As an FT newsletter notes this morning:
The UK's largest energy suppliers are requesting a multibillion-pound emergency support package from the government to help them survive the crisis sparked by high gas prices, including the creation of a “bad bank” to absorb potentially unprofitable customers from failing rivals.
The fear is that smaller, so-called ‘challenger', companies could go bust because of record wholesale costs of natural gas and electricity.
As the FT notes in another piece this morning:
Benchmark European gas prices have already tripled this year. Norway's Equinor, one of Europe's biggest gas suppliers, said last week that high energy prices could last well into 2022 and warned of possible price spikes.
A number of very obvious thoughts follow, plus some that may be less so.
The first is that this move shows how rigged the supposed UK energy market is. If this supposed market can only work on the basis of regulation and government support it is not a market at all. Why we have to suffer the cost of this sham is hard to work out when at the end of the day there is, in effect, a single national gas supply and the so-called market never actually changes what come out of the pipe we are connected to. The sooner utilities were nationalised to recognise this reality the better.
Second, even though some consumer facing energy companies will be facing bankruptcy in the situation that has developed this does not mean that there isn't profiteering going on. There clearly is. The cost of producing gas has not risen. All that is happening is that increased demand as the economy reopens is being reflected in increased prices and gas producers are profiteering from it. Of course, in the largest cases these producers also have consumer facing supply companies as well. The exploitation will be very obvious in their accounts, but the abuse is permitted by UK regulators. The question as to why that is has to be asked.
Third, I can't help but think that there is a certain degree of politicking going on here to suggest that we cannot do without gas as the climate crisis develops. What this current price increase really says is that we need to develop the alternatives to gas as fast as possible, but that will not stop the politicking continuing. I read game play into all this more than I read almost anything else. The smell of an artificially created crisis is very high. Pre COP 26 I sense an industry sending a message that it should be allowed to expand when the opposite is required.
Fourth, in that case the need for a windfall tax is significant. And it could be done. All the major gas producers will be producing country-by-country reports for tax purposes. These could readily be adapted to indicate appropriate profit allocations to jurisdictions that could then be subject to excess profit taxes. International agreement is not required in that case. Political courage would be though.
Fifth, I have to change my mind on an issue: there will be inflation as a result of this. The external shock that might create this has now arrived. It did not exist before, and now it does, not leat because of the spillover consequences already being highlighted in supply chains.
Sixth, whilst I doubt that the inflation in question will exceed 4% to 5%, and it will be temporary, for large parts of the UK population this is going to be a considerable burden to bear. Wealthy households will be able to shrug off fuel price increases that will have been covered many times by the value of increased savings resulting from quantitative easing inflated asset prices. But a majority of households will not be in that situation. They will simply see this as another cost to add to extra national insurance, a loss of universal credit, other price increases, and all offset by limited pay increases at best. For many this is going to be a very tough winter, and the government is going to do nothing about it.
Seventh, the interest rate fetishists will be demanding interest rate rises because of this even though such an increase would do nothing to address this type of inflation, which is beyond the reach of monetary policy. If they succeed the risk of Bank of England induced recession is significant.
Eighth, this feels like another part in the systemic failure I mentioned a few days ago: we have constructed a wholly artificial market in energy that cannot manage the world we now live in, and the consequences are real as the failure imposes cost. How many times must we now suffer this?
Are there any upsides? Not unless there is the courage to act to tackle the fundamental underlying issues that I note. And I do not see that. I sense already that all the effort will go into saving the faux energy market and not into helping real people with the problems that they face. So much for levelling up.
Thatcher delivered the foundations for this mess. Her plan has failed, as it was always apparent that it would. But are we willing to move on now that is clear? That is the big question.
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Yep – that’s all I could think of on the way into work this morning – ‘market failure’ yet again.
Pre-covid there was the usual demand for gas and energy in general. During covid the demand would have fallen but we did not see a dramatic fall in wholesale gas prices and neither supposedly did an increase in storage of gas occur which you should see when there is a dramatic fall in demand.
Post covid an entirely predictable and expected increase in the demand for gas has happened back to the pre-covid levels. There is no massive increase economic activity in excess of pre-covid or indeed pre- financial crisis of 2008.
Clearly there is no normal market for energy. It is a monopoly creating monopoly super profits.
Clearly there is no Government energy policy given that these variations in demand are entirely predictable.
Clearly there is no credible opposition to Government because no-one is pointing out the obvious failures of Government to manage the UK state whether that is in energy, covid, paying pensions to those who are eligible, foreign policy, the crisis of displaced peoples, social care provision, the collapse of the justice system, corruption in planning and the so called honours system and any number of other areas.
