By Charlie Wilson
This is a terminal crisis of the government’s attempt to hold down pricing through opening up the market to competition from, as the phrase goes: “agile new competitors”. This seemed to be working until this year. In 2013 the Big 6 energy companies controlled 99% of the market. By 2020, this had been cut to 70%. In 2015, just 4% of customers switched their accounts. In 2019, 24% did. At the beginning of the year there were 70 companies supplying energy. By July, this had fallen to 49. It is speculated that by the end of the year this will be down to 10. Better fewer, but better?
This is because the wholesale price for gas has risen 250% this year, and 70% just in August. What that means is that companies operating on the margins and constrained by a price cap do not have the revenue to cover costs and are going bust. As Greg Jackson of Octopus put it, “there are idiot companies out there who offered bonkers low prices when the market was low and seek bail outs now that its high.” Company failures so far have affected 5% of the market and 1.5 million customers. In a reverse of their strategy hitherto, some of the remaining vulnerable companies are now lobbying the government to remove the energy price cap altogether; so, they can raise prices high enough to get out of trouble. Putting this in a free-market framing that they think will appeal to the government, wanting to “avoid a return to a selective monopoly.” As if anyone would stick with them if they raised their prices to the degree that they’d need to.
This is not new. There is something amnesiac about these crises, which are always presented as though they have come out of a clear blue sky and nothing similar has ever happened before. But it always has. One example is California at the turn of the century in which a combination of a deregulated market, long term supply contracts and rapidly rising wholesale prices led to energy shortages and company collapses between 2000 and 2001.
So far, the government has dealt with this with its usual breezy denialism, two parts Dr Pangloss to three parts Mr Micawber. The government Atlas is shrugging. Boris Johnson chunters on that “this will get better as the market sorts itself out”; which translates as “nothing to do with me Guv”. The BBC, channelling Minsters, as it so often does, reports that the prospect of loans to bigger companies to make sure they don’t follow the minnows down the pan is “very much on the back burner”(sic) and the government intends to “tough this one out”. They have no intention of bailing out the small companies. Customers will be transferred to the larger surviving entities instead, with current balances intact but liable to be put on a significantly higher tariff. They, of course, rule out nationalisation in principle, but in the event of one of the core ten big companies going under there is the possibility of putting in a “Special Administrator”, which is a temporary nationalisation of the sort they have previously resorted to in rail when all else has failed. Keir Starmer’s statement on Sunday morning that Labour would also not contemplate public ownership – on the grounds that “I do not agree with the argument that says we must be ideological” –performs his expected role of taking pressure off the government and keeping the horizon of what is politically imaginable from an alternative government within limits that are safe for capital.
The rise in prices has been the result of a sharp increase in global demand for gas as the world’s largest economies rebound after squashing the virus, like China, or fire up on as many cylinders as they can that are compatible with “living with” it, like the UK and US. This is the strategic determinant that makes Johnson’s optimism that “the market” will “sort itself out” so misplaced. If he thinks “the economy” will boom from here on, he’s got to assume an increased demand. In the absence of dramatically increased supply, the price will go up. Particularly in the Winter, which is on its way. There are other local factors which have had a real effect, like a cold Winter and late Spring this year, the fly by the seat of your pants “just in time” supply strategies that see keeping reserves as a dead weight rather than a defence. The UK’s reserve storage capacity was cut by 70% when the huge Rough storage centre in the North Sea was closed in 2017, rather than invest in maintaining it. Storage gives a cushion to plan, and possibly purchase at lower prices.
An unusual run of calm weather has reduced the contribution of wind energy, putting weight back onto fossil fuel in recent weeks; but these just add to the underlying trend and should not obscure the reason for it.
As one “senior industry adviser” cited by the Guardian noted “There’s nothing about this situation that wouldn’t be better if we were not so reliant on gas.” A view put more positively in Ed Miliband’s observation that “If we had been investing at sufficient scale in diverse, secure, zero carbon energy supplies and making energy efficiency a much bigger priority, we would not be in such a precarious position.” Energy efficiency is a key part of this point because reducing demand – and therefore bills – is as essential as changing the source of supply.
This, again, isn’t new. A ten-year-old report from OFGEM notes that “higher gas prices have been the main driver of increasing energy bills over the last eight years” (i.e. from 2002) and noting that post-crash economic recovery, especially in China, was leading to increased demand and therefore increasing prices. Plus ca change…
The UK relies on gas for around 39% of its electricity generation averaged out over the year in 2020. That is why the rise in gas prices have also had a knock-on effect increasing electricity wholesale prices by 49% this year so far. This covers wide variations over time, but also by region. According to the fascinating carbon intensity web site, in the last week South Wales relied on gas for 92.9% of its electricity, whereas Scotland didn’t use any at all. Nevertheless, overall, this is a heavy reliance. At the same time, 87% of domestic heating is supplied by gas, and it is also used in a huge proportion of domestic cookers.
