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Energy death spiral
Image: Gary Henderson

Low demand and renewables accelerate Britain’s energy death spiral

For several years, Britain’s National Grid has issued warnings about potential energy shortages as demand outstrips supply in winter.  However, the company, which operates the UK’s energy infrastructure, is now raising concerns about a new problem – low demand coupled to an excess supply of renewable electricity in summertime.

According to Susanna Twidale and Nina Chestney at Reuters:

“Summer electricity demand from the grid has been falling over the past few years due in part to a rapid increase in the amount of solar power generation on people’s homes and factory roofs.”

At face value, this appears to be a good thing.  However, it has a similar financial impact to excess demand in winter, because National Grid is obliged to pay extra to balance supply.  Whereas in the winter National Grid pays big businesses to do less while paying generators to produce more electricity:

“To prepare for the low demand National Grid, earlier this year secured 139 megawatts of ‘demand turn up’ capacity through which firms are paid to either use electricity or produce less power during the summer months when output is high from renewable energy sources such as wind and solar.

“Under the scheme the companies will conduct some operations overnight or at midday when there is a lot of renewable generation, or cut their electricity output when demand is weak.”

The key point is that any gap between supply and demand adds to the cost of operating and maintaining the Grid.  This cost is added to the price of energy and, in turn, passed on to ordinary households and businesses.

This is where the energy death spiral kicks in.  As a recent report by the UK Committee on Climate Change (CCC) discovered, when energy firms increase their prices we – collectively – do not meekly pay them:

“Improvements in energy efficiency have saved the typical household around £290 per year since 2008 as demand for electricity and gas has reduced. This saving has come largely through the replacement of older products such as fridges, freezers and boilers with new, higher-standard energy efficient alternatives.”

This is the affluent liberal-friendly news that the CCC chose to highlight.  However, buried deeper in their report is a discussion of the plight of the 3.2 million UK households currently experiencing fuel poverty.  These people do not enjoy the necessary disposable income or credit worthiness to purchase new, more energy-efficient household appliances; still less invest in subsidised rooftop solar systems.  Instead, they are obliged to simply disconnect themselves by limiting their use to essentials only.

So, broadly, as electricity costs increase, an increasing number of households and businesses at the top invest in subsidised solar systems and energy-efficient equipment and appliances.  Meanwhile a growing mass at the bottom are forced to stop using electricity altogether.  The result is that the rising cost of maintaining the energy infrastructure has to fall onto the shoulders of an increasingly squeezed middle until the point is reached where the income from bill payers is less than the cost of operating the grid.  When this point is reached, we will experience an energy crunch more economically damaging than the credit crunch of 2008.

In reality, the energy death spiral will become a political hot potato long before the National Grid becomes unviable.  Business and/or households will simply cease voting for governments that continue to load the cost of renewable and nuclear power onto their bills.  Sooner or later, the UK government will be forced to introduce a more equitable means of funding energy infrastructure.

The option floated by the industry itself is for a progressive version of VAT in which the more energy a household or business uses, the higher its rate of tax.  The obvious – although out of political fashion – alternative would be to simply nationalise the National Grid and pay for the infrastructure out of general taxation in the same way as we pay for the road network.

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Let us not forget that beyond hard-pressed bill-payers are thousands more who can no longer afford electricity at all