A Manifesto for Lord Mandelson- 7 (Energy)
Fundamental situation
British hydrocarbons should be a national success story. Reserves were last officially estimated in 2020. They then represented between twelve and twenty-five years at current rates of consumption (ten to twenty billion of barrels of oil equivalent (Bboe), with consumption at 0.8 Bboe in 2023, the last year for which we have figures). This is an underestimate: reserve calculations include assumptions about prices, depressed by Covid in 2020 and now 90% higher. Today, correspondingly more reserves would be economic.
A second success story should be the “small modular reactors” (SMRs), where Rolls Royce leads American and European competitors. SMRs are to replace decommissioned nuclear plants supplying “base load”, come wind or shine. A large number of small generators is more resilient than a few large plants. SMRs also offer rapid build and a small footprint, making them an easier planning battle.
In the event, the country is struggling, with policy whipsawed between three objectives:
Decarbonising. Central, sustained by the Climate Change Act; a political climate embracing the manifesto on which the government was elected and the leanings of Ed Miliband, the energy secretary, all underpinned by Labour party and popular sentiment.
Security. Disorderly, with obsolescent nuclear capacity, retreat from indigenous hydrocarbons leading to net imports representing 40% of our consumption, reluctance to develop new fields, further imports of biomass and investment focussed on renewables, inherently intermittent.
Economy. De facto abandoned, with subsidies for inefficient producers, leading to wholesale electrical prices four times the US, around 2.5x Korea or Japan, and around 1.5x France and Germany. We are also in for new distribution costs from renewable farms.
The balance of this post calls for new thinking. We are encouraged by Rachel Reeves’ remarks at Davos that “growth trumps net zero”. She was talking about the expansion of Heathrow, so it is early days to see this as a full change of course. This makes what follows something of a thought-experiment, a Plan B conditional on the manifest failure of current policy. Tests for such a failure include blackouts, avoided so far this winter; or shifts in European policy - see below.
Dealings with the US
Lord Mandelson should respond to openings from the US Energy Secretary, Chris Wright, however graceless. On 17 January, Wright condemned plans to achieve net zero carbon emissions by 2050 as a "sinister goal"; and criticised British attempts to meet them. He was thinking of our reluctance to replace depleted fields, with production falling by 72% from the 2000 peak. He reminds us that development depends less upon geology - the UK sits atop abundant oil and gas-bearing strata - than politics. He may want us to reverse our anti-fracking policy and renew exploitation rights for American companies. This makes economic sense, with current prices thirty percent ahead of the breakeven for American frackers; and a new gas discovery in Lincolnshire said to have reserves of 2.9 Bboe, equivalent to five years’ consumption.
However economically sensible, our mood-music isn’t yet ready for this. Lord Mandelson could, however, remind Mr Wright of Rolls Royce, which could enter into joint ventures with American manufacturers or licence its designs to them exclusively, rather than entering into such arrangements elsewhere.
Equivalent to Europe
European policy is revisiting unqualified commitment to early decarbonisation. Draft rules promise an “an unprecedented simplification effort”, preparing for fuller correction of overreach in sustainability. In parallel, Friedrich Merz, the German chancellor-in-waiting, has spoken of reversing his country’s longstanding objection to nuclear plants and cementing steps to relieve it of its dependence on cheap Russian gas. This opens the way for the UK to bring in European interests to support the renewed development of our own hydrocarbons - this would be money rather than technology or feedstock, both of which the Europeans lack. So too may we tender Rolls Royce’s technology, the appetite for which is attested by the call at Davos from Ebba Busch, the Swedish deputy prime minister, for Britain to join a pan-European venture for such purposes.
Negotiating objectives
In energy, Britain’s cards are as good as in labour markets. The country has reserves, nuclear technology and (making a plus out of a minus) an economy already accustomed to high prices. On the other hand, it’s all in the play. It will be no stretch to remind both the US and Europe of the prize represented by Rolls Royce’s technology. Elsewhere, we would have to alter current policy to make the most of our strengths. We can then either offer markets to the US for gas and fracking, with a view to a more orderly transition to decarbonised power; or bring in such European interests as may present themselves. Either way, we should be getting concessions elsewhere.
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