Hydrocarbons are soaring in price
Last year, Energy UK, the trade body that represents the power generators in the UK urged the government to intervene further to soften the impact of the continued surge in wholesale gas prices. Twenty six UK electricity-distribution companies went bust last year because the government’s price cap on the cost of domestic gas prevented them from passing on the increase in wholesale prices to their customers.
As a result, the energy price cap was recently raised by Ofgem from £1,277 to £1,970. Thus, from April onwards, 22 million households will be paying about 54 percent more to keep warm. About 30 percent of all electricity supplied to the national grid in the UK is generated by combined-cycle gas turbines, so the cost of electricity will increase too. It is predicted that many people will be plunged into fuel poverty.
Some politicians, such as Craig Mackinlay MP, who is chairman of the Net Zero Scrutiny Group of Tory sceptics, have proposed that VAT be suspended on domestic power. But this is currently set at just five percent so would not make much difference. More significantly, the suspension of environmental levies could reduce the cost of domestic electricity by up to 23 percent. Instead, the Chancellor announced a £9bn package of measures to alleviate the impact of rising fuel bills, mainly involving council-tax rebates.
The overweening reliance of many European states, particularly Germany, on gas supplies from Russia has been shown to be risky by the recent alarm over a possible Russian invasion of Ukraine. For Mackinlay and others, the obvious way forward for the UK is to develop the untapped reserves of oil and gas in the North Sea and to revisit the ban on hydraulic fracturing (fracking) to release shale gas.
In the US fracking is widespread and consumers pay one tenth of what their British counterparts pay for gas. Critics of government policy argue that it does not make sense to import oil and gas when we could be producing our own. They say we should stop demonising the oil and gas majors and stop threatening them with windfall taxes on profits which arise from very long-term forward planning and investment. People forget that oil companies already pay 30 percent tax on their upstream profits, as well as a 10 percent supplementary charge, compared to the 19 percent tax paid by most other businesses.
Meanwhile, the price of Brent crude has risen from about $64 a barrel 12 months ago to around $94 this morning. JP Morgan is predicting that crude oil will hit $150 soon. There is so little capital investment in the industry that the markets expect that supply will soon fall even as demand is sustained – and that means rising prices over the medium term.
In the UK, selected generators are paid by the government to ensure that they provide sufficient standby capacity to cover potential shortfalls at short notice, for example when the wind doesn’t blow. The scheme, which is ultimately financed by levies on energy bills, will have cost £101m this winter with standby power priced at £45 per kilowatt hour. In a recent auction for next winter’s reserve power, the energy price came out at £75 per kilowatt hour. So, the government subsidy will be £375m next winter, according to energy analysts Cornwall Insight. It’s not just the consumer who is being squeezed but the government too. One of the greatest beneficiaries of this scheme will be Scottish & Southern Energy (SSE) which owns numerous gas-fired plants. Gas is, according to COP26, the key ‘bridge fuel’.
Something has gone awry with the UK power network. If Jeremy Corbyn had won the December 2019 general election, no doubt the entire UK power industry would now be nationalised. The privatisation of the industry in the 1990s was supposed to ensure healthy competition, thus driving down prices. But by 2019, Theresa May’s government adopted the policy that Ed Miliband had advanced as Labour leader in the 2015 election – a price cap on energy bills. This at precisely the moment when the net carbon zero by 2050 strategy was enshrined in law.
We are constantly told that wind and solar power are the future. Yet as the price of oil and gas has exploded so shares in renewable-energy companies have been tumbling. Wind-power giants like Iberdrola, Vestas and Ørsted are down by around 45 percent over 12 months. One reason is that such companies are vulnerable to prospective rises in interest rates; another is that input costs such as the costs of steel turbine blades have been surging. But the main reason seems to be that the fossil-fuel sector, rather than dying a slow death as the eco-warriors foretold, is suddenly in rude good health. As a result, the opportunity cost of holding renewables has risen. Private-equity giants such as Norway’s HitecVision and the US’s Postlane Partners have been snapping up smaller European oil and gas firms in recent months.
