UK’s Winter Energy Crisis Amid EU and US Actions
The UK is increasingly feeling the effects of Brexit, many of which were predicted by economists before the 2016 vote to leave the EU, but one effect that may have escaped their attention is this: the UK no longer has a layer of governance that continues operating even when it is in a governance vacuum. The impact of this is going to become clear as the energy crisis unfolds over the coming weeks.
From the moment when Russia invaded Ukraine, the EU began preparing for an energy crisis. Knowing the dangerous dependency of many EU countries on Russian gas, the European Commission put forward mandatory national gas storage requirements just two weeks after the invasion. That regulation has resulted in storage now being filled to an unprecedented 85% in the EU.
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Over the summer, the EU adopted a plan for gas rationing for 2022 and 2023. After a series of emergency meetings over the past two months, this week the Commission put forward legislative proposals requiring all member states to reduce electricity use by 5% during peak hours and to impose a windfall tax on record energy profits and redistribute them to consumers. The proposals also allow governments to cap electricity and gas bills. The Commission is beginning preparations for a deep reform of energy markets that could decouple the price of gas and electricity.
In the US, which is far less exposed to the volatility in energy markets than Europe, the Inflation Reduction Act nonetheless contains measures to shield consumers from the coming energy crisis by establishing funds for those in energy poverty, along with unprecedented climate legislation. The US government has also released strategic gas reserves and is incentivising energy companies to invest their record profits into increasing energy supplies, particularly from renewable sources.
The UK government, however, has been largely inactive, thanks to a power vacuum created by the Conservative leadership contest and the unfortunately timed passing of Queen Elizabeth II on 8 September. Following his resignation three months ago, Boris Johnson did not show much interest in governing while the leadership contest to replace him was under way. No new policies to prepare for the coming winter were adopted. When Liz Truss was finally elected as the next UK prime minister at the start of September, she quickly prepared an “energy price guarantee” to cap consumers’ energy bills at £2,500 a year, along with a support scheme to help businesses. She also spoke of vague plans to give out 100 new oil and gas drilling licences and lifting the moratorium on fracking for shale gas, but work on these plans was halted later that same day when the Queen died and parliament was adjourned.
According to a report in the Financial Times, companies have become very nervous, because now it looks like the support scheme to help businesses will be significantly delayed until at least November. “It is not worked through yet,” one government official told the paper. Businesses are not covered by Ofgem's price cap for consumers. “With no existing mechanism in place, ministers and officials are still struggling to work out how to limit companies’ energy bills,” the FT reports.
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By GlobalDataCritics have pointed out that Truss intends to fund her consumer energy bills capping scheme, which at this stage is a yet-to-be-implemented idea, with £150bn of taxpayer money, rather than using a windfall profits tax on energy companies as the EU is doing and Labour has suggested. This means that consumers will effectively be paying for their own bailout, facing higher costs later in exchange for lower costs now.
This is all the UK government has put forward to combat rising energy prices. Unlike the EU there has been no gas storage effort, no gas rationing plan, no electricity use reduction mandate, no market intervention.
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The UK currently has nine terawatt-hours (TWh) of gas stored, compared with 217TWh in Germany, 122TWh in France and 162TWh in Italy. Part of the problem is that the UK government dismantled its largest gas storage facility in 2017, a decision taken by then chief secretary to the treasury – Liz Truss. While Germany and Italy’s energy situation is obviously less secure than the UK’s because of their reliance on Russian gas, the gas market is going haywire, which will affect every country in Europe. Everyone is about to compete for the same non-Russian gas supplies the UK has been using. The UK uses a huge amount of gas, making it uniquely vulnerable to a gas shortage this winter. Britain is the fourth-largest per capita user of gas in Europe after Belgium, Italy and the Netherlands.
That is why the EU gas storage regulation that took effect on 1 July 2022 set targets across the Union, even for countries that are not dependent on Russian gas, like France. Some countries in the EU also currently lack gas storage capacity, such as Lithuania and Finland. However, those countries are now required to set up gas-sharing arrangements with neighbours that do have storage.
Were the UK still a member of the EU, its government would have been part of the energy crisis preparation meetings in Brussels. It would have been obligated to fill its gas storage facilities and set up sharing arrangements with neighbours – even during the period when its national government was essentially inactive because of the Conservative leadership contest. The UK government would also have had to draft a gas rationing plan for submission to the Commission, and it would now have to start preparing to cut electricity use and tax windfall profits, with at least some civil servants having to work during the grieving period for the Queen.
The British government is expected to resume work on 20 September following the Queen’s funeral, just as temperatures start to drop. They will be facing a looming energy crisis for which the country seems dangerously unprepared. With almost no gas stored and the only floated measure being an energy bill price cap still set at a very high level – and ultimately paid for by consumers themselves – British households and businesses are right to be worried. It will be a difficult winter across Europe, also for EU countries, but the EU's early coordinated action will help it weather the storm. By going it alone, the UK has squandered months of time it could have spent preparing.
This is a benefit to EU membership many in the UK may never have considered – when your national government is incapacitated, work at EU level continues.
