The UK's Energy ‘Crisis’ – How do we solve it ? Some practical suggestions

 We in the UK are currently experiencing an attack on our personal financial resources, the like of which we have not seen since the financial meltdown of 2008-9. 

The 'UK cost of living crisis' as it has been called has been a long time in the making. What has caused it ?

The answer is complex, but amounts to a 'perfect storm' of coincident events.

The combined effects of 10 years of artificially-induced low interest rates and excessive quantitative easing by central banks conspired to prevent 'normal' levels of inflation throughout the 2010s. This unprecedented (and in retrospect somewhat foolhardy) interference with the financial system effectively stored up inflationary pressure, and this was exacerbated by the economic effects of the Covid pandemic. 

The worldwide economic 'recovery' resulting from the lifting of Covid restrictions and the recent Ukraine conflict have triggered a rapid increase in demand resulting in a surge in the world price of energy, and more recently of food. 

All this, combined with the general increase in demand as economies attempt to get going again, and post-pandemic labour shortages, has effectively 'blown the gasket' on the hitherto pent-up inflationary pressure and set us on course for a prolonged period of high single-digit inflation. Hopefully one benefit this will be a return to more sensible levels of interest rates, which should in turn go some way towards reining-in the inappropriate levels of expenditure and indebtedness we have seen in recent years. With luck, it will also convince central banks to avoid any such action in future.

The inflationary spiral has already caused much financial hardship and worry about the future, particularly amongst the least well-off in society, and the continuing, albeit slower, rise in interest rates will do little to help many middle-income households, encumbered as they already are with mortgage debt. Measures introduced by Government have until very recently been woefully inadequate in attempting to ease the burden.  Recent announcements in UK of more government rebates are of course welcome, but the majority of the extra grant funding proposed is heavily means tested and won't help the majority of middle income earners who are also struggling. Those of us who are old enough to have lived through the 1970s will realise what may be yet to come...many younger members of society won't. 

Ultimately, though, there is only one primary cause for the situation we're now in  – there are too many of on this small island trying to live essentially 'beyond our means' and now by our own choice economically divorced from our European neighbours on the mainland. This situation is largely of our own making, and our chances of competing successfully for diminishing resources in an increasingly competitive world market are inevitably more limited as a result. 

Is there a solution to this problem, other than mass de-population of our island and/or major reductions in our standard of living? There are a number of ways in which we may be able to improve our prospects, but these all involve significant changes in the way we live, which will take time.....and will be painful. Maintaining the 'status quo' unfortunately just isn't an option any longer.

Focusing on energy, the Covid pandemic, and world events over the past few months have all conspired to bring the supply issue quickly to a head. The current acute geo-political situation requires that we must wean ourselves off Russian gas and oil as soon as is possible - and stay off them permanently. This is an imperative rather than a 'nice to have'. As discussed in my recent blog, Putin's ambitions present an existential threat to our democratic way of life, and must be contained at all costs.

We cannot change our energy strategy safely without first ensuring self-sufficiency, and the way in which we do this this will be crucial to our future prosperity. The recent cost pressures have unfortunately coincided with an obsession with eliminating fossil fuel consumption as quickly as possible on climate grounds, something which was always going to be a tall order, to say the least, given that our society revolves around the use of fossil fuels, and has done for the past 150 years since the start of the industrial age.

In the medium term, our energy strategy certainly does need radical reform. There are a number of options for rationalising it, and these will be key in implementing the overall changes that must be made to our lifestyles. These include a large increase in nuclear capacity and offshore wind generation, with smaller increases in onshore wind and commercial solar 'farms'. All these measures are medium- to long-term and their exact timing is uncertain - nuclear in particular has a notoriously bad record for costs and timing. Just recently, EDF announced further delays in the Hinckley Point nuclear plant (now estimated onstream in 2028 - 10 years later than planned, and with a sizeable cost overrun confidently predicted). 

We need action to reduce the price of energy and relieve the growing pressure on our personal finances now.....

In the remainder of this post, I’ll focus on some practical short term measures on energy provision we could take as a nation in the short term if government and the Energy Industry could be persuaded to help. As consumers, the majority of whom are increasingly financially challenged, we cannot do it alone.

Some of the measures outlined in the latest Government strategy document are potentially quite useful, but many of them won’t come on stream until towards the end of the decade. 

Improving our Energy Strategy

Commercial fusion reactors, which have always been the 'holy grail' of energy production, could be the fount of limitless cheap 'green' power, and would solve most of our supply problems at a stroke. However these are still only a pipe-dream at present and they may never actually come into service if we can't solve the problems containing the super-hot plasma needed to enable hydrogen to helium fusion. We should of course redouble our efforts in trying to 'crack' fusion, but certainly should not set too much store by an early success.

The stark reality thrust on us by 'Net Zero' is that we need more and cheaper electricity now if we are to continue heating our houses…and power our new electric cars.

Given the current geo-political situation, our immediate emphasis must clearly be on reducing our dependency on imported fossil fuels, particularly those emanating from Russia. This is of necessity a short term measure, and an urgent one. Some of the Eastern European countries (notably Hungary) are already 'dragging their feet' on when (or even if) they are prepared to stop imports, and may well need more forceful incentives to comply.

