Why Labour’s net-zero plans could all go up in smoke
Ed Miliband risks repeating Pakistan’s energy collapse with his push to eliminate fossil fuels
Part way through Joe Root’s record-breaking innings against Pakistan this week, one of the commentators on Test Match Special talked about the regular power cuts in the city of Multan, where the Test was played. The former England player Alex Hartley, said she had become wary of running on the treadmill in the hotel gym in case the power suddenly went off and she ended up flat on her face.
Why does Pakistan have such frequent power cuts? The state of its grid is partly to blame. Another problem is an intermittent and expensive supply of gas for its power stations. Pakistan has learnt the hard way that relying on imports of liquefied natural gas (LNG) can be a perilous game.
Things got really bad two years ago when the price of gas spiked thanks to Russia’s invasion of Ukraine. The commodities trader Gunvor decided that it would not deliver four promised tankers and the Italian oil and gas company Eni another seven. Pakistan was forced to go to the spot market at short notice to fill the gap, at huge cost. Eni and Gunvor said they had done nothing wrong under the terms of their contracts: Eni claimed to have been let down by its supplier and, although Gunvor never confirmed it, it was widely reported at the time that it had decided to pay the penalty for non-delivery and sell the gas elsewhere at a much higher price.
One would hope that Ed Miliband was listening to the cricket as well. Labour’s new energy policy is all about eliminating fossil fuels from our energy mix. If this can be achieved Britain will no longer be exposed to the vicissitudes of the international gas market. We will produce most of our own electricity, so there will be no need to worry if there is yet another price shock.
Unfortunately, as this column has pointed out before, it will take much longer than Labour claims for energy independence to arrive. Miliband, the energy secretary, wants a net-zero grid by 2030. The future planning by Neso (National Energy System Operator, the organisation that runs the UK grid) does not envisage an end to gas-fired electricity generation before 2036, and even that date is tied to optimistic assumptions about how quickly new wind, solar and nuclear stations can be built. Miliband admits that gas will still be required but says that net zero can still be achieved because the carbon dioxide produced will be captured and stored underground.
But where will the gas come from? The second prong to Miliband’s energy policy is the penalisation of domestic oil and gas production through windfall taxes. North Sea companies have complained long and loud about Labour’s plan to raise those tax rates, and increase their life, saying that it will deter investment in new fields. In a report out this week, the highly regarded oil and gas analyst Chris Wheaton at the investment bank Stifel, tried to work out the combined effects of the two policies: the dash for renewable power and the curtailment of domestic production.
His verdict? “Higher windfall taxes will force UK gas production into decline faster than the UK can decarbonise through investment in renewable energy.” He says that the higher windfall taxes will mean that domestic gas production will fall by 70 per cent by 2030. Demand for gas will not fall at anything like the same rate, however, because households will still want it for cooking and heating and there will still be a need for gas-fired power stations to meet peak electricity demand, and to fill in at periods when wind and solar are not producing at full capacity.
The result is that the UK will have to import more gas. A lot more. Wheaton calculates that by 2030 Britain will need to import 80 per cent of the gas it will need. Another way to look at it is that the UK will need to secure about 5 per cent of global LNG production, and make sure it comes here rather than sailing off to China, Japan or even Pakistan.
It is possible that this might not be a problem over the next couple of years because Qatar is planning a big expansion of its export capacity and most analysts think this will keep prices down. Possible, but you wouldn’t want to bet on it. We know that any kind of geopolitical tension can lead to an increase in gas prices and you can hardly say that the Middle East, the source of much of this LNG, is looking set for a long period of tranquillity.
In the long term, Miliband’s vision may well come to pass. For the next decade and a half, however, the loss of domestic gas production could end up being an extremely expensive policy. We might all end up being a bit cautious around the treadmills in gyms.
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