If investors are falling out of love with renewable energy, there is a growing body of opinion that it is not as ecologically sound as its proponents have affirmed. Wind-turbine arrays kill birds, bats and insects. Offshore arrays are unloved by the Scottish Fishermen’s Federation. Turbine blades are almost impossible to recycle. Last February, the High Court quashed planning permission for Vattenfall’s giant Norfolk Vanguard project after complaints about onshore cables.
There is even a hypothesis that climate change is causing more windless days. Scientists at the University of Reading have a identified a pattern of declining average wind speeds globally. As more ice melts at the poles, so the temperature differences between the Arctic/Antarctic and the tropics is attenuating, and therefore wind speeds are dropping. The relationship between wind speed and energy generation is very sensitive – a one percent drop in wind speed equates to a three percent drop in energy generation. Government statistics show that power generation from wind farms fell by 30 percent between July and September last year due to light airs.
Ørsted has challenged this hypothesis, arguing that there has been an increase in wind speeds over the last 40 years and that 2021, with many windless days in Northern Europe, was an anomaly. It is generally agreed that one of the best locations for wind farms anywhere is the North Sea – and that wind power is intermittent. The cleanest and most reliable backup supply is gas.
Solar arrays occupy land that would best be used to produce food or for planting CO2-sequestering trees. This is already a highly contentious issue, with 75 acres at Spetisbury, Dorset covered with solar panels to power the citadels of finance in the City of London.
One idea – still nascent – which would obviate the need for more land is to put solar arrays into orbit around the Earth. The cost of solar panels has fallen by 85 percent in the last decade and the cost of launching satellites, thanks to new entrants like SpaceX, has fallen in tandem. The technology to build solar arrays in space already exists: the issue is how to get the electricity generated back to Earth. One design proposes that the electricity could be beamed to Earth in the form of high-frequency radio waves, to be captured by a giant dish about 13 kilometres in diameter. Clearly, there is more work to be done on this; but if the technology could be shown to be viable it would be transformative.
And now nuclear-fusion energy is in the news again. The Joint European Torus (JET) tokamak in Culham, Oxfordshire burst into life for about five seconds last week. Britain is clearly a leader in this experimental technology.
An Oxford University spin-off in this space called First Light Fusion has already raised a total of $107m from investors, including Chinese technology giant Tencent and Bravos Capital. First Light uses an alternative technology to JET called “inertial confinement”. Another player is Tokamak Energy backed by Legal & General and the billionaire Hans-Peter Wild. Canada’s General Fusion, whose investors include Jeff Bezos, is also building a demonstration reactor at Culham. In the US, Helion Energy has raised $580m from backers; and Commonwealth Fusion Systems, a spin-off from the Massachusetts Institute of Technology, has raised $2bn from investors including Bill Gates and George Soros.
To frack or not to frack?
There are potentially huge quantities of shale oil and gas below the ground in the North of England − and even more in France and Poland. The Bowland Shale Reserve which stretches across Lancashire and Yorkshire is estimated to hold over 37trillion cubic metres of oil and gas. Just 10 percent of that, some say, could meet all UK gas needs for the next 50 years. There is more in the Weald Basin, which stretches from Winchester to Tunbridge Wells.
Under the chancellorship of George Osborne, the frackers were given generous tax breaks. But three years ago, the environmental lobby won out and pretty much all fracking in the UK, conducted by players such as Australia’s Cuadrilla Resources, was halted. In fact, Cuadrilla stopped its last two operations in Lancashire earlier this month amid claims that they would never be commercially viable anyway. France had already banned fracking outright in 2017, but then France derives 70 percent of its power from nuclear energy – more than any other European country.
The main objections to fracking are that it can cause localised earth tremors and that it can in rare cases pollute subterranean aquifers. It is true that in the early days of fracking in the US there were horror stories, but that was because it was done inexpertly. There have been few incidents in the US, where fracking is widespread and intensive, in recent years.
