If there is one thing that Britons like to complain about more than the weather it is the state of the trains. An overwhelming majority of us in poll after poll believe that things were better back in the days before the unnecessarily complex Tory privatisation in 1996. The current Secretary of State for Transport, the hapless Chris Grayling (aka “the fascist who couldn’t get the trains to run on time”) is currently presiding over the slow motion collapse of the system as falling demand has forced major players like Virgin and Stagecoach to pull out of their franchise contracts. Meanwhile, timetabling cock-ups, staff shortages and perennial labour disputes combine with eye-wateringly high ticket prices to make life miserable for the average commuter.
Behind this tale of woe is a more profound economic question that has never been satisfactorily understood by the neoliberal administrations that have run the UK government for the past 40 years. This is whether state subsidies are far too high or not high enough. In the “mixed economy” days before privatisation, the nationalised British Rail was subsidised directly with a grant from the Treasury on the understanding that being able to move people (freight was always profitable) between their homes and their jobs provided a wider benefit to the economy. The downside, of course, was that the taxes of people who did not use trains were being used to lower the cost of travel for those who did. This was anathema to neoliberal economists and politicians who seek to create a free market even where such a thing is impossible. So it was that, among other things, the 1996 privatisation aimed to make rail passengers pay a greater share of the costs. The problem, however, was that any privatisation that required passengers to pay the full cost of rail travel would raise ticket prices so high that the system would collapse due to crashing demand.
The current compromise is that the UK government continues to shovel corporate welfare at the network and the operating companies – more, even, than had been the case when the railways were in public ownership – but passengers still struggle to afford fares that increase at well above the rate of inflation every year. While Grayling may be hoping that the fall in passenger numbers that resulted in the collapse of the East Coast Mainline franchise last year will be a one-off, all of the economic indicators suggest that similar collapses are to be expected in the near future.
Grayling’s response to the East Coast Mainline failure has been to run the franchise on a not-for-profit basis – one of the options proposed by the opposition Labour Party. Longer-term, however, if falling passenger numbers, lower profits and higher state handouts to the operators continue, it is hard to see any government resisting the public clamour for re-nationalisation (either in the form of a direct national industry or a single arms-length, private not-for-profit company). The alternative – letting the railway companies go bust – is simply too devastating in both political and economic terms; and would have a detrimental impact on the environment if people switched to commuting by car.
While not entirely the same, Britain’s privatised energy system has some uncomfortable similarities with its failing railways. Perhaps the least obvious of these is analogous to the relative values of freight and passenger traffic. Just as rail freight requires far less state subsidy than passengers, so the supply of energy to UK businesses is far less unprofitable than the supply to households. Not, of course, that you would know this from the mainstream media headlines that accuse the “big six” energy companies of operating a cartel to rake in huge profits from beleaguered households. Eighteen months ago I published an article pointing out that while the energy companies as a whole are still highly profitable, their UK energy supply divisions are not:
“It is here that we find an uncomfortable truth behind the media headlines about the British Gas price hike. While Centrica [the parent company] 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.”
Where the energy industry differs from the railways is in the way that these losses are paid for. Whereas railways are funded progressively (the more you earn the more you pay) via taxation, the energy companies are funded regressively (rich and poor pay the same flat rate) via customers’ bills. As with all other countries that have been switching to non-renewable renewable energy harvesting technologies, Britain’s energy bills have risen far ahead of inflation for several decades. This was offset to a small extent under the last Labour government’s version of the “Green Deal” which provided energy efficiency grants to low-income households – this was replaced with loans by the Tory/LibDem coalition. Even this, however, was cancelled out by the generous feed-in tariff system in which those wealthy enough to fit solar panels or install a wind turbine were offered a generous price guarantee for the electricity they supplied to the grid; even when supply outstripped demand. From April 2019, this system is being replaced with a far less (but still) lucrative rate for the purchase of surplus electricity from renewables.