In any other period of history this rampantly incompetent and corrupt government would have been replaced. The sadness is there seems to be no-one with the political skills to replace them.
As PSR says, more market failure. I always thought that privatising something as basic but vital where the product being sold is identical (gas is gas, electricity is electricity) was a piece of ideological stupidity. Ok, there has been some innovation in how energy is supplied in the form of companies like Good Energy (my supplier) and Ecotricity which have been set up with the purpose of combatting the climate emergency by building renewable energy infrastructure.
Dale Vince, the founder of Ecotricity was on R4 this morning. He said that there were two types of energy company effectively. Those who’d hedged their gas supplies and those that hadn’t and are or will be going bust. He noted that other companies wouldn’t take on these people as customers as they’d signed on as customers with contracts that meant the companies were locked into supplying them with cheap gas; the moment gas prices went through the roof, these companies were in deep trouble.
His solution? Build renewable capacity like crazy for the next ten years to get to having a 100% renewable supply. The obvious question though, is who’s going to do this?
Only the government can
And unfortunately, we have a government that is staggeringly incompetent from a party of narrow minded ideologues who are obsessed with a small state low taxation anti public sector agenda, and the absurd belief that the market is always the most efficient way to do things.
Not in this instance. I appreciate there are innovative companies in the sector who are committed to renewables, but to make the changes on the scale and in the timescale required needs the power of the state, using its ability to create money and borrow more cheaply than any private company can do. As you’ve pointed out Richard.
Incidentally, the afore mentioned Ecotricity are busy making a hostile stock market takeover for good Energy. As a Good Energy shareholder I’ve got their notification, and Ecotricity’s offer. Hmmmmmm…
Agree. A priority for any national government should be to provide energy security for your country. Energy is essential for modern life. The failure to provide is a failure of government.
Denmark did better. Their national oil and gas company DONG became Oersted the world leader in off shore wind. Guess who has even better offshore wind potential than Denmark! I agree with Dale Vince. Should have seen heard the call (of the wind!) years ago.
Agreed
And Scotland should really be heeding those now
I disagree. Renewable developers are perfectly capable of buidling out renewables at a rate of knots. a 700MW off-shore wind farm can be & has been built from a “standing start” (= kit on the quayside) in 8 months (Jan 2020 – Oct 2020 Borsele 1 & 2 – Orsted). Rasing money for RES is not a problem.
The problem is that most countries still like to act as “gatekeepers” even though most renewables can now be built with no subsidy. Of course there is the related problem of the network operators/mafiosi who are a law unto themselves and which, in no small part make sure that RES when it is built costs more than it need to.
In the UK, it is difficult to see why the UK clown gov want’s to act as a gatekeeper for RES – but once one recognises that for the toryscum party brown envelopes from the oil&gass mafia are vital – things come into perspective.
To conclude: developers are happy, willing & able to build out renewables – fast. The current gov does not want that – because this would cause the governing party “problems”.
I’m happy to be corrected
Perhaps an equally pertinent question as ‘are we willing to move on’, considering the current political system and culture in the UK, is – how?
Well, Tom I shall be attending an online discussion hosted by The Guardian regarding Labour’s electoral chances so I suppose that might provide some ideas. Given that we have a government of immoral lying chancers who are fixing the electoral system to make sure they stay in power for ever, it had better be good from Labour.
Declaring a coalition of non right wing parties to fight the next election would be a start.
[…] Cross-posted from Tax Research UK […]
Electric heat pumps are the answer. Developers are still building houses with gas boilers. I see them going up.
I have just got rid of my ancient back boiler for a heat pump system. I use gas only for cooking now. That may go too as I’m considering a switch to an induction hob.
Energy policy is a mess. Generators close to London get paid to generate power. Those more distant have to pay through the nose for the ability to feed power into the grid. So an offshore wind turbine field off the Scottish coast can be charged £1m just to connect.
Add in WM’s removal of subsidies and installation has stalled or slowed just as we need more non gas production. Scotgov doesn’t have the cash though it has used the planning system etc to make it as easy as possible.
Scotland can produce an excess of renewable energy now. But we have the potential for far more. There are consumers outside of London who need power too. Stop this ridiculous tax on power generation.
There’s no silver bullet. Heat pumps basically use a rather smaller amount of high-grade energy to make rather more energy available as low-grade heat. That means there are [at least] two necessary conditions for heat pumps to be useful:
1 – The mechanical (ie electrical) energy used to run them is not thermal / fossil-fuelled. Otherwise you are simply using a more complex system with higher embodied energy to stay (at best) just where you were before. Net loss.
2 – They are used in buildings that are very well insulated, and with adequate heating surfaces to operate with the low grade heat they can produce. That is, as you imply, much easier done with new build than retrofit.