Similarly, there are at least six gas fields in the North Sea where approval for new drilling has been pending for more than one year. Gas storage capacity has been run down too. Incredibly, the Rough gas storage facility was closed in 2017. We are the only major economy in Europe with virtually no strategic gas reserve – and that has exacerbated the price spike here. The UK obtains about half its gas from the North Sea and the other half from imports from Norway, the EU and Qatar, the latter in the form of liquefied natural gas (LNG). We are far from having energy security at a moment when China is buying all the LNG it can get, and the Russians are likely to divert gas from the Yamal fields away from Europe towards their best friend, China.
By banning fracking and by discouraging the extraction of known reserves in the North Sea, the UK has rendered itself dependent on imports of natural gas from abroad. According to figures released by the Office for National Statistics last week, the UK is running a deficit on natural gas of £2bn a month. Trade surpluses in Europe are also in free fall. The cost of our natural-gas imports in December was £5.3bn – up from £3bn in November and just £800m the year before that. And the transportation of gas in the form of LNG is itself a major source of carbon emissions. OEUK reckons the carbon footprint of LNG is 55-60 kilograms of CO2 per barrel equivalent, compared with 20 kilograms for North Sea gas.
No wonder BP chief executive Bernard Looney declared this week that Britain needs “more gas, not less”, which would require more investment in new fields. The British oil major posted profits for 2021 last week of $12.8bn (£9.5bn), prompting calls for a one-off windfall tax. That was a turnaround from a loss of $5.7bn in the pandemic year of 2020.
Looney promised that BP would use much of that cash to invest in green energy. BP already plans to build major wind arrays off the Scottish coast and a hydrogen plant in Teesside. In December, BP took a stake in Gasrec, the UK’s largest provider of compressed biogas for the road-freight sector. And last month it bought a 30 percent stake in Green Biofuels which uses waste products such as vegetable oils and animal fats to generate biofuels.
In a letter to Boris Johnson, former Europe minister Lord Frost and 29 prominent Tory MPs argued that it was not too late to end the moratorium on fracking. In this they reportedly have the support of the new Minister for Brexit Opportunities, Jacob Rees-Mogg. The prime minister, however, is thought to be resistant. The environment minister Lord Goldsmith said: “It is hard to overstate just how unpopular fracking is with the British public … the UK is not Utah”. He does have a point that the yields from wells in Lancashire are likely to be much smaller than those in Utah. But then again, I doubt if his lordship worries about fuel poverty.
New North Sea oil?
The prevailing sentiment around the climate-change debate has led to a policy of “leave it in the ground”. But if new exploration and extraction is a no-no, increased oil imports are necessary to keep the economy running – as most vehicles on our roads still operate on petrol and diesel, even as sales of EVs climb (as I wrote recently). The energy giants may be under constant attack from eco-warriors and ESG-obsessed shareholder activists − yet we still need them.
Last year, Shell pulled out of the Cambo oil field development west of the Shetland Isles in which it had a 30 percent stake. It claimed that the economic case for investment was “not strong enough”. The majority stakeholder, Siccar Point Energy (private) had reportedly been negotiating the sale of part of its 70 percent stake to a private-equity company. But when Shell pulled out those talks stalled.
Shell’s hesitancy reflects lukewarm support for the project in Westminster and outright hostility in Holyrood where Nicola Sturgeon’s SNP minority government is now in coalition with the Scottish Greens. Last summer, Sir Ed Davey, the leader of the Liberal Democrats, proposed a ban on all new listings of fossil-fuel companies on the London Stock Exchange, in conjunction with a halt to all new finance for oil and gas projects. When an oil company invests in a new field it must take a 30-year view on how the political, legal and fiscal climates will evolve.
There are proven gas reserves in the Saturn Banks field off Norfolk and the larger Jackdaw field east of Aberdeen. Only seven new exploration wells were drilled in the North Sea last year − fewer than in any year since 1965. The North Sea accounted for 1.7bn barrels of oil in 1999. That figure will plunge to 0.2bn by 2030 unless new fields are developed. Last week, Chancellor Rishi Sunak asked Business Secretary Kwasi Kwarteng to fast-track licenses for six new wells in the North Sea, according to the Daily Telegraph. Ultimately, such licences are in the gift of the Oil and Gas Authority, the national regulator. The wells in question are in the Rosebank, Jackdaw, Marigold, Brodick, Catcher and Tolmount East fields.
