Briefing paper
Review of Energy Policy 2021
Dec 2021
By UKERC Director, Prof Rob Gross
One of the most immediate impacts of the horrific Russian invasion of Ukraine was a two-fold jump in the price we in the UK pay for gas, taking the price above the unprecedented high seen just before Christmas 2021.
To put this into perspective, prices immediately prior to the invasion were already approximately five times the ‘normal’ level that the price fluctuated around for the previous 10 years. Oil and gas prices have always been volatile, but price swings of this significance have never been seen in the gas market and were last experienced in the oil market during the ‘oil shocks’ of the 1970s. We also know that any increase in the prices of oil and gas directly benefit the Putin regime.
Despite the sanctions and other responses from Western governments, Europe is still buying gas from Russia. The EU relies on Russia for about 40% of its gas consumption. It is not possible to turn off the taps without huge disruption and genuine hardship.
The UK situation is rather different because the bulk of our gas comes from the North Sea – either our own reserves or from Norway – and most of the rest comes in the form of gas by tanker, or LNG (liquefied natural gas). Some UK LNG has come from Russia, but according to the UK Government less than 4% of UK gas originates in Russia.
Despite this, we all pay the same high prices, and even if we do not directly consume (much) gas from Russia, UK demand for gas is part of the global appetite that Russia helps feed. LNG imports to the UK transit to the EU through our interconnectors and Norway supplies both the UK and other European nations. In short, across Europe at least, we are all in the same boat and need a trans-European approach to the crisis.
It is interesting therefore to consider the ten-point plan to reduce reliance on Russian gas in the EU, announced last week by the International Energy Agency. If all the advice were followed, EU imports from Russia could fall by a third. Obviously, the UK has left the EU, but many of the recommendations the IEA makes for mainland Europe also apply here.
UKERC experts are often asked what can be done to reduce demand for gas, or to respond to high prices. We have been arguing since 2017 that the UK should be taking a more strategic approach to the management of gas as we transition to a lower carbon future. However, the only very short-term answers lie in the domain of financial transfers to vulnerable consumers (for example tax relief or hardship payments) and perhaps a mechanism to stabilise prices.
Looking further ahead most countries can do more to reduce demand and diversify away from gas, through improved energy efficiency, accelerated renewable energy deployment and the roll-out of electric cars and heat pumps. So, what does the IEA recommend and how applicable is it to the United Kingdom context?
The 10-point plan includes advice to governments not to sign any new gas contracts with Russia’s Gazprom, not renew expiring deals and to set a minimum obligation on companies to store gas. These recommendations have least relevance in the UK because we have no direct pipeline to Russia and (in hindsight perhaps regrettably closed our last large scale storage facility in 2017). Whilst the UK buys most of its LNG from the Middle East and North America, it can and has bought LNG from Gazprom.
The relative absence of storage is a concern for Britain. This is because as other countries in Europe fill their storage during summer the effect will be to keep prices a little higher. Come winter though, they will be able to use the stores as a buffer against the highest of the price swings. The UK can access this gas through our interconnectors into Belgium and the Netherlands, but the gas will only flow here if the price paid is high enough. In short, whilst the UK has a very diversified set of sources of gas, we will have to pay the prevailing price to get it.
The other IEA recommendations allow for interesting comparisons between the UK and our neighbours. The headline grabbing recommendation is to turn down thermostats by 1C. The IEA notes this could save 10bn cubic metres of gas in the EU. The UK has some of the draughtiest houses in Europe, so we could shiver more than most as a result, but there is no doubt that simple behavioural responses matter.
The water temperature in central heating may be above the level that maximises efficiency, windows get left open, hot taps running. The idea we can all help ‘do our bit’ by saving energy might well get popular support. But it is important to distinguish between the energy saving actions we can all take without detriment and the enforced lack of warmth and comfort faced by the poorest in society.
The ability to save energy is closely linked to progress on energy efficiency. This is another of the IEA recommendations and one that particularly chimes with UKERC advice and analysis. The UK has not been making decent headway with energy efficiency for almost a decade and quick and easy steps to improve insulation still exist in many properties. However, it would be wrong to think that we can galvanise huge improvements in energy efficiency in time for next winter. The skills and supply chain need time to build up. It is best seen as a medium-term priority, but action should start now.
The same applies to speeding up the replacement of gas boilers with heat pumps, another area where UK progress has been poor in comparison with some of our neighbours. Again, we need to see this as a medium-term solution and we need to get on with it.
The IEA also recommends maximising nuclear and biomass output (subject to safety constraints) and speeding up deployment of wind and solar. These are all areas where the UK has made strong progress in recent years and has particularly ambitious plans for offshore wind. The role of new nuclear will probably be controversial across Europe and it won’t be quick. However, the speediest renewables are the easiest to install – onshore wind and solar. The government recently reversed its opposition to onshore wind. Ground mounted solar and onshore wind are also the cheapest renewables.
The economics of small-scale solar may also look more attractive with high consumer prices. Like energy efficiency, capacity to install rooftop solar schemes can’t be created overnight, and the industry is still recovering from precipitous cuts to policy support made a few years ago. Small scale solar could be one of the biggest beneficiaries of current high prices because once lofts are insulated, and windows replaced it is often the quickest and easiest route for a household seeking to cut their bills – particularly if it is possible to use the energy generated within the home. With power prices soaring and solar prices a fraction of what they were even five years ago, solar schemes may make sense, for those able to bear the upfront cost.
The final recommendations from the IEA are perhaps the most arcane – to enact a ‘short term tax measures on windfall profits’ and ‘diversify and decarbonise power system flexibility’.
The windfall tax is probably the most controversial recommendation the IEA makes. The idea is that many energy companies will be profiting hugely whilst prices are high, as consumers suffer. This obviously applies to oil and gas firms but perhaps also to power generators who operate nuclear, wind and solar, as well as gas plants. Windfall taxes are not unprecedented in the UK, and it is likely that this idea will get increasing attention.
Low carbon flexibility is best understood as finding a way to manage the varying output of renewable energy without relying on gas plants. This has long been a focus of UKERC research and will be essential if we are to achieve net zero.
Overall, the IEA has provided a rallying call to European governments that applies on both sides of the English Channel. There are no quick fixes, but that does not mean we should not make a start on long-overdue actions like improving energy efficiency.
The appalling events in Ukraine have shocked us all, but the IEA is right to point out that we can all do our part to reduce financial flows to the Russian regime, reduce our bills and cut emissions at the same time.
The IEA 10-point plan in full