One Damned Surprise after Another

Trump signed a deal with the Taliban that NATO would be out of Afghanistan 18 months later, i.e. by 31st August 2021. Apparently, just two weeks before the final exit date, this came as a surprise to our Foreign Secretary, Dominic Raab, holidaying in Greece. Poor chap, nobody told him anything. Now his Cabinet colleague, Kwasi Kwarteng, has been equally astonished, last weekend, by the sudden leap in the international wholesale price of gas, even though it has been rising steadily, by 250% since January, by 70% since August and 455% over the past year. He was busy getting a few Statutory Instruments rubber stamped by Parliament. Never mind the UK energy market was collapsing into chaos, we had to be sure our “Ecodesign for Energy-Related Products and Energy Information (Lighting Products)” were up to scratch.”

Was Ofgem closely monitoring developments? Its 2020/21 annual report, published in July, does not give that impression. The Chair, Martin Cave, in his Foreword states “Ofgem, as a regulator, has two equally important challenges - to protect today’s consumers to make sure they get a fair deal, and to protect consumers in the future by tackling climate change” but the report as a whole is far more interested in decarbonisation than consumer prices. Ofgem seems to have forgotten that its original role was to simulate free markets in gas and electricity, not to pursue social policies.

Mr Kwarteng should have been surprised that it is not staffed by 1,000 handpicked intelligent and competent staff navigating our way through the complexities of international energy markets; instead it handpicks its employees to ensure they are as dumb as the rest of us. Here’s CEO Brearley in the annual report: “we have redoubled our efforts to ensure that Ofgem – as well as the wider energy sector – have diverse and inclusive workforces that better represent the consumers we all serve. Diversity and Inclusion has [sic] therefore been a key focus of our engagement this year.”(p.8)

Given that, he should not have been surprised that Ofgem regards the wholesale price of gas as outwith their control and forces gas retailers to buy at that price but sell at, or below, the “cap” even if that is lower than the price they’ve already paid wholesale. Bankrupting the smaller suppliers and destroying the market currently appears to be Mr Kwarteng’s plan. 39 energy companies are expected now to fail, leaving only 10. It is true that those who offered long term fixed pricing without hedging their future purchases have themselves to blame but wasn’t Ofgem supposed to be supervising?

A number of surprises paved the way. Who would have thought, for example, that the demand for energy would bounce back as the pandemic eased? Who were the clever people who thought that was a good time to take gas platforms out of production for maintenance? Thanks to Covid and poor management, a major backlog has built up but the regulator calling the shots was not Ofgem but Health and Safety. UK gas production is down 28%.

Russia gets blamed for rigging gas prices but the truth is the UK gets a trivial amount of gas from Russia; it gets over 120 times more from Norway. A bigger, and more predictable, surprise is that the wind does not always blow at the same speed. The UK shift to renewables is admirable in many ways but it is far from clear that the Department for Business, Energy and Industrial Strategy (BEIS) has thought through the need to balance renewables with reliable energy from nuclear and gas, nor through the need for gas for the production of CO2 for food, drink and health uses.

Imports and storage were traditionally important means of evening out price spikes. Unfortunately, BEIS and Ofgem have assumed eternal price stability and presided over an annihilation of the UK imports and gas storage facilities. The UK can store 4% of annual gas consumption. In Germany, France, Italy and Austria, this ratio is between 20 and 30%. US natural gas prices (about $5/mmBTU) are a currently a fraction of those in the UK (about $23/mmBTU) but we are unable to take advantage of them.

The BEIS reaction to the gas price crisis has been to clobber the consumer through higher retail prices and government subsidies which will inevitably be passed on in taxes. It does not seem to have occurred to them that the downstream higher costs are exactly matched by the upstream higher profits. Whether Ofgem is responsible for wholesale prices or not, the natural gas producers and wholesalers could be taxed on their windfall profits and the proceeds used to offset costs to government and consumers as well as restoring the UK energy market.

As things stand, we are not witnessing market failure so much as government failure. Mindless of the current chaos, BEIS launched, on 20th September, a consultation on the governance guidance for the Oil and Gas Authority, a quango of 164 persons that some might consider wholly unnecessary. When I googled it, the initial response was that no information was available because the search engine “filters out results that might return adult content.” The comment could apply to BEIS as a whole, a department founded only five years ago and employing, with its quangos, about 20,000 people. Some might consider it too big for its own good; on the ball it is not.

So far a few surprises, that should not have been surprises, have been noted but its dogged refusal to consider energy options for the future is much more worrying.

Replacing fossil fuels, i.e. coal and gas, will be primarily by electricity. Generation will mainly be from renewables underpinned by nuclear. Given the volatility of renewables and the slowness of turning nuclear on and off, there will need to be some remaining gas and biomass generation, with carbon capture, but hydrogen will only be a storage medium, e.g. for planes, where electricity, which will always be cheaper than hydrogen, is not available. So much is common ground.

The BEIS approach to nuclear should be ringing alarm bells. It is reminiscent of the Air Ministry’s dismissal of Spitfires and jet engines in the 1930s. High command was still fighting the previous war. BEIS is wedded to old high pressure nuclear technology, both large (Hinkley Point and Sizewell) and small (Rolls Royce) which needs large and complicated containment structures and safety systems. Other countries (the USA, Canada, China and Indonesia) are pushing ahead with Generation IV new technology low pressure plants with commensurate reduction in problems of siting and safety. For unexplained reasons, low pressure plants, using molten salt as a coolant, have been rejected by BEIS and do not appear in the 2020 energy White Paper. These units are small and low cost by comparison with existing nuclear power stations.

For examples, see Moltex which aims to have a plant operational in New Brunswick in the early 2030s. The Canadian Nuclear Safety Commission has given Phase 1 approval. Terrestrial Energy intends to be generating electricity for Ontario Power by the late 2020s. ThorCon International is on track to be licensed in Indonesia by 2026. SINAP-CAS aims to have a prototype running in Gansu Province this month and a full plant in 2030. ARC, also in New Brunswick, aims to be up and running in the late 2020s. TerraPower has backing from GE, Hitachi and Bill Gates and expects to be operational in Wyoming in 2027/28. Finally, Ultra Safe Nuclear Corporation, based in Seattle and working with the Dutch, expects a licensing decision for a plant in Ontario in 2022 and there is no reason to believe it will not be granted.

In short, there is a lot going on in the world of new technology but BEIS is oblivious to it all. Rather than huddling up in the office, their 20,000 staff would like to be working from their homes this winter, if only they could afford the heating costs. Now there’s a surprise.