Nuclear (fission) power
The UK was once in the vanguard of civil nuclear power. The Calder Hall nuclear-power station came onstream in 1956, followed by Dounreay in 1958. As the old Magnox reactor stations came to the end of their economic lives, four new power stations were planned in the late 1980s: two at Sizewell (Suffolk) and one each at Wylfa and Hinckley Point. But as the Tory privatisation of electricity generation progressed in the early 1990s under the government of Sir John Major, three of these were cancelled. Today, the UK gets just 15-20 percent of its electricity from UK nuclear plants.
The UK SMR Consortium, led by Rolls-Royce, hopes to roll out a fleet of compact nuclear reactors to be operational by the early 2030s. It will benefit from the £505m package of government grants for new energy technologies unveiled last July. The Consortium is also backed by BNF Capital. Each small modular reactor will cost around £1.8bn.
But the jury is still out on the economics of nuclear power. The Hinkley Point C reactor, currently under construction in Somerset under the direction of France’s EDF, will generate power at a cost of $140 per megawatt hour. Desert solar power in Saudi Arabia is reportedly coming in at $10 per megawatt hour.
When completed, hopefully in 2026, Hinkley Point C, at a cost of around £23bn, will provide seven percent of the UK’s total power needs. A proposed nuclear plant at Bradwell, Essex, backed by China General Nuclear (CGN) now looks unlikely to go ahead for political reasons.
President Macron is hoping that permissions will be granted for six large, new nuclear reactors in the coming months. France has 56 nuclear-power plants, though right now 18 are out of service on safety grounds. Construction of a new reactor at Flamanville (opposite Guernsey) which uses EPR technology – a variant of the pressurised water reactor (PWR) – has run into delays for technical reasons. Something similar is envisaged for Sizewell C in Suffolk.
Towards practical solutions
Climate change is a real and present danger, and we must succeed in cutting our carbon emissions for our own benefit and for the benefit of the Earth. But aiming for “net carbon zero” ahead of almost everyone else is daft. For a start, humankind has been emitting carbon since the Stone Age. And Mother Nature herself – through volcanic eruptions – is the biggest emitter of CO2 of them all. That is not going to change. The very idea of “net zero” is a kind of mental straitjacket.
I would prefer an approach which prioritises maximum energy efficiency, minimal waste (with preferably zero plastic), and maximum recycling. Building regulations are still inadequate, as state-of-the-art insulation could massively reduce the CO2 emissions of the average household. I admit the Insulate Britain people have a point, even though their tactics, such as gluing themselves to the M25 are counterproductive.
This country has dodged power outages during a relatively mild winter, with spring now on its way; and while President Putin continues to play mind games with us (and there are more to come) our lights remain on. This is not a good moment to demonise companies which generate fossil fuels, especially when they are diversifying into renewables like crazy. British industry already pays some of the highest power tariffs in Europe, making it uncompetitive at a time when we are supposed to be increasing productivity.
As it stands, net carbon neutral by the entirely arbitrary date of 2050 is going to entail a massive crash in the standard of living for the British people, while doing next-to-nothing to arrest global warming. Outsourcing our carbon emissions to foreigners is malign. (I’ll have much more to say about heat-pump folly in a future article). McKinsey, the management consultants, estimates that the net spending required to achieve net zero will cost us 7.5 percent of GDP from 2021 to 2050. In saying that, I’m aware that anyone who challenges the net carbon zero chimera risks being branded a “climate denier”. But sooner or later, the British political and media elites, cocooned in their sense of moral self-righteousness, are going to have to face the music.
I’ll have much more to say on the hydrogen economy – where things are moving fast – soon. But next week I’ll consider another strand in this analysis − how successive British governments have failed to ensure adequate food security. It’s a similar story of following those who shout loudest rather than leading opinion, with potentially disastrous consequences.
Listed companies cited in this article which merit further analysis:
- Scottish & Southern Energy (LON:SSE)
- BP (LON:BP)
- Shell (LON:SHEL)
- Rolls-Royce (LON:RR)
- EDF (EPA:EDF)