The US-Israel war on Iran will drive household energy costs in Britain to their highest level in two years over the summer. This has given fresh impetus to calls for the energy secretary, Ed Miliband, to change course. The cabinet minister is vulnerable because he promised cheaper bills if Britain embraced his clean, green power plan.
Critics, including Labour’s former prime minister Sir Tony Blair, are circling. Yet Mr Miliband ought to ignore the naysayers. Until global carbon emissions, including Britain’s, are reduced to net zero, the planet will continue to fry and temperature records will continue to be broken.
But what happens when Mr Miliband’s clean power system is not yet in place, while the fossil fuel system is being run down in a crisis? That is the question a new paper for the Common Wealth thinktank seeks to answer. The economist Patricia Pino takes the lessons of the 2022 price shock and applies them today. Britain had bet after that crisis that liquefied natural gas (LNG) supplies would be plentiful and could replace supplies lost when Russian pipeline gas to Europe was cut off. But the war in the Middle East has reduced the flow of LNG through the strait of Hormuz.
When domestic production, pipeline imports and storage withdrawals are not enough in the UK, the price of gas is set by scarcer and therefore more expensive LNG. To make matters worse, gas does not just set gas prices. It often sets electricity prices too. Ms Pino, a doctoral candidate at University College London, says that the problem is not that gas demand is not falling at all; it is that demand is not falling fast enough relative to the decline in domestic production and surging winter peak requirements. It leads to costly LNG setting energy prices.
To reduce this vulnerability, Ms Pino argues that Mr Miliband should intervene directly in the gas and electricity markets now. Her prescription is to retain as much domestic gas as possible for domestic use by making it cheaper than European gas – and nationalising Centrica’s Rough gas storage facility as a buffer stock that can smooth out peak prices.
With electricity, the paper envisages the government buying it at a fixed price from clean providers and allocating it to suppliers. The logic is that instead of letting the market produce a household bill crisis and then subsidising it to the tune of £23bn, the state spends a few billion changing the incentives that made the emergency price apply so widely in the first place.
Timing is key. Between April and September this year, the state can still do four things: retain more domestic gas through an export levy; fill a buffer stock before winter while demand is lower; signal import support before gas supplies are committed elsewhere; and move part of the electricity system off gas-indexed pricing before wholesale spikes feed into retail bills.
None of this is easy; the EU’s feathers will be ruffled by energy taxes. Delay, however, leaves the UK more exposed to conditions it cannot control. Immediate intervention shifts Britain from being braced for impact to actively managing supply, demand and prices. Mr Miliband is right that Britain needs clean power by 2030. But the paper is asking a different question: what can be done before winter this year to stave off a cost of living crisis? The answer appears to be: quite a lot.
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