The big pricing difference more recently is the switch from a flat subsidy added to customers’ bills in favour of “Contracts for Difference” auctions (which the European Union has judged to be unlawful). Potential electricity suppliers bid to supply electricity at their best price, with the lowest price winning the auction. Much was made in 2017, for example, about two successful wind farm projects that claimed to be able to supply electricity at just £57.50 per megawatt hour. The way Contracts for Difference work is that the companies involved will get that price irrespective of the actual wholesale cost of the electricity they generate. If the wholesale price drops to £45 per MW/h, the companies will pocket the £12.50 difference. If, on the other hand, the wholesale price rose to £70 per MW/h the companies would have to pay the additional £12.50 from their profits.
The question, then, is whether £57.50 per MW/h is a realistic estimate of the future wholesale price of UK electricity. If it is an over-estimate, then the generating companies can look forward to a bonanza. There are, however, several recent trends that suggest that – rather like Virgin and Stagecoach’s bid to run the East Coast Mainline, the price underestimates the future costs.
Just like the railway companies, electricity suppliers have seen a big fall in demand since the crash of 2008. As Joshua S Hill at CleanTechnica reports:
“Electricity generation in the UK in 2018 fell by 63 TWh, or 16%, from 2005 levels despite the fact the UK population increased by 10% over the same period. Further, according to Carbon Brief, if per capita electricity generation had continued at 2005 levels, then the total in 2018 would have measured 439 TWh, meaning that the country has saved 103 TWh relative to constant per capita generation.”
Among the reasons for this are energy saving measures that include improved home insulation, greater energy awareness, improved energy efficiency of domestic appliances and the switch to LED lighting. Hill discounts the idea that falling demand reflects any underlying economic stagnation; pointing to GDP figures:
“UK electricity generation continues to track away from traditional economic orthodoxy, which states a growing economy must be matched by a growing use of electricity. In fact… the break between generation and GDP split decades ago, in 1980, since when the economy has expanded more than two-fold.”
The year 1980 gives a clue as to why Hill is wrong on this one. For centuries Britain’s debt to GDP ratio was stable at 55 percent. Things diverged dramatically in 1980 when the Thatcher government relaxed borrowing regulations to allow social housing tenants to buy their homes. As energy economist Tim Morgan explains:
“Deteriorating prosperity might be ‘a new fact’ in the world as a whole, but it’s an established reality in the West – with the single exception of Germany (rather a special case), no developed economy covered by SEEDS has enjoyed any improvement in prosperity at all since 2007. In most cases, the decline in personal prosperity has been happening for longer than that. But our societies seem to have learned almost nothing about what’s going on – and, until the processes are understood, crafting effective responses is impossible.
“Historians of the future are likely to be bemused by our futile efforts to escape from the energy dynamic in the economy. From the turn of the millennium, we started pouring ever larger amounts of debt into the system. This led, with utter inevitability, to the 2008 global financial crisis (GFC I).
“Undeterred, we then compounded cheap and abundant debt with ever cheaper money, yet the inevitable consequences of this process will still, no doubt, be declared both ‘a surprise’ and ‘a shock’ when they happen. We surely should know by now that we have an “everything bubble” propped up by ultra-cheap money, and that bubbles always burst. If there’s any sense in which “this time is different”, it is that, since 2008, we’ve taken risks not just with the banking system, but with money itself.”
The apparent divergence between energy and the economy – which is particularly stark in the UK because of the prominent role of the City of London in the economy – is merely the over-inflated debt bubble. To understand this at a personal level, examine the difference between the total value of all of your property, including pensions and savings, the nominal value of your house, car, household goods, etc. Now imagine what it would be worth in the event of a collapse of the global banking and financial system. Some of it – your house, various tools, clothing, food stocks, etc. – would continue to have great practical value. But most of it – the contents of your bank account, your pensions and savings, your now unfuelled car, your disconnected electrical goods, etc. – would be practically worthless. That, on a global scale, is what awaits us when all of the debt we have run up over the last four decades falls due… at which point, energy and GDP will rapidly re-converge.
For those energy companies that have gambled (i.e. borrowed) on the understanding that demand for electricity is bound to increase, the decline in UK energy consumption is a problem that plays into a long-standing “energy death spiral” in which any attempt to raise prices results in wealthy businesses and consumers generating their own power while poorer consumers simply shiver in the dark; leaving a shrinking “squeezed middle” to pick up the tab. This has already hit a new band of smaller energy supply companies founded to take advantage of new regulations aimed at encouraging competition (which is supposed to force prices down). Kevin Peachey at the BBC reported earlier this month on the fate of some of these supposedly leaner and meaner supply companies:
“Energy supplier Economy Energy, which was recently banned from taking on new customers, has collapsed…
“Economy Energy is the latest of a host of small suppliers to fold…
“In the past year, a number of small energy suppliers have gone bust, including Spark Energy, Extra Energy, Future Energy, National Gas and Power, Iresa Energy, Gen4U, One Select and Usio Energy.”
It is likely, given that huge multinational corporations like Centrica and SSE have to subsidise electricity supply out of their non-supply corporate activities, that the growing list of failed small suppliers will continue to expand. Not least, because the supply costs are likely to increase in future too. This is because the UK faces energy shortages in the 2020s resulting from a lack of baseload capacity.
UK coal generation is (or at least was) to be phased out by 2025. Its baseload generation was to be replaced with a new fleet of nuclear power stations that would also have to replace Britain’s older nuclear power plants. But as Amit Katwala at Wired reports:
“The UK’s nuclear power capabilities are slowly disappearing. Right now, the country gets about 20 per cent of its power from nuclear – it’s second only to gas as a source of electricity. But by the early 2030s, only one of the seven existing nuclear power stations in the UK is still planned to be in operation, and attempts to build replacements continue to falter.
“On Thursday, Japanese giant Hitachi pulled the plug on the £16 billion Wylfa Newydd nuclear plant on Anglesey in Wales, as well as another planned project at Oldbury in Gloucestershire. It is the latest in a string of blows to the UK’s nuclear new build programme. In November last year, Toshiba pulled out of the Moorside project in Cumbria – between them, the three scrapped power stations would have met 15 per cent of the UK’s future electricity demands.”
Katwala’s “solution” is to turn to renewable energy although to achieve this requires the deployment of yet-to-be-invented technology:
“However, renewables are intermittent, which is one of the reasons the UK government has always seen nuclear as an important part of the energy mix. Having its own nuclear power stations reduces reliance on foreign suppliers, and provides stability during longer lulls in the supply of renewables.
“What’s needed is seasonal storage – technology that can smooth out the peaks and troughs inherent to renewable energy at a large, longer-term scale…
Katwala provides us with no clue as to where such a technology is supposed to come from, but merely calls on the state to fund further research. The problem is that seasonal storage (e.g. to capture sunlight in June for use in December) is well beyond anything we are currently doing with batteries – which struggle to provide more than a few hours of power – or pumped storage – which would require most of our remaining valleys to be flooded – both at costs well above what customers can afford to repay. To give a comparison from the USA, it is estimated that to run New York State on renewables (something they have committed to do by 2040) would need some 1.5 million MW of battery storage (roughly 160 million Tesla Powerwalls). But according to the EIA there is only a little more than 700 MW of battery storage in the entire United States.
For the foreseeable future the UK will have to use gas to flatten out the peaks and troughs in solar, wind and biomass. And even this may not be sufficient to maintain supply during adverse weather conditions (of the kind that will be more frequent as the climate shifts). As Grant Wilson and Iain Staffell explain for The Conversation:
“In 2018, Britain was coal-free for a record 1,898 hours – that’s up from just 200 hours in 2016. Coal generation fell for the sixth year in a row, and the country now has substantial periods without coal power (the longest stretch was just over three days straight)…
“However, low levels of coal generation averaged across the year mask its importance at times when the electrical demand is particularly high. For example, over the week of the Beast from the East cold snap in February 2018, the gas system experienced significant stress and coal stepped in to provide nearly a quarter of Britain’s electricity. As coal generation is set to be phased out by 2025, the electrical system needs to continue to find alternative power sources to cope during extreme weather events.”
A similar issue emerged during the six week heatwave in May and June, when the UK’s wind turbines fell silent and increased gas generation had to be used to meet demand. And it is this intermittency/baseload problem that results in renewable energy being a parasite that is slowly killing its host rather than as a means of weaning us all off fossil fuels. The problem is that the cost of balancing out supply and demand is not included in renewable energy generators’ balance sheets, but instead falls on the already stressed shoulders of businesses and households.
Nor is the balancing cost merely the wholesale price of the coal, gas and diesel oil that has to be used. When there is insufficient electricity, large businesses are paid to shut down their activities. When, on the other hand, there is surplus electricity, these businesses are paid to use more. At the same time, coal and gas generators are obliged (but not compensated) to cut their supply to the grid. All of those costs are then loaded onto bills… which is great for the owners of renewable energy but bad for everyone else.
One consequence of the current UK energy set up is that the government has been forced to introduce a legal cap on the price energy companies can charge consumers. While, for the moment, the cap only applies to standard tariffs and has minimal impact on company profits, it is likely that politicians will be queueing to outbid each other on how low they will set the energy price cap if only we vote for them.
None of this, however, addresses the UK’s fundamental problem – one that is itself a microcosm of the global energy crisis that will emerge in the 2020s. The energy system, together with the economy it enables, was built on the back of an abundant supply of cheap fossil carbon fuels. As Tim Morgan explains:
“Throughout the period from 1760 to 1965 – roughly speaking, from the start of the Industrial Revolution to the post-1945 low-point of the ECoE [energy cost of energy] parabola – the world economy was characterised by rapid growth in aggregate prosperity. This translated into steady improvement in personal prosperity despite the huge growth in population numbers over that period.
“This era was characterised by (i) expansion in the gross amounts of energy consumed, and (ii) reductions in ECoE caused by reach, scale and technology. Surplus energy per person was thus on a strongly rising trajectory, growing at rates faster than the expansion in aggregate energy supply. The world became accustomed to growth, which came to be regarded as a natural phenomenon, even though some economists have conceded that our understanding of what makes growth happen is imperfect…
“Latterly, however, as the upwards trend in ECoE has become exponential, the scope for further expansion in prosperity has been undermined. It is probable that the rise in trend ECoE between about 1990 (2.6%) and 2000 (3.9%) marked a significant turning-point after which growth became ever harder to attain.”
Because the energy cost of obtaining energy (which is similar to “net energy” or “energy return on investment” calculations) is increasing, the amount of surplus energy left over to power the economy has been shrinking. Financialisation though debt and increasingly lower interest rates has allowed us to paper over this growing chasm to some extent – for example, allowing unprofitable fracking and tar sands to be brought into short-term production. But as the energy available to the economy shrinks, the ability to pay back the debt evaporates. Only a new cheap and abundant energy source can provide a route out of this predicament; and thus far, no such energy source has been found (at least, not one that we are anywhere close to knowing how to exploit). Meanwhile, the few energy alternatives available to us – wind, solar, conventional nuclear and shale gas – are so expensive that the cost of supplying them cannot be borne by the customer base.
As with Britain’s railway network, the state can put its hand in everyone’s pockets and provide direct subsidies to the energy companies. When it does, however, it is simultaneously removing that currency from elsewhere in the economy. The resulting drop in economic activity – as seen, for example, the gathering retail apocalypse – also translates back into a falling demand for rail travel and falling energy consumption. In short, financial manipulation can delay our appointment with destiny, but it cannot save us from it. And when the time comes, we are all going to be doing a lot more walking, cycling and shivering in the dark.
As you made it to the end…
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