Given also the emphasis on achieving ‘Net Zero’ by 2050, and the demise of petrol and diesel vehicle sales by 2030, both of which are still enshrined in UK law, Government is obliged to  find ways of bolstering our electricity supplies at the earliest opportunity with renewables if we are to ‘keep the lights on’ and remain mobile, without bankrupting ourselves in the process. 

We must also be prepared to relax the ‘NetZero’ requirements in the short term so as to allow ourselves to exploit our remaining North Sea Oil and Gas reserves and at least explore the possibilities of fracking as a viable local source of additional gas supplies. 

It is generally accepted (even among the most ardent of environmentalists!) that renewables and nuclear alone cannot provide sufficient power for all our energy needs this decade. Fossil fuels will in any case be needed by many parts of industry as essential feed stocks for manufacturing for many years to come. We have to lay firm foundations for the wholesale switchover to renewables planned for the 2030s and 2040s if it is to be effective, and we must therefore upgrade and maintain our own sources of these fossil fuels to ensure self-sufficiency during the transition and thereafter. Unfortunately putting new North Sea fields on stream takes a number of years, and many of the existing fields are almost exhausted.

What about our domestic fossil fuel usage - can this be easily reduced ? The proposed switch from our existing gas boilers to electric heat pumps for domestic heating has been much publicised recently as the best option environmentally, but will, if it proceeds as planned, only serve to exacerbate the electricity supply problem if nothing is done to increase our electricity grid's capacity and supply base. You cannot expect consumers to switch to costly electric heating systems if they don’t believe there will be sufficient power to run them…and charge their new electric cars into the bargain.

One thing we now have plenty of in this country is roof space, and its acreage is increasing rapidly with the continued push for ever more new housing. The vast majority of this roof space is currently unused  (in my own area, a quick check reveals that fewer than 5% of houses have solar panels or solar water heaters installed; this is probably representative of the UK as a whole). 

The main problem causing the low uptake of domestic solar is the cost of the initial installation (ca £8,000 minimum even for a basic system without battery storage). Once installed, maintenance of panels and associated controllers is minimal. 

Another deterrent is that the old coalition-era  green feed-in subsidies, which were relatively generous particularly in their early stages, are now long-gone. The only financial gain available to the consumer, apart from the little free energy you manage to use while the sun is shining, is the meagre yield from the replacement smart energy guarantee (SEG) scheme. This stipulates that energy companies must pay you for any excess energy you export to the grid, but notably does not specify how much per unit. In practice, the available tariffs offered by the supplier 'cartel' are miserly in comparison to the burgeoning cost of units they supply to us. The maximum (offered by Octopus Energy) is around 7.5p / unit, with typical values being closer to British Gas's measly 3.5p / unit. Compare this with the 25-30p / unit minimum most of them charge domestic consumers on top of the recently introduced excessively high electricity standing charges, and you'll see there is really no incentive for individual householders to invest, even if they are in the fortunate position to have the available spare capital to do so. 

How quickly could the costs of a solar installation be recouped ? The 'payback' period for a basic solar system without battery storage (i.e. the time  required to defray the initial cost of installation) is likely to run into decades, even factoring in the predicted trebling or even quadrupling of electricity unit prices and standing charge increases over the next year.

Pensioners who have been thrifty during their working lives and managed to accumulate some savings for their old age, might be a demographic willing to invest in solar panels. However, they would be unlikely to see any significant recouping of costs during their remaining lifetimes. Many of them are also faced with the prospect of soaring residential care costs when they become unable to support themselves at home, and know full well that they will get no help with finance from their local authorities unless and until they become effectively destitute. They will, quite understandably, prefer to preserve their life savings now to support them in their final years - and leave something for their financially hard-pressed offspring if they have any.

Grants of up to £5000 have been announced for renewable installations under the new government ‘B.U.S.’ scheme initiative – a look at the small print, however, reveals that these do not apply to solar panels, and grants are means-tested when it comes to eligible 'green' replacement heating systems. Like most government financial incentives, the restrictions, and the paperwork involved in applying, almost seem designed to minimise the number of applicants.... 

If government were to supplement B.U.S. by offering tax relief at marginal rates on the cost of a solar installation, I believe this could go a long way to persuading consumers to invest. Tax rebates could be easily administered simply through Self Assessment. A one-off tax cut, combined with the prospect of soaring energy prices could provide a powerful incentive to invest in the UK's energy future. Alternatively, they could introduce a similar B.U.S. grant of £3k to £5k to support the cost of a solar installation. If Oil & Gas providers were also to use some of their profits (which by their own admission are vastly increased as a result of recent price hikes) to 'chip in' an equivalent amount, the majority of the cost would be covered, giving a powerful incentive for the hard-pressed consumer to invest. 

How significant could the contribution of domestic solar be to the UK's overall electricity generating capacity ? 

