ENERGY

WITH Russia playing hardball with natural gas supplies to Europe, and the power links between France and Britain temporarily disabled due to a fire, it should finally be dawning on our politicians that as worthy as Britain’s dash to be the G7’s greenest economy may be, our current system of energy supply is woefully ill-equipped to cope with the transformation.

The UK Business Secretary, Kwasi Kwarteng, is trying to cobble together a temporary rescue plan for the food supply chain and gas supplies.

What is certain is that consumers – both ordinary households and big energy users such as the steel industry – face horrendous price increases which could trigger a catastrophic rise in inflation.

The greatest paradox in the present energy crisis is that it has set off a chain reaction: there is a shortage of cheap gas to fire up fertiliser plants which, in turn, produce the carbon dioxide needed to keep food supplies plentiful.

In other words, the UK’s determination to become carbon neutral has drawn attention to the important role of CO2 – vital for the food and drinks industry – actually plays in our day-to-day lives. What is potentially really humiliating for Boris Johnson’s government is that this debilitating episode comes on the eve of the COP26 climate change conference in Glasgow that starts on October 31.

What the crisis reveals is the shocking geo-political naivety over the years of this country’s leaders when it comes to energy policy. The current policy is still highly dependent on natural gas. And it assumes that natural gas, which globally is in plentiful supply, will always be available as a backup when wind turbines fail to turn, and our aged fleet of nuclear plants are shut down for maintenance.

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BUT it is an energy policy that assumes there is a benign regime in Moscow, open shipping lanes in the Middle East and that interconnectors – or power links – between the UK and France and the UK and Norway are in fine fettle.

Yet if just one these assumptions proves mistaken, gas supplies are reduced and the price of the natural gas that does arrive soars.

Among the reasons that German Chancellor Angela Merkel has been so fawning towards President Putin is that she recognises he holds the whip-hand on gas supplies.

That is because Gazprom, the Russian energy behemoth, controls the flow of gas from deep in the Urals into Germany as well as much of the rest of Europe, including eventually Britain.

The fact is that the UK is at the end of a very long pipeline, with supplies pretty much dependent on what Putin decides. And yet we have an eco-minded government that, because of its determination to meet strict carbon targets, is determined to end our use of coal and reluctant to grant new oil-drilling licences, for instance, to firms wishing to further develop the Cambo oilfield near Shetland.

Other European nations, such as the Netherlands, have dealt with the Moscow threat by building huge storage capacity which can withstand months of disruption. In the UK, our biggest storage site at Rough off the coast of East Yorkshire was shut down in 2017 because of safety and leakage concerns.

The belief was that secure liquid natural gas supplies, arriving from Qatar would ensure constant availability.

That judgment has proved flawed. The surge in gas prices in August and September has been truly alarming and is why the fertiliser processor CF Industries – American owned and quoted on the Nasdaq stock market – closed-down its operations, strangling supplies of carbon dioxide for the food industry.

Carbon dioxide is used in the nation’s abattoirs for stunning livestock before slaughter and has led to protests from the pig producers and turkey specialists. In frozen form carbon dioxide is used to produce the dry ice required to deliver fresh meat and poultry supplies to supermarket shelves safely.

In much smaller quantities, and no less important, dry ice is used to keep the Pfizer Covid jabs fresh on their way to vaccination centres. Even if new supplies of natural gas are secured, there will be the impact on inflation.

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AND the numbers are startling, with the price of wholesale natural gas climbing by a staggering 800 per cent in August. That alone could add up to £400 to energy bills this autumn – particularly for those customers of small energy companies that have collapsed – leaving those least able to pay without heating in their homes.

The great breakthrough of a competitive energy market, where consumers can change suppliers at a click of a mouse on price comparison sites, is vanishing before our eyes.

The new players are falling like ninepins with four going into liquidation in recent weeks and many more on the danger list.

OFGEM, the regulator, will likely have to raise the cap, the highest average price for households, to a much steeper level.

The point is that energy prices do not stand alone.

