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National Grid faces funding crisis

From the moment Britain’s energy supplies went into irreversible decline in 1999, the National Grid was doomed.  The only questions were about how long the process would take to unfold, and what we might do to replace it.

The reason for this is quite simple – National Grid is funded by a levy on bills.  With dwindling energy supplies and increasing dependence on imports, those bills were bound to go up; as indeed they have.  In my book, Britain’s Coming Energy Crisis, I outlined the fundamentals of the coming crunch:

“The economic feedback to high energy prices occurs both at the bottom and the top of the income scale.  Where the poor cut back, the rich go “off-grid”.  As the cost of micro-scale renewable energy generation (solar, wind, geothermal, etc) has fallen, so thousands of (mainly affluent) households have begun to generate their own electricity and sell any excess back to the Grid.  However, for the time being, this activity is essentially parasitic.  Since it is impossible to live entirely off grid, these affluent households remain reliant on the Grid for those periods when they cannot generate enough energy.  However, they are no longer contributing to the maintenance of the Grid that they depend upon.

“This raises what should be a key political issue – how do we fund the Grid in future?  At present, the electricity grid is funded through capital expenditure from the generating companies.  This investment is possible only because those companies can promise investors that they will generate sufficient future profits to pay a return on the investment.  If, however, an increasing number of households at the bottom of the income scale are ‘voluntarily’ disconnecting themselves, and a large number at the top are being paid to go off grid, the only means of maintaining profit rates is to further squeeze those households in the middle.  Obviously, this only serves to push even more households out at the bottom, while encouraging even more at the top to go off grid.  Ultimately, the energy companies cannot remain profitable.  Investors will flee.  Maintenance will fail.  Our energy supply will become intermittent.”

At the time of writing this, I faced accusations of pessimism and even fear-mongering.  However, this weekend, we learned that the industry regulator Ofgem is considering introducing a National Grid Insurance Premium on everybody’s bill to pay for the ongoing maintenance of the Grid.  As Emily Gosden at the Telegraph reports:

“Currently, the cost of maintaining and upgrading the networks is factored into the prices energy suppliers charge for electricity, accounting for about £140 a year on a typical household bill.  Households that install their own panels will need to buy less electricity, so will avoid paying as much toward the costs of the network.  However, most such households will still need to use the networks to draw power from the grid by night or in winter, and may also benefit from selling surplus electricity they produce to others via the network.”

Interviewed for the Telegraph article, Dermot Nolan, chief executive of Ofgem described the problem of funding the National Grid as “hugely challenging”:

“If people all go off grid, the phrase has sometimes been used that there will be a ‘death spiral’; that you’ll end up with some bizarre example that there’s only one person left paying the entire cost of the network. I think those examples are very extreme, but I still think there’s a huge challenge.”

Although Ofgem’s suggestion of an additional “insurance premium” on everyone’s bill might mitigate the problem for a time, it comes with problems of its own.  Despite currently low fossil fuel prices, the broader trend is upward simply because of the additional cost of technology-intensive extraction (e.g. hydraulic fracturing, open cast deep mining and offshore drilling).  So the drive for the affluent middle classes to go off-grid can only accelerate.  This trend will be exacerbated by additional “insurance premiums” designed to maintain the Grid – especially as the market in household battery storage develops.  Rather than today’s solar and wind systems that feed in and out of the Grid, we may well see the widespread development of entirely off-grid systems.

More worryingly, at the bottom end of the income ladder – where millions of families already have to choose between heat and food – any additional levy to maintain the Grid can only result in even more people disconnecting themselves.  Since even this cannot move people entirely off-grid (in the worst way) because standing charges and levies are included in bills even if no actual electricity is consumed; its main effect has to be more low income families being dragged through the courts for failing to pay their bills.  Obviously, this legal action must also be paid for out of people’s bills.

While Ofgem does not have a remit to propose it, in practice, there is only one fair way of funding the National Grid, and that is through general taxation.  Since the majority of the state’s tax income comes from progressive taxes – corporation tax, national insurance and income tax – this would ensure that those with the greatest resources shoulder more of the burden.  Any other solution must by definition fall hardest on those with the least ability to pay.  For this reason, we need a serious political debate about the future of energy in the UK – something that, unfortunately, is unlikely to happen until the lights go out… by which time it may be too late!

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