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UK energy death spiral accelerates

Image: Damien Shaw

The “energy death spiral” is the process in which increasing numbers of business and domestic consumers disconnect themselves from the centralised electricity grid system.  The result is that the cost of maintaining the existing infrastructure and investing in new projects (like offshore wind and new nuclear) fall onto a shrinking “squeezed middle.”

Affluent households and businesses with access to capital investment opt out by deploying their own renewable energy generation.  For most households this means installing rooftop solar arrays.  This allows them to save on their electricity consumption and to be paid for any excess electricity they generate.  Where businesses can raise the capital to invest, the choices are much greater, and include wind turbines and biomass.  As “green” technologies become more available so increasing numbers of UK businesses are turning to them as an alternative to the Grid.  As Nathalie Thomas and Michael Pooler in the Financial Times report:

“A recent survey of industrial companies by PwC suggested 17 per cent [of UK businesses] plan to generate all, or almost all, of their own electricity within five years. A further 45 per cent want to reduce their dependence on the grid by producing some power on site…

“Some are generating their own power on site, others signing long-term supply agreements with renewable energy developers. In extreme cases, some are trying to move “off grid” entirely…

“This avoids charges such as network costs, which fund the UK National Grid and local distribution companies, whose cables carry electricity from the national transmission system to homes and businesses. Network costs can make up about a quarter of regular energy bills.”

The problem, of course, is that those network costs do not go away.  Someone has to pay for them; and there are only three groups who can – consumers, investors or taxpayers.  For the time being, network costs are being loaded onto consumers.  But the downside of this is that it increases fuel poverty at the bottom of the income ladder while pushing small and energy-intensive businesses close to bankruptcy.  Once energy costs push a business’ overheads higher than income, it is only a matter of time before that business is forced to close.  In a similar way, once household energy costs push outgoings above income, sooner or later the household is going to default.

Once again, the result is that the network costs fall onto the shoulders of those consumers who still depend upon the Grid and still have the necessary income to keep paying.  However, as we have seen in each of the last three general elections, energy prices have become a political hot potato for which there is no obvious solution.

The UK government’s populist knee-jerk in favour of a price cap is, in effect, an attempt to transfer a proportion of the network cost onto investors in order to relieve the burden on consumers.  The problem with this approach, however, is that it is far easier for investors to go off-grid than it is for energy consumers.  Put simply, if the returns from investing in energy companies is forced down, investors will simply move their money elsewhere.

Investor-flight is not a theoretical scenario for the future.  It is already happening.  In August, we reported that the cost of supplying electricity to Britain’s homes and businesses was being internally subsidised by the energy companies themselves:

“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.”

How long companies like Centrica will continue to cross-subsidise their activities in this way should be a central concern to a government that believes the electricity-dependent so-called “digital economy” will be at the centre of Britain’s post-Brexit economic future.  However, by persisting with its proposed price cap, the UK government looks likely to exacerbate the problem.  As Jillian Ambrose at the Telegraph reports:

“Britain’s second-largest energy supplier is eyeing the exit as the Government’s crackdown on energy bills threatens profits.

“SSE, formerly known as Scottish and Southern Energy, may turn its back on supplying gas and power to almost 8m British homes ­after years of political threats against the six largest energy companies comes to a head.

“City sources say the FTSE 100 energy giant is quietly discussing early plans to sell off its customer accounts, or even spin the business off as a separate listed company in order to focus on networks and renewable energy and avoid the Government’s looming energy price cap.”

Nor is SSE the only energy supplier to be hit by investor-flight according to ThisisMoney:

“Almost £1billion was wiped off the stock market value of energy firms last month when Prime Minister Theresa May announced plans to cap bills – which have reached an average of about £1,200 a year – estimating it could save customers on standard variable tariffs around £100 a year.”

The real problem is that energy price increases are not simply some temporary blip that will be reversed when some new (and yet-to-be-invented) energy source and/or technology ushers in a golden age of electricity too cheap to meter.  In the course of the last decade, we have seen the age of cheap and abundant fossil carbon fuels disappear in the rear-view mirror.  In part, this is simply because oil, gas and coal fields – like those in and around the UK – have been depleted.  In part it is because climate and environmental imperatives prevent us from burning what fossil carbon we have left.  However, the current alternatives – nuclear, solar, tidal, wave and wind – while lowering the cost of “fuel,” massively increase those ubiquitous network costs.

I do not rule out that at some time in the future someone will find a way of making nuclear fusion, fourth generation fission and next generation battery storage commercially viable.  It might happen, but these technologies have been just a few years away for the six decades that I have been around, and I see little evidence of them putting in an appearance before I’ve gone.  In their absence, we face increasingly expensive energy that will form an ever larger proportion of business and household non-discretionary spending.  Assuming that we do not want to go back to some eighteenth century pre-industrial economy, then it will take more than a populist politician’s price cap to maintain the vital flow of energy to our homes and businesses.

If investors will not fund the energy grid, and consumers are increasingly unable to, then there is only one group left who can… taxpayers.  This appears to be the direction that the British Labour Party are moving toward – stopping short of nationalising the entire industry, but taking the key infrastructure into public ownership and funding it out of state coffers.  However, even this is insufficient so long as the gross income inequality that has been allowed to develop since 1980 (and which has accelerated since 2008) is not addressed.  Put simply, in a world in which energy prices have to increase, household incomes must also increase.  The alternative is that, sooner or later, the lights go out.  And if that happens, then the economy will go out with them.

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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