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Energy is a bigger problem than Brexit

The temptation is to jump on the bandwagon and attack British Gas owner Centrica for profiteering and for participating in a cartel in the wake of its 12.5% hike in electricity prices.  It is certainly difficult to feel any sympathy for a multinational corporation that raked in profits of £816 million in the first half of 2017… still less a CEO who takes home more in a week than an NHS nurse will earn in four years.  But the British Gas electricity price rise points to a brewing crisis that promises to be more devastating than the fallout from the Brexit referendum last year.

Most politicians – and the economists who (mis)advise them – believe that the way to ensure a continuous supply of energy at an affordable price is to create a quasi-marketplace in energy in which consumers (households and businesses) can switch to the provider with the lowest prices.  The result, in theory, is that prices will be driven down.  The obvious (to anyone who isn’t a politician or an economist) flaw in this proposition is that – unlike money – energy doesn’t grow on trees.  That is, while energy is all around us, we have to generate three forms – heat, motion and electricity – to power the economy.  This involves obtaining fuel – for the moment largely gas, followed by coal, wood burning and nuclear with a relatively small amount (around 10 percent) from wind and solar – and constructing and maintaining power stations and the Grid infrastructure.  The cost of these essential activities has been rising globally, and particularly in countries like the UK that have ceased being net energy exporters.

Since Britain no longer has a coal industry worth speaking of (we produced more coal at the height of the 1984/5 miners’ strike) there is little point expecting coal to play much of a part in our energy future.  Indeed, coal power stations are being closed earlier than the government anticipated because it is no longer worth maintaining them ahead of their legal demise in 2025.  Britain still enjoys a dwindling supply of gas from the North Sea (which has fallen more than 60% since 1999) which now generates more than half of our electricity.  Nevertheless, Britain is increasingly dependent on imported gas from Norway, Qatar (which is subject to sanctions) and Russia (which is subject to sanctions).  Wind and solar power generation is increasing from a low base.  But without massive investment in infrastructure and storage, wind and solar are reaching the point where they become incompatible with the operation of the National Grid.  The result is that the UK is increasingly dependent upon imported electricity from the former European partners that it has decided it no longer wants free trade arrangements with.  What that means, in short, is the end of cheap electricity.

On several occasions in the last five years, National Grid has had to use a scheme that pays large industrial electricity users to cut their use in order to lower demand to levels that can be supplied.  In part this is due to the intermittency of wind and solar.  However, it is also because of technical problems with the UK’s aging fleet of coal and nuclear power stations, and especially the failure of “the market” to deliver the new fleet of gas power stations.  More recently, National Grid was forced to use an opposite – and equally costly – scheme to bribe large industrial users to use even more electricity, while paying power stations to cut output because of a surge in electricity from wind and solar.

The trouble is that all of these increasing (fuel, infrastructure and work-around) costs have to be borne by someone – the energy companies or, most often, Britain’s beleaguered electricity consumers.  It is here that we find an uncomfortable truth behind the media headlines about the British Gas price hike.  While Centrica profits were down (but still high) the division of British Gas that supplies electricity to UK consumers (businesses and households) actually made a loss of £61.1 million last year – in the household market, the loss was even bigger at £71.9 million.  That is, business electricity consumers are subsidising household electricity to some extent, while Centrica itself is subsidising its UK electricity business out of the profits from its other divisions.  Despite this, of course, electricity consumers are facing increasing bills even as they scale back their consumption.  This is exacerbated by the government decision to load the cost of renewables, new gas and new nuclear onto customers’ bills; effectively creating in all but name an even more regressive tax than VAT.

This has set up a pernicious “energy death spiral” in which, in an age of ever cheaper and still subsidised wind and solar, businesses and households with money to spare can simply opt out of the cost of the energy infrastructure by deploying their own solar panels and wind turbines – even though the need to balance the output from these renewables adds to the cost of running the Grid.  At the same time, those at the bottom of the income ladder go off-grid in the old fashioned way by turning everything off and shivering in the dark.  Britain already has three million households in “fuel poverty” even before the costs of new gas and nuclear power and increased renewable capacity is added to the bill.  The result is that the cost of developing, extending and renewing the Grid infrastructure falls on the shoulders of an increasingly squeezed middle whose incomes are still stagnating in the wake of the 2008 crash.

The crunch point will come when one or other of the “big six” energy companies simply walks away from its domestic electricity activities.  We are not there yet, of course.  But with overall profits falling, sooner or later investors and lenders will insist upon it.

In addition to being one of the few economists to see the 2008 crash coming, Steve Keen is one of just a handful worldwide to understand the essential role of energy in the economy.  As keen puts it:

“Capital without energy is a sculpture and labour without energy is a corpse.”

If you don’t believe that energy is vital for the economy, just turn off all of the power to your workplace for the day and see how much work you manage to get done.

It suits government to pretend that rising energy costs are nothing to do with them.  But next to protecting the country from foreign invasions, there are few more important functions of government than to provide us with the energy to guarantee a thriving economy.

The British government’s pipe dream solution to our looming energy crunch is the supposedly cheap gas that can be recovered from British shale gas deposits.  Once again, the problem with this is that governments listen to economists when they should be listening to geologists and engineers.  To an economist, shale gas will be cheap because there is lots of it.  An engineer, by contrast, will point out that nobody ever ran a power station on gas that remained several thousand metres below the ground.  An oil geologist might then point out that in a country like the UK where the geology is tortured and fractured, where existing land use makes three quarters of the shale deposits unreachable, and (especially) because there is no developed land-based oil industry and supply chain, fracking is an unrealisable Ponzi scheme.

It matters not one jot how much shale gas is buried beneath the ground.  All that matters is that the cost of extracting it is so high that few of us will be able to afford the electricity that it is used to generate (which is the main reason the hoped for new fleet of gas power stations never got built).  Without fracking, however, the British economy is finished.  There is no other affordable electricity to be had.

This brings us to the broader economic catastrophe that is brewing.  There is only so much that households and businesses can do to cut their electricity use without either going off-grid or taking a hit to their profits/budgets.  But because electricity is essential to the basic functioning of a business and a household, the spending cut is experienced elsewhere.  The additional money we now have to spend on electricity is money that would otherwise have been spent elsewhere in the economy.

Paradoxically, for businesses, automation – which often involves even more electricity use – is the best solution because it saves on much higher labour costs.  In reality this merely passes the damage done by high energy prices onto the public.  The alternative is that businesses scale back their activities and lay off or cut the hours of workers; again passing the costs onto the public.  For households, the choice is stark; simply cut out those things that you do not have to spend on so that you can afford those things that you do… until you reach the point where you are forced to choose between fuel and food.

At this point I am supposed to offer some greenwash hopium based around electric cars, solar panels and LED lightbulbs (all of which I think are great by the way).  But the reality is that we are rushing toward a different kind of energy-intense future – one where far more of our spending will go on energy and far more of our business/work activities will involve energy generation and/or energy conservation; often with manual labour doing what we currently expect machines to do.

The question is less where we are going than how we want to get there.  The choice is to maintain the current quasi-market arrangements so that an increasing number of us are driven into poverty to the point that the consumer economy collapses entirely; or we can treat energy as an essential utility that is developed and maintained as a national asset like, for example, the road network*, that we all contribute to through general taxation.

* I was going to say “the Royal Navy” until I remembered that Britain has aircraft carriers without any aeroplanes and six destroyers that cannot operate in tropical temperatures – perhaps hinting at the kind of energy future the current British government is likely to deliver.

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