The amount of potentially suitable roof area in UK is vast – if only an additional 10% of houses were to install solar, the grid would have a large reservoir of extra power to call on, particularly during the Spring to Autumn period when solar energy is most plentiful in UK. Solar is also an important fallback on bright anticyclonic days throughout the year when there is little or no wind - wind is currently the main growth area for renewable supply, but the UK has recently been experiencing significantly more of this type of weather, and the trend looks set to continue as the climate continues to warm. 

As battery technology improves, existing solar panel systems could be upgraded such that householders would also become able to store any unused power not required by the grid and use it for heat pumps and overnight vehicle charging. 

Domestic solar could thus provide a very significant additional contribution to a household’s power needs, and would do so ‘at source’ without the need to export the power needed directly to the grid. This would help minimise the risk of overloading the grid at times of plenty, which is currently a problem with wind and commercial solar, which has no effective buffering capacity of its own. (Lack of storage is a problem which is likely to be difficult to solve for the grid with current battery technology, given the scale involved, and the position will worsen as more renewable capacity comes on stream.)

Domestic installations would also be better on environmental and food sustainability grounds – far too much of our valuable agricultural land has been taken out of circulation recently by vast new commercial solar installations, literally creating 'black holes' within our English landscape. We may need to reclaim this land to help feed ourselves sooner than we think - the events of the past 3 months alone should have been enough to convince us of this. The land reclamation process in itself would take time, given the need to restore the soil quality and field structure required for crops to grow well. There has been something of a backlash against commercial solar and onshore wind recently, and government have tightened the planning restrictions accordingly. We can only hope these restrictions continue to apply, for the sake of our still relatively 'green and pleasant’ land.

The rapid increase in house-building on greenfield sites, which has been made possible pre-pandemic by the government's wholesale relaxation of planning restrictions, has also already taken its toll on our green spaces. To compensate at least in part for this, a mandatory requirement on developers for all new builds should be a solar installation with battery storage capacity, and an air- or ground-source heat pump system for heating. This would at least ensure some-degree of local self-sufficiency in power supply for new estates. Developers are still currently installing conventional gas boilers in most new builds because it’s cheaper and easier, and I have yet to see a single new build in my own area with a pre-installed solar array. This practice must stop soon if we are to avoid literally 'cementing in' long-term environmental damage to our new housing stock…..

The problem of lack of financial incentive also extends to Government’s much-trumpeted plan to replace existing central heating boilers with heat pump systems, despite the current grant offerings. The cheapest option of air source heat extraction costs upward of £10k to install; ground source technology starts at £15k, and presumes the property has sufficient adjacent ground to accommodate the underground pipework.

Unless a significant proportion of the upfront cost is provided by government and the energy industry, these conversions just will not happen. Consumers will wait until their gas boilers actually expire, and this could take decades for recently installed gas heating systems. The recent reduction in VAT on 'qualifying' renewable installations will do little to help with the initial outlay, since this is dwarfed  by the capital cost of a new system. There is also the risk that some consumers without adequate funds for a replacement and not eligible for grants because of means testing could be left without central heating altogether when their boilers finally die. 

This unhappy situation combined with all the other pressures now being exerted on domestic budgets could well result in additional deaths from exposure, particularly for older pensioners who were brought up in an age where bankruptcy was a shocking admission of failure, and are terrified of going in to debt during the winter months. There have been some appalling stories in the media recently of vulnerable consumers  having to make the choice between heating and eating last winter – this just should not be allowed to happen in a prosperous western economy which still boasts 6^th position in the world economic order (despite the self-inflicted economic losses resulting from Brexit!). 

It’s also symptomatic of this government's attitude to benefits for the elderly that the basic winter fuel payment has been stuck at £200 for many years and was not mentioned at all in the Spring Statement, despite the recent excessive energy price hikes and the return of rampant inflation. Boris's failure to honour his promise of the triple lock on the state pension being maintained this April added fuel to the fire.  The recent announcement of a one-off supplement this autumn will do little to dispel pensioners' ire.

It could be argued that doing nothing for the pensioner and disabled demographics will simply allow nature to take its course, and will actively assist with the pensions funding crisis by reducing the elderly population – I suspect this viewpoint wouldn’t be much of a vote winner in 2024, though, given that pensioners have long memories…and are living longer nowadays. They also tend to make a habit of voting, and do so in favour of those politicians they feel are most likely to support them after a lifetime of work effort - and of compulsory NI contributions !

The message to Government and the Energy Supply Industry on UK energy needs in my view is clear – quite apart from environmental considerations, which are of course important in themselves, we must take every opportunity to promote domestic energy generation, and must do so quickly. No amount of offshore wind or nuclear expansion in the late 2020s will help alleviate the current cost of living crisis - an effective doubling of consumer electricity and gas prices over pre-pandemic levels will be with us before next winter sets in, with more to follow in 2023. A measure of self-sufficiency will reduce the need for state intervention longer -term and render us less susceptible to external challenges.

Despite our latitude and climate, we can, and should, still ensure we use our roof space to supply as much as possible of our own energy needs. We can do this far more quickly and efficiently than can any of the more grandiose schemes in aid of energy self-sufficiency proposed by government so far. 

The technology and will is already here – we just need to fund it….now

VJCW 19.6.22