In 2020, the UK used just over 1,000 Terawatt hours of gas. Just over half was domestically sourced from the North Sea and half imported, mostly natural gas from Norway, the Netherlands and Belgium that arrives by pipeline, but there is also a lot of Liquid Natural gas (LNG) that arrives by boat. 40% of this is from Qatar, 27% from the USA, 12% from Russia, 7% from Trinidad and Tobago. The UK remains the third largest gas producer in Europe and production has been stable for ten years. A small proportion of domestically produced gas is exported, mostly to Ireland, but there is an increasing to and fro with the Netherlands.
Within the UK, gas is used like this.
You can see a more sophisticated flow diagram version of this graph in here.
The paradox of Boris Johnson’s assertion that the market will sort itself out is that they are in no position politically to allow the market to do that. Allowing prices to rise to market rates would impose an even more sudden and significant financial burden on everyone, and an unbearable one on many. The price cap set by OFGEM, with the government pulling the strings in the background, is designed to prevent uncontrolled market mechanisms creating a crisis that the government would be unable to contain politically. All the same, there was a £96 a year increase in the cap in April and another £139 rise is coming in on 1st October. The cap is due to be reviewed in February, but there are confident predictions that it will be raised again by a further £178 from next April. That will take it from £1069 to £1482 in just a year, an increase of over a third, and there is no guarantee it will stop there. Rising energy prices will also directly feed into other prices of goods, especially food.
This will impact hardest on those on lowest incomes, as this is a flat increase and so will take the biggest bite out of the lowest household incomes. People going through fire and rehire, enduring a wage freeze, losing their jobs at the end of furlough or losing the £20 in Universal Credit uplift the day before the cap level is raised will be hit hard. If they are on prepaid meters because they can’t reliably sustain a direct debit, or don’t have a bank account, or are in debt, they will be hit even harder because this is a more expensive way to pay in the first place. This is predicted to throw 488,000 people into fuel poverty. The Rowntree Foundation predicts that an intensifying cost of living increase will leave a typical low-income household £1750 a year worse off by next April. Whatever you want to call this, “levelling up” it isn’t. This doesn’t seem to bother Johnson, who announced ” I don’t believe people will be short of food – and wages are actually rising” and “Christmas is on!” It’s quite possible that he doesn’t understand that the reason average wages are increasing is that so many low wage people have lost their jobs. If you have a room full of people and some of the shorter ones leave the room, the average height of those left increases, even though none of them have actually grown. It is equally possible he knows perfectly well what the situation is, but finds the lie a useful one to deflect attention from reality. The reality will, nevertheless, bite back.
As this unfolds there will be one off fixes in the immediate term. Perhaps an increase in Winter Fuel Allowance or Warm Homes Grants that will cover a proportion of the increased costs and make a politically useful feelgood sound bite – but – assuming that the Treasury can be pressured to allocate the funds – probably hedged round with all sorts of loop holes and complex application forms that make them as difficult to get as a Green Homes Grant. At the moment Kwasi Kwarteng, the Energy Minister, is making encouraging noises about these but is promising nothing definite. “We have discussions about the budget, and you will see what happens in the budget.” This is firefighting.
Tax Justice UK has pointed out that six companies made £16 billion in windfall profits during the pandemic between April 2020 and March 2021. SERCO, Rio Tinto, ASOS, Astra Zenica, Tritax Big Box and Scottish Mortgage Investment Trust. Their call for a 50% windfall tax would raise £8 billion from just these six companies, for Corporation Tax to rise immediately to 25% from 19% would raise a further £20 billion and equaling the taxation of capital gains and regular income a further £14 billion. As “magic money trees” go, this is a big one full of fruit that could be used to keep people out of fuel poverty. The Socialist Party, Unidos, Podemos coalition that runs the government in Spain is taking a course like this and should be seen as a model by Labour here.
Sustained increased gas prices will nudge many of those who can afford it off gas for central heating and cooking, but that incremental effect will have little impact for those who can’t afford to change without state investment to make it possible. A government serious about climate breakdown would invest heavily in speeding the transition away from gas as a fossil fuel, and in a crash programme to insulate entire estates that are in fuel poverty, to reduce bills and carbon emissions at the same time. There are 11 million badly insulated homes in the UK that are cold, damp and expensive to heat. The knock on health impacts (and costs) are obvious. Those who argue that the increasing costs of fossil fuels make it uneconomic to get off them are arguing for burning money and condemning the poorest to permanent fuel poverty.