Insulating the UK from volatile gas prices
Gas prices spiked to their highest level in seven years yesterday, prompting fears consumer bills would also go up. The price hike leads to questions over the UK’s future energy strategy: Do we want to rely on gas imports, or would decarbonising the energy sector protect the UK from a volatile market?
The price rise, reported in the Financial Times, comes as parliament is set to debate an amendment to the energy bill requiring the UK energy sector to decarbonise by 2030. New research by thinktank the Institute for Public Policy Research (IPPR) suggests the amendment could be a good way to insulate the the economy from changeable fuel prices by reducing the UK’s dependence on gas imports.
Volatile gas prices
The gas price hit its highest point since 2006 yesterday at £1.15 per 100 cubic feet. Regulators and energy companies often blame rising wholesale gas prices for increasingly steep consumer energy bills.
A power outage at a Norwegian gas plant was the main reason for the price jump, further exacerbated by a leaking crude oil pipeline in Scotland blocking the supply of natural gas from fields further up the production chain.
The National Grid tells Carbon Brief the “market responded exactly as it should have done”, with more supplies from stores and other European imports filling the gap. National Grid says the market is now “back in balance”.
Yesterday’s price spike isn’t expected to have any long-term effect on the UK’s supply, so there shouldn’t be any extra cost to consumers. But the fact that the hiccup ended even in a temporary price jump highlights that markets can be vulnerable to supply chain problems.
Craig Lowrey of Utilities Exchange, quoted by Bloomberg, said the market’s response “highlights the nervousness of traders” at the UK’s increasing reliance on the Norwegian pipeline for gas supplies.
The situation also raises the question of how vulnerable the UK’s economy might become to unexpected gas price volatility.
Andrew Horstead of energy consultancy Utilyx tells Carbon Brief the incident “shows how reliant the UK has become on imported gas” and highlights the need for the government to invest in the UK’s domestic gas industry.
And the chancellor, George Osborne, has previously announced plans to do just that through a series of tax incentives in the government’s gas generation strategy. The aim is to attract investment to add up to 37 gigawatts of gas power to the UK’s energy mix – the equivalent of building a 40 new power stations. The strategy could encourage investment in the UK’s shale gas industry, and help wean the UK off imports.
The chancellor has previously stated his admiration for the US’s shale gas revolution which has decreased the US’s reliance on energy imports and made it more energy secure.
Decarbonising the UK’s energy sector
But the chancellor’s strategy is a gamble, according to the New Scientist. It says if the UK’s shale gas reserves aren’t as large as the chancellor thinks it could leave the UK locked into a carbon intensive strategy that remains vulnerable to rising gas import prices.
And the chief of the government’s key scientific advisor the Committee on Climate Change (CCC), David Kennedy, suggests a dash for gas “would entail unnecessary costs and price increases.” The CCC recommends a target for the power sector of 50 grams of carbon dioxide emissions for every kilowatt hour of electricity generated.
Following the CCC’s recommendations could insulate the economy from the effects of a volatile gas market, according to new research from IPPR.
IPPR’s new figures show the UK could save £23 billion by 2045 if it adopts an energy strategy based on the stringent 50 grams decarbonisation target. The calculation is based on a conservative government projection of an 11 per cent gas price rise by 2020 – so it’s not even dependent on a particularly large price spike.
IPPR’s senior research fellow, Clare McNeil, tells Carbon Brief exposure to volatile international energy prices would be a real problem for consumers, particularly households on low incomes who can’t afford the extra costs. IPPR says pursuing the treasury’s pro-gas scenario could mean household bills rising by as much as £229 – over £150 more than if the UK sticks to a 50 grams decarbonisation target.
In contrast, the thinktank argues a low carbon pathway would buffer the UK from market volatility while providing other benefits like lower bills and allowing the UK to meet its climate targets.
Questioning import reliance
McNeil says the latest price upturn should “force us to question how reliant we want to be on gas imports” in the long run. Adopting a decarbonisation target could be one way to encourage investment in renewable technologies over gas at the same time as providing the UK with greater energy security.
So while the latest gas price hike isn’t much to worry about for now, failing to reduce dependence on gas imports – whether through a decarbonisation strategy or increasing the UK’s domestic production – could make the UK much more vulnerable to events like the Norwegian power outage in the future.