Energy security a top priority for new UK government
The newly appointed British Prime Minister Liz Truss has a ‘to do’ list dominated by an energy crisis that saw the wholesale gas price increase by 250 percent last year.
In her acceptance speech, newly appointed British Prime Minister Liz Truss joked that she had just sat through the longest job interview in history. Truss, who formally took the reins last Tuesday, also has one of the most formidable in-trays of any British leader coming into office. It is a ‘to do’ list dominated by an energy crisis which has seen the wholesale gas price increase by 250 percent last year.
At the heart of this energy emergency is Russia and its gas. Earlier this week the Kremlin, which many in the West have accused of weaponizing energy, turned off its main gas pipeline to Europe.
The latest figures published by the UK’s Department for Business, Energy and Industrial Strategy (BEIS) show the UK is not currently importing any gas from Russia.
While the UK only received a tiny fraction of its gas from Russia last year (under 4 percent, BEIS data shows) gas-fired power stations provide 41 percent of the UK’s electricity and as much as 65 percent when the wind is not blowing, according to Offshore Energies UK.
Therefore, outside of the contracts the UK has signed with reliable partners such as Norway, it is having to compete with other large European nations, such as Germany, for gas on the open market. This has dramatically pushed up the wholesale price of gas and has increased energy bills.
There is of course a subtext to this story, which centres on energy security: the seeds of the current energy crisis were sewn long ago. Lord Howell, who served as Secretary of State for Energy under Margaret Thatcher revealed that in a meeting between German Chancellor, Helmut Kohl and Margaret Thatcher in 1979, Kohl, told an astonished Thatcher that “Germany was going to rely on 25 percent of Russian gas” to fulfil its energy needs.
If the dye was cast some 40 years ago, Jim Watson, a Professor of Energy and the Director of the UCL Institute of Sustainable Resources, says that “European countries must lock in lower demand for gas”. He told Gas Outlook: “That doesn’t just mean moving to more sustainable sources of energy. Too little emphasis has been placed on making buildings – both industrial and residential – more energy efficient.”
But as Europe transitions to a low carbon economy, Watson believes that policymakers must strike the right balance between security and sustainability. He says, “We must constantly reassess where the UK sources its gas from. Policymakers should question whether the UK has access to the right diversity of supply and the right types of contract. Ministers should explore if there is enