Energy has been much in the news recently, including threatened closure of an oil refinery, high energy bills etc. What we are seeing are symptoms of chaos and confusion in British energy policy and markets. The Grangemouth refinery story, for instance, has been treated in the media as a simple industrial relations story. However, what is being ignored is the larger story, that the European refinery industry is in trouble, due to competition from abroad caused in part by the US shale gas and oil revolution, construction of new refineries in the Middle East and China, falling demand, high energy costs and productivity issues caused by failures to invest in new technology.
Whilst, the current controversy over high domestic energy prices, is not only about supernormal profits being achieved by the energy companies, but also the failure of government to actively encourage significant new entrants into the UK energy market. Think tank IPPR said Ofgem’s data on customer bills shows that profits in 2013 are 6% and operating costs make up 9% of bills. In a competitive market, it should be about 2%, the norm for supermarkets. In addition, European electricity prices have dropped by a third. Similarly, European spot market prices for gas have made similar declines. See table below, indicates that wholesale costs have increased, while customer bills have increased in the UK.
Because of America dumping its cheap coal on the European market, we have seen utilities switch off their gas power stations and instead increased their use of more profitable coal power generation. [i] Europe is planning 69 new coal power plants with a capacity of 60 GW over the next decade.[ii] In addition, UK utilities have made deals with American shale gas producers to deliver cheap shale gas to meet customers heating and power needs, thus helping to improve profit margins further.[iii]
Government policy failure to proactively direct investment in sufficient new generating and distribution capacity has also not helped; it means we could be facing third world energy shortages in the coming years.
The high cost to the taxpayer of energy subsidies is an urgent problem that also needs tackling and reform. Much is made about Green subsidies and taxes; little is made of taxes and subsidies on fossil fuels. The whole system of energy subsidies and taxes needs reform as it distorts the market and is not meeting its objectives. Generating technologies are still getting help even when there is no longer the economic or the technological case to do so.
Another area for reform is government policy on energy saving and efficiency. Government policy is a mess; many new house owners will be surprised that current building standards on energy conservation are at least 20 years behind that of Scandinavia. Vested interests have resisted lobbied against the introduction of the latest in mainland Europe standards. [iv]
In addition, for those in the Government to blame Europe is not justified, however, certainly political expedient to do so. The real question that needs to be asked, is why the government has shown little real energy leadership. [v]It has played a passive rather than proactive role in attempts to reform the European energy sector. I suspect it is because energy is not a politically popular topic for MPs aiming to make a name for themselves in politics. In addition, the issues are very complex and very challenging in terms of decision-making. [vi]Perhaps, this explains why we have had over 10 energy ministers in past 10 years. The trouble is the energy sector is a complex and very difficult topic to manage; the current amateur approach is not in the national interest. [vii]We need politicians able to take a more professional approach, this means a minister for energy needs time to learn about the job and be effective by staying in the job for the life of a parliament, just as the European Commission does for its Commissioners. Until we have expert professional energy ministers, we will continue to have a set of dysfunctional energy policies that fail the interest of both business, hard pressed consumers and tax payers.