They form a large part of the costs of every domestic manufacturing process including steel, cars and food. The UK’s consumer price index soared to 3.1 per cent in August, in a development which the Bank of England describes as transitory (temporary).

That increasingly looks far too optimistic. The inflation genie has been released and getting it back in the bottle could be hugely disruptive.

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INSIGHT

. How has this energy crisis come about?

The reawakening of the global economy following the Covid pandemic has driven the demand for gas, both to heat homes and fuel power stations producing electricity. This has caused prices to surge. The UK is reliant on expensive gas imports in the winter via connector pipes from the continent, Norway and Russia, which has capped supplies. Wind levels have also been below expectations, making us more reliant on gas, nuclear and coal.

. What about energy bills?

Wholesale gas prices for winter are up 68 per cent in the past five weeks, and the price cap for household utilities from watchdog OFGEM is rising too. Some 15 million will see annual increases of £139, with more pain expected from next April.

. Why are small suppliers failing?

They offered cheap long-term tariffs to millions of households when wholesale prices were low, but then faced huge losses. Larger suppliers protected themselves – to an extent – by purchasing energy long in advance.

. What about their customers?

OFGEM transfers customers of collapsed firms to a new supplier. There is no risk people will lose power – but they will find themselves on much higher tariffs, likely to cost at least £400 a year more.

. What is the Government doing?

Ministers have held talks with their Norwegian counterparts in the hope of securing strong gas supplies through the winter. They insist there is no risk the lights will go out.

. What’s the link to food supplies?

A US company running fertiliser plants in Teesside and Cheshire shut down as the high cost of energy meant they were no longer economically viable. The sites produced CO2 gas which is vital to the entire food industry.

Business Secretary Kwasi Kwarteng has held talks with the US firm, CF Industries, in the hope production will restart. The Department for Food and Rural Affairs is also holding meetings with industry chiefs. It is likely that a taxpayer-funded solution will be found to minimise food shortages.

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Thursday, 23 September

FEARS that Russia will starve Europe of vital supplies have been heightened following concerns from financial markets that British wholesale gas prices for October have shot up 16 per cent at the start of this week. The compounding effect on restricting supplies is starting to hit hard.

Moscow is restricting the amount of gas supplied to the Continent via Ukraine next month, according to market results of a key gas auction.

The decision will exasperate fears that Russia is rigging prices to undermine the UK and the EU’s economic recovery from Covid-19.

There are also signs that Moscow could send less gas in through another pipeline, the Yamal-Europe. Russia is thought to be withholding gas to pile pressure on European leaders to switch on a controversial pipeline, Nord Stream 2, which is built but still needs final approvals.

The squeeze on Europe next month will compound a mounting energy crisis in Britain that threatens to bankrupt dozens of small suppliers, bringing the meat industry to a halt and leave beer taps running dry.

At the same time, the National Grid is turning to “dirty coal” to help keep the lights on.

The UK’s three remaining coalfired power stations are on standby – or already being used – to fill gaps in the energy supply system. In September last year, coal was responsible for 0.5 per cent of UK electricity supply, but at the beginning of this week it was running six times higher at 3 per cent.

UK gas prices for October surged by 16 per cent to reach 188.1p a therm, while benchmark European gas prices rose by 16 per cent to 75.33 euros per megawatt hour.

The energy crisis has been brewing for several months, with low European supplies being a key part of this.

A long winter last year meant there was less stored gas going into summer, but Russia providing less also means countries have not built-up critical stores ahead of this winter.

Russia’s decision to cap additional supplies to Europe next month means time is running out. Storage facilities are around 72 per cent full – a level not seen at this time of year for around a decade.

The UK does not have any of its own gas storage sites, and a cold winter could force EU nations to send less power to the country.

Britain’s three coal-fired power stations are West Burton A in Lincolnshire, run by EDF, Ratcliffe-on-Soar, Nottinghamshire, owned by Uniper, and the Drax power station near Selby, North Yorkshire.

West Burton A has been fired up on several occasions in recent days in response to requests from the National Grid. And it now seems likely the country will be more reliant on coal-fired electricity this winter.