Britain's energy crisis explained as cost of living woes await new PM

Europe's energy crisis will force annual household costs to rise above £3,500 from October

Electricity generation in the UK is affected by high fuel prices in Europe. Getty
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British consumers face an 80 per cent increase in household fuel bills this autumn, regulators announced on Friday in what they acknowledged was "devastating news".

Regulator Ofgem said the energy squeeze across Europe meant it had no choice but to raise the price cap, but called on Britain's next prime minister to "act urgently" and ease the pain.

How bad is Britain’s energy crisis?

With winter coming and fuel bills going through the roof, the cost of living crisis is deepening. The UK inflation rate is already in double figures and is tipped to reach an eye-watering 18.6 per cent, the highest for half a century.

The average annual household bill is going up to £3,549 ($4,186) from October and Ofgem said things could get "significantly worse" in 2023.

Analysts who correctly forecast the increase said another substantial jump to £5,386 was likely when the price cap is next updated in January.

Foreign Secretary Liz Truss and former chancellor of the exchequer Rishi Sunak, the two candidates to become Britain’s next prime minister, both acknowledge the country is facing a cost of living crisis as well as a potential recession.

The managing director of energy company EDF said British consumers were facing a "dramatic and catastrophic winter".

Why are energy bills so high?

The price of natural gas, which Britain uses in large quantities to heat homes and generate electricity, is at an all-time high on European markets.

Prices went into overdrive after Russia invaded Ukraine and slashed its natural gas exports to European countries, such as Germany and Poland.

Although the UK imports little energy directly from Russia, the squeeze across Europe makes high prices inescapable when Britain imports gas and electricity from the continent.

Prices were high even before the war, as supply chain problems left over from the coronavirus pandemic caused havoc in the global economy, and safety issues at French nuclear plants have added to the energy crunch.

Will there be power cuts?

Chancellor Nadhim Zahawi did not deny a report that planned power cuts could take place in a worst-case scenario involving cold weather and reduced imports from Norway and France.

The National Grid is holding four days of exercises in the autumn to simulate how it would respond to a gas emergency.

Where does Britain get its gas?

A little more than 40 per cent is produced domestically from gasfields in the North Sea, but the majority is imported.

Norway is by far the largest supplier, thanks to imports through a 1,170-kilometre undersea gas pipeline.

There are also pipeline links with Ireland, Belgium and the Netherlands, and liquefied natural gas is shipped in from Qatar, the US and a small amount from Russia.

Britain also buys pre-made electricity from France, Belgium, the Netherlands, Norway and Ireland, drawing, for example, on French nuclear power stations.

Another factor weakening Britain’s hand is that it has fairly little gas storage capacity, especially since its largest gas tank was closed in 2017 — a decision the opposition has sought to link to Ms Truss’s time as a treasury minister.

What is the government doing to help?

Prime Minister Boris Johnson’s government announced £37 billion ($44bn) of support for households in May, including a flat-rate payment of £400 ($470) to every household in six instalments over the winter.

Millions of poorer households will receive an additional one-off payment of £650 ($765).

Local authorities in England are also being handed an extra £500 million ($590m) to distribute to vulnerable people.

What are the Conservative candidates promising?

Dealing with the cost of living crisis has become the main dividing line between the two candidates.

Ms Truss is promising tax cuts in an emergency budget, arguing these would stimulate growth and that it is pointless to tax people more in order to “give them their own money back”.

"She will immediately take action to put more money back in people’s pockets by cutting taxes and suspending green energy tariffs," a campaign spokesperson said in a statement that neither offered nor ruled out further support.

Mr Sunak has condemned Ms Truss's tax plans as unaffordable and said cuts to national insurance would be of no use to pensioners, signalling instead that he would increase direct support.

Conservatives on the campaign trail — in pictures

Will the support be enough?

Many are doubtful. Mr Lewis said the existing support package was based on earlier predictions of a 42 per cent rise in prices, instead of the 80 per cent now coming into view.

Some politicians say a response on the scale of the Covid-19 crisis, when Mr Sunak as chancellor spent £400 billion ($470bn) covering people’s salaries during lockdown, is needed to meet the moment.

The opposition Labour Party is ramping up pressure on ministers by saying it would freeze energy bills via a windfall tax on oil and gas producers.

“We are beyond tinkering around with small changes on bills or environmental costs,” Iain Conn, the former boss of energy company Centrica, told BBC Radio 4’s Today programme.

Mr Zahawi said he was drawing up options for the next government to "deliver support for those who need it most as soon as possible".

What else can be done this winter?

Paul Drummond, an energy expert at University College London, said the only short-term fix was improving energy efficiency to lower demand.

His recommendations include installing heat pumps and encouraging people to turn down the flow temperatures on their boilers, which should make them run more efficiently without making people colder.

The EU has moved in this direction by ordering member states to cut gas consumption by 15 per cent, but Britain has not introduced any such initiative.

“Looking at short term measures, the options are limited, but I think energy efficiency policy is really the area that's had nowhere near significant enough attention on it,” Mr Drummond told The National.

“It's the thing that really could help very strongly this winter and particularly next winter. Everything else is more medium term.”

What can be done for future winters?

There is a consensus that Britain should generate more energy at home but less agreement on how to go about it.

Mr Sunak has promised to drive up North Sea oil and gas production, building on an energy security strategy published by Mr Johnson’s government in April.

Environmental activists, who object to increasing fossil fuel production, say this is less attractive than it sounds because energy companies will sell their gas to the highest bidder, meaning Britain may not benefit.

Wind is another battleground. Offshore power is becoming significantly cheaper, said Mr Drummond, with some electricity due to come on the grid from 2026 that will be eight times less expensive than gas.

But Mr Sunak has promised the Conservative Party’s homeowning base that even a cautious move towards more onshore wind power would be scrapped if he becomes prime minister.

And both candidates have called the expansion of solar power into question by saying they would protect farmland from photovoltaic (PV) panels.

“It does concern me if they are effectively, through one means or another, banning onshore wind and solar PVs,” Mr Drummond said.

“If you are removing those options from the table, you’re essentially just leaving offshore wind, which although it is very cheap you are then reducing diversity in the sources you have.”

On nuclear power, Mr Drummond said the government’s enthusiasm for miniature reactors overlooked the fact the technology is unproven and will probably not be up and running for some time.

The nuclear industry has big plans for small reactors but industry insiders do not expect to be selling them much before the end of the decade, while Britain has a target of building a zero-carbon power grid by 2035.

There is also a major review under way into Britain’s complex pricing system, in which gas too often dictates the overall cost of energy, even if renewable sources are cheaper.

Updated: August 26, 2022, 12:25 PM