective EU response, surely, would be to focus on reducing reliance on Russian pipeline gas imports in the medium- to long-term. This would buy time to build up LNG export capacity in the US and Qatar and improve connections to existing EU terminals. This time could also be used to improve EU energy efficiency, boost renewables and heat decarbonisation to drive down demand for gas. Indeed, investments in gas infrastructures to boost short-term imports would exacerbate the risk of stranded assets.

Is the UK being left out in the cold?

The UK seems to stand somewhat alone in relation to these new energy policies. It has clearly aligned itself with ‘the West’ against Russia, not least in its decision to also wean itself off Russian oil and gas, and its support for the Ukrainian military since 2014. However, as it is no longer a member of the EU it is not part of the US-EU LNG arrangements, nor is it part of the common purchase platform.

This relative energy isolation matters in different ways. In foreign policy terms, it suggests that the UK may not be the major player on the world stage that Brexiteers imagined it to be. It also makes very little geographic or practical sense. The UK has three LNG terminals, it sits squarely between the EU and Ireland and the US, and is inter-connected to mainland Europe via gas and electricity interconnectors. Given the EU’s need to increase LNG imports the UK’s LNG terminals could be of considerable use, but they do not even appear on the EU map of regional terminals.

Isolation also has ramifications for the ability of the UK to import more LNG near-term, in support of its own attempts to stop Russian imports by the end of the year, and potentially the price it pays. Significant volumes of US LNG have already been delivered to UK terminals, but a lack of domestic storage capacity has meant that much of this gas transited to continental Europe.

The implications of less co-operation with the EU

Lessened energy and climate coordination has also had implications for the EU and UK’s considerable expansion plans for wind in the North Sea. The current situation, along with the re-emphasis on electrification and renewable growth, means that the new EU-UK trading and interconnection terms that were promised by April 2022, including a return to implicit trading, are now more needed than ever.

Despite being significantly less reliant on energy imports from Russia, the UK has not been insulated from sharp price rises in recent months. This is an important lesson for the UK. Being part of the European price zone transcends Brexit and, given its relative size, the UK is likely to always be a price taker rather than a price setter. Equally, just like the EU, the UK is exposed to price competition in the global LNG market. These events, and EU policy responses, make clear that there are implications for the UK of being exposed to the EU’s energy diplomacy whilst having little ability to influence it.

The UK’s new energy strategy in relation to the EU

There have been suggestions that, as a result of Brexit, the UK might become ‘nimbler’ in policy terms. Certainly, the UK’s reliance on Russian fossil fuels is lower than the EU’s, making it easier to reduce imports – but that would also have been the case were the UK still part of the EU.

The UK has delayed its new energy plan a few times, and it is now due later this week. Most policies rumoured to be in the plan could have been undertaken as part of the EU except, maybe, the drive to expand nuclear power. Boris Johnson recently announced that the UK will get 25% of its electricity from nuclear, whilst there are also rumours that the UK state will take a stake in Sizewell  C, via a development company. These policies would have been very difficult under previous EU State Aid rules. However, changes being discussed in the EU might well allow this kind of state investment, particularly now that nuclear energy has been included in the EU Taxonomy for sustainable activities.

There are other EU policies that the UK is missing out on. Given that UK households are very exposed to high energy prices, not least because of the UK’s old and inefficient housing stock and stalled energy efficiency policy, policies that provide social support through turbulent sustainable transitions are sorely needed. The EU, meanwhile, has progressed its thinking in terms of affordability and has made commitments to a more just transition, partly through its ‘Just Transition Mechanism’ and its plans for a new ‘Social Climate Fund’.

Concluding thoughts

There are, then, seismic shifts ongoing in energy policy. The UK is excluded from some key EU policies, is taking longer to revise its own energy policy, and is very exposed to high prices, whilst RePowerEU creates externalities for those outside the bloc. The UK will have its work cut out trying to deal with this new energy context on its own, whilst also concentrating significant resource on balancing near and longer-term energy trilemma goals.