30 September, 2021

By Dr John Rhys

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Energy crisis? Market failure, incompetent government, Covid, or just another manifestation of Brexit

Nothing better illustrates the complex interdependencies in modern economies than the cluster of interrelated threats now hitting the UK with high gas prices, gas company failures, HGV driver shortages and supply chain problems and shortages of CO2 – all interacting and impacting on food supplies, supermarket and fuel deliveries, and retail price inflation. So, looking for the OBE – One Big Explanation – is a mistake.  But the explanations, excuses and blame-shifting currently in evidence are interesting and various. As usual, they will include personal prejudices and ideologies as well as informed analysis. Here are a few from the last few days, and an attempt to give a considered, but still personal, verdict on each. The perspective is an examination of the UK response to both global trends and UK circumstances.

In energy at least it’s just the global gas market and supply shortage. There are multiple causes, and all we can do is try to mitigate the impacts. 

This contains an essential truth, with a well-established willingness to pay much higher prices (for LNG) in Far East markets, together with more immediate and temporary factors such as weather or low renewables output triggering dramatic spikes in gas prices. But in spite of meeting up to 50% of demand from domestic production, UK prices remain highly exposed to international markets and possibly have surged more than elsewhere in Europe. Decisions to leave the EU’s single market for energy, and to make Britain more “independent”, plus reduced reliance on storage, are additional factors that may be exacerbating the UK crisis. Verdict. Global and more regional, European, factors and trends are real and substantial; but the obvious criterion for judging UK government and institutions is UK performance in comparison with other EU countries, most of which are significantly more import dependent.

Covid?

It is hard to see why the fading impacts of the covid pandemic should be very different in the UK from the impacts in other countries which have suffered very similar levels of infection. Verdict. Covid will have affected everything in the last 18 months, but as an all-purpose excuse, this is starting to sound rather tired.

It’s all down to our obsession with climate change, and trying to go green, at the expense of energy security. 

So, if we had doubled down on our dependence on gas, we would be better placed to manage a global tightening of gas supplies? Prima facie, earlier moves to low carbon sources, renewables or nuclear, would have reduced gas import dependency and mitigated the current crisis. One might also more justifiably argue, in relation to the related CO2 shortage, that Osborne’s highly controversial 2015 cancellation of carbon capture projects (essential components of global low carbon climate strategies) deprived us of an obvious alternative source of CO2. This would at least have reduced the risk to food production that was an indirect consequence of the gas price spike, and avoided the need for a government subsidy to CO2 production. These potential supplies might well have been in the wrong place or lacked delivery infrastructure, but this is at least a logical response to a silly argument. Verdict: blaming Green policies to reduce fossil dependency is both counter-intuitive and, in this instance, simply wrong.

Turning to the transport sector, other long-term trends, including demographics and an ageing HGV workforce, are to blame. Other countries face the same HGV problems. 

These are exactly the trends markets are supposed to anticipate, manage and remedy, eg via higher wages and industry training initiatives? The UK has been particularly badly hit, largely due to the post-Brexit exodus of EU drivers. Verdict. These are trends that should have been anticipated, so this is a partial explanation or excuse at best. Comparison with other European countries, which do not have empty shelves or petrol queues, is instructive.

Failures in the design and regulation of UK energy markets. 

Electricity trading arrangements do not deal adequately with reliability. Consequently, in the power sector, the government has already assumed de facto responsibility for capacity planning. But the current crisis is primarily in gas and responsibilities for security are less clear than in other parts of the energy sector. Traditionally, public utilities supplying essential services like gas were regulated monopolies for a reason. Competition, the Tory and Thatcher mantra for decades, should have been fine provided there was a means of enforcing an obligation to supply on all market participants. Absent that, together with a weak regulatory framework and no clear responsibility for delivering reliability, and problems begin. There is every incentive for aggressively competitive suppliers to undercut more prudent suppliers who have covered their commitments to consumers by contracting for firm future supplies, sometimes at a higher but guaranteed price. This can lead to gambling on permanent excess capacity and the assumption that spot prices will always be low. Failure to anticipate price spike risk puts some companies in trouble and leads to systemic risk for the sector and government bailouts. Verdict. This is a regulatory and policy failure by the UK government, over decades, but it is also a major factor in the current crisis.

It’s Brexit, stupid! Brexit adversely affects both the transport and energy sectors.  

Undoubtedly the loss of EU drivers is a major factor, probably the biggest, in reducing HGV capacity. But Brexit has also made haulage less efficient. It limits the cabotage rights which made UK (and EU) haulage more efficient. A truck from Spain dropping fruit in Glasgow could pick up dairy in Glasgow for delivery in Hull, then fish in Hull for delivery in Madrid. Ending cabotage is equivalent to reducing effective HGV capacity.

Trade with Europe in both gas and power remains important for our security. Brexit inevitably puts more friction into that trade, though this may have so far had at most only a limited impact on exchanges of power or on energy security. But it could become a significant factor in a more serious energy crisis, just as in other supply chains. Verdict. Brexit consequences, positive or negative, inevitably impact almost every aspect of the economy – including energy, transport and trade.  

It is the downside that is currently in evidence, summed up in the following quote. “Energy price hikes, empty shelves, chronic labour shortages, tax rises, rampant inflation and that’s before we start talking about farming, fish or the motor industry. Where is the Brexit Wonderland we were promised?”