26 August 2022

The Tories didn’t cause the energy crisis – but they have made it much worse

The UK has been left exposed to dwindling supply and rocketing prices by poor political choices.

Photo by ANDY BUCHANAN/AFP via Getty Images

Well, now we know: today Ofgem announced that from October, energy bills in the average household will hit £3,549 a year. Considering 68 per cent of British households have an annual income of less than £30,000, the rise will push 8.9 million homes into fuel poverty (defined as spending more than 10 per cent of their income on keeping the house warm and the lights on), according to National Energy Action.

The main source of the energy price rise is, clearly, Vladimir Putin, whose power over Europe’s energy security has been laid bare in the six months since Russia’s invasion of Ukraine. It’s also tempting to lay some of the blame at the doors of energy suppliers, who announced mammoth profits, record dividends and huge share buyback schemes as the prices of oil and gas climbed.

But the Conservative government also deserves its share of blame for this, having missed a litany of opportunities to increase the UK’s energy security.

Let’s start with David Cameron’s instruction to aides, in 2013, to “get rid of all the green crap”. In the wake of that comment, there were cuts to onshore wind projects, solar subsidies and energy efficiency schemes. Earlier this year research showed that those decisions now cost every British household £150 a year.

The “green crap” would have been a very prudent investment: solar power is now 88 per cent cheaper than the government expected it to be a decade ago, according to Simon Evans of Carbon Brief. This is not a one-off event: each year the Department of Business, Energy and Industrial Strategy (BEIS) publishes its forecasts for the costs of various types of energy over the next decade. As one senior insider at an energy supplier told me: “It repeatedly gets it wrong. It always assumes that renewables are going to cost more than they do… They just consistently underestimate the benefit of innovation and of change.”

Instead, the Conservatives kept the UK hooked on gas: four fifths of homes are still heated with it, while more than half our electricity is currently generated by burning it. Earlier this week European gas prices soared by more than 10 per cent, putting them close to €300, more than 14 times their average. That was triggered by an announcement from Russia that it was planning maintenance on its Nord Stream 1 gas pipeline to Germany – having cut flow to 20 per cent of capacity, the announcement effectively dangled the possibility that it might cut off supplies altogether, which caused Germany to take as much liquefied natural gas (LNG) as it could.

While Germany is more dependent on Russian gas than the UK, it can prepare with its large LNG storage facilities. Britain, not so much. Figures published in September showed the UK has storage capacity for just 2 per cent of annual gas demand, compared with between 25 per cent and 35 per cent in Europe’s four largest storage holders. Before 2017, the UK had 70 per cent more capacity – but Centrica shut down its enormous Rough storage facility, 18 miles off the coast of Yorkshire, which had the space to store enough gas to keep the UK warm for ten days, because it had become too expensive to run without government support. At the time, the government barely shrugged. Now, it is pushing for it to be reopened, at a cost of £2bn – although according to the Telegraph it may only return to a quarter of its capacity this winter. “It’s basically too late,” said Mike Foster, the chief executive of the non-profit trade association Energy and Utilities Alliance.

Finally, lest we forget, there is the mass failure of small energy suppliers last year, which should perhaps have been the canary in the coalmine of the UK’s energy market. In the 1990s, the government relaxed rules around energy supply – and by the 2010s, dozens of new suppliers had sprung up. “They seemed to be, from what I can make out, set up in people’s garages,” said Foster.

When those small suppliers went bust, their customers were moved to larger, more dependable ones. The problem was that those larger suppliers had already secured a price for their existing customers in advance (a process called hedging). What they hadn’t done was plan for huge increases in the number of households suddenly added to their books – so they had to buy additional energy at higher prices. The extra cost of buying energy for millions of people at wholesale prices has been added to the standing charge – the fixed daily amount we all pay our energy suppliers, no matter how much we use.

“I think that standing charge doubled at the last price cap to pay for energy supplier failure,” said Foster. “By definition that is unfair to people who make lower uses of electricity. People who are very careful about their use are still paying the cost of failure.” The situation is so severe that even the regulator, Ofgem, is becoming jumpy: last week one of its non-executive directors, Christine Farnish, resigned, telling the Times that Ofgem had not “struck the right balance between the interests of consumers and the interests of suppliers”.

Meanwhile, the Tory leadership candidates are proposing to combat the problem by ditching green levies, which make up less than 3 per cent of energy bills, and removing solar panels from farmland. Such bluster indicates the Tories’ lack of foresight has not disappeared. It seems that, whoever wins the leadership race, the UK’s energy problems will almost certainly not be solved by a Conservative prime minister.