Britain’s Energy Crisis Puts Net Zero In Trouble
(Bloomberg Opinion) -- Faced with an energy crisis and a pile-up of winter pressures, it’s no wonder Boris Johnson has his story and is sticking to it. The U.K. government has said that the rising prices are temporary and that the recent failures of several suppliers merely reflect market forces at work.
Politically, this narrative makes sense. Spiking prices and supply worries tend to be the kinds of things voters remember at the polls. Johnson also wants to focus attention on his upcoming set-pieces, including the Conservative party conference, a budget review and the United Nations’ COP26 climate summit in November.
On Wednesday Johnson told the UN General Assembly that Kermit the frog was wrong to say it’s “not easy bein’ green.” Kermit wasn’t there to defend himself, but he might have said that truly going green means owning the challenges that come with it. The energy crunch tests that commitment because it requires the government to rethink the way the market is structured and regulated — and square with consumers about the costs of decarbonization. So far, there’s little sign of either.
When Jonathan Brearley, chairman of Britain’s energy regulator Ofgem, appeared remotely before Parliament Wednesday, the lights went out and an alarm sounded in the background. How symbolic. The agency had just put five energy suppliers on notice that their licenses could be revoked if they fail to pay overdue renewable energy levies. Two more firms — Avro Energy and Green Supplier Limited — had just announced they would stop trading. That makes nine suppliers that have folded this year, serving some 1.9 million households.
“The government will not be bailing out failed companies,” Business Secretary Kwasi Kwarteng told Parliament this week. “Taxpayers should not be expected to prop up companies which have poor business models and are not resilient to fluctuations in price.”
This kind of statement maps neatly onto outdated stereotypes of profiteering energy companies. But as competition was introduced into the sector, especially in the last decade or so, it became far more innovative and consumer focused. The vast majority of customers are happy with their suppliers.
A six-fold increase in gas prices has meant that weaker suppliers — whose hedging strategies were inadequate or who had cut prices too drastically to win customers — couldn’t survive. But it’s wrong to put the blame entirely on the sector; many suppliers were hedged but had been squeezed between a massive spike in wholesale prices. As Brearley acknowledged, the majority of firms have been making a loss.
The government can’t ignore the role played by the current regulatory environment, which includes a price cap set by Ofgem twice a year along with layers of regulatory costs.
“A well-known side effect of the energy price cap is that it removes the capacity of retail energy companies to save for a rainy day,” says Andy Mayer, the chief operating officer of the Institute for Economic Affairs, who has just put out a policy paper arguing Britain is giving up on gas before it has viable alternatives in place.
Losing money is not unique to the retail energy sector, but the cap means it is highly vulnerable to any price spikes. And it’s smaller firms, with less capacity for sophisticated hedging strategies, that are most at risk.
The current crisis hands some leverage to larger suppliers that want government support to take on customers who’ve been left stranded. The government has so far resisted calls for state-backed loans or added subsidies to support a reallocation of customers (some of whom are on loss-making tariffs or have accounts in arrears). But there is a danger that help will go toward bigger firms, while smaller ones are left to manage on their own. It’s an odd position for a Conservative Party that once styled itself as the champion of the small- and mid-sized business sector, the risk-takers and the innovators.
“Some suppliers were reckless, but there are a bunch of great suppliers out there innovating, including many smaller ones,” says Gary Miles, head of Gentrack, which provides billing and customer experience systems to many large and small suppliers. “You can’t just say that big is good and small is bad.”
The disruption in the energy sector is particularly awkward just before COP26, where the government will be pushing its decarbonization agenda. While accelerating the switch to renewables means marginal energy costs would be low, it makes us all more vulnerable to supply shocks. If there’s no wind or sun, energy will need to be taken from somewhere; with less gas and coal available, other sources will become more expensive.
That will require a rethink of how Britain’s energy market is structured and regulated to allow more flexibility. “People need to accept that gas is part of the transition to net zero,” says Tony West an energy consultant and expert on hedging. At the same time, he says, the government should stop subsidizing wind and solar, which is no longer needed, and instead foster more research and innovation. “The subsidies are in the wrong place; they are not supporting innovation.”
If Britain is to have a more resilient energy sector and manage the transition to net zero in a volatile energy environment, the prime minister will need to be more honest about the trade-offs involved. Although the government says it’s sticking with the cap on energy prices for now (it will rise from next month), consumers and taxpayers will likely bear a much higher burden eventually.
“The U.K. has done a great job creating competition in the energy sector and making Britain a clean-tech beacon globally” says Miles, who is originally from Texas. But, he notes, government can either encourage that dynamism and investment or end up quashing it. “Other markets around the world are looking to the U.K. now to see how they handle this.”
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.
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