- [ANALYSIS] A Brief History of Rwanda: Understanding the UK-Rwanda Partnership Through a Historical Lens - November 11, 2022
- Could Inflation Prove More Damaging than Parties to Boris Johnson’s Leadership? - March 18, 2022
- Great Britain’s Energy Failure: Poor Economic Structures Lead to Crisis - December 16, 2021
This November, many Britons will be seeing their first or second extraordinary energy bills as winter rears its bitter head and homes grow cold. While winter creates a familiar dent in many British pockets due to increased heating bills, this year the dent is closer to a chasm. Energy prices are soaring with both supply-side and demand-side forces pushing the energy market close to collapse.
Causes of the Current Crisis
Energy prices are increasing globally, in particular for natural gas. Last winter’s cool temperatures and lockdowns put pressure on supplies, meaning this year’s gas station supply is lower than normal; around 22.9 billion cubic meters below normal. This is coupled with increased demand from Asia, but perhaps the more pressing issue is the litany of poor economic structuring of the past decade due to privatization and Conservative rule.
Among structural problems at the basis of the phenomenon, The Economist reports the following:
- In the 1980s-90s, privatization created an oligopolistic energy market dominated by the “Big Six” energy companies, whose shareholders were paid large dividends and bosses received large salaries. When Britons argued against their higher energy bills, the government liberalised the market further, leading to fragmentation.
- New companies, such as Bulb and Octopus, are thinly capitalized and produce no independent energy, instead buying it wholesale and reselling it. This leaves them vulnerable to price fluctuations in the global market, which we are now facing.
- In 2017, a large gas-storage facility closed, leaving Britain able to store only 2% of annual demand.
- Perhaps most dire of all, Britain is painfully dependent on natural-gas imports (41.9% of total energy usage in 2020). After replacing its coal-fired plants with wind power, calm weather leaves it extremely vulnerable to shortages in the global supply. On top of this, as a non-renewable energy source, natural gas is in limited supply, estimated to have just 52 years of supply left.
With gas prices up 250% since January, Great Britain finds itself significantly in the weeds.
Both homes and businesses are being directly affected by increased energy costs. In September, Britons will remember seeing plenty of headlines about meat shortages across the country, caused by the closure of CF industries, an American-owned fertilizer company responsible for over half of Britain’s CO2 supply. Due to increased energy costs, the company announced it was shutting down operations in September, creating disastrous effects for the meat industry who relies on CO2 for the processes of food production.
The Economist reported that on the 21st of September, the government met and agreed to subsidize CF Industries’ energy prices to the tune of “many millions” according to the Secretary of State for Environment, George Eustice MP. In fact, CF Industries reported a profit of $246 million in the second quarter of 2021, a 29.5% increase from its $190 million profits in the second quarter of 2020.
Great Britain’s energy market needs restructuring away from dividends, large salaries, and million-pound subsidies, but it does not look like the government will be going in this direction any time soon.
Subsidies Upon Subsidies
Great Britain’s dependence on natural gas may be the reason it continuously chooses to subsidize the fossil fuel industry, so much so that in the 2015 and 2016 financial years, it gave more money to oil companies than it received in taxes, according to its own official statistics.
The government’s persistent support of the fossil fuel industry is leading it into conflict on both national and international levels. In 2021, Paid to Pollute, a UK-based NGO, launched a legal campaign against the government, specifically against the Oil and Gas Authority’s new strategy which states that the sector has a “legal duty to maximize economic recovery” of oil and gas.
Campaigners are concerned that this phrasing leaves room for uneconomic operations to be propped up by subsidies, potentially even the construction of new sites. Not only would this framework not be ‘in the best interests of the UK economy and taxpayer’ but it would also directly conflict with the government’s ‘leveling up’ commitment and promises of a transition to a low-carbon economy.
Giving such economic freedom to fossil fuel authorities is worrying not just for UK campaigners, but also for international organizations. In 2021, the UN’s Human Rights Council extended the mandate for its Special Rapporteur On Human Rights And The Environment titled ‘Safe Climate’. Within the document, the rapporteur mandates that:
‘To address society’s addiction to fossil fuels, all States should: (a) Immediately terminate all fossil fuel subsidies, except for clean cookstove programs.
“Safe Climate,” Para 35
The 26th Conference of Parties, hosted by the UK government up in Glasgow, was expected to readdress the essential requirement for all governments to stop subsidizing fossil fuels, especially at such enormous levels, and comply with the UN’s mandate. As of writing this article, PM Boris Johnson is yet to address the issue to fellow nations, but he is unlikely to admit to Britain’s fossil fuel subsidy problem, as the government has consistently adopted the public position that it does not subsidize fossil fuels, point-blank.
He is able to deny such accusations because ‘a significant part of the subsidies identified by the commission is the 5% rate of VAT on domestic gas and electricity, cut from the standard 20%’. Phillip Hammond, the previous Chancellor of the Exchequer, has admitted the government had ‘“forgone” billions of pounds by choosing not to implement a scheduled rise in duty on petrol and diesel’: this fuel duty freeze alone amounts to around £46 billion in revenues from 2011 to 2019. The table above, provided by Bloomberg Green, showcases just how much of such subsidies are ‘post-tax’.
Future Choices
Great Britain is not only stuck in a structural energy problem near a predictable collapse, but it is also heavily embroiled in some harmful environmental practices, all based around its energy consumption practices. Its current position is not sustainable.
A positive future of British energy would be less dependent on imported, non-renewable fuel, and instead be manufactured in an environmentally sustainable way either on British soil or out of the influence of volatile global energy markets. A top-to-bottom restructure is necessary, and hopefully, in the next few winters, warm homes will not be so costly to Britons, and to the environment.
- Was COP26 a space where countries made significant moves forward in terms of promises on energy industries?
- Is a transition away from natural gas inevitable, due to its increasing scarcity and vulnerability to global volatility, or will its use continue?
- How will Britons react to the increase in energy prices, and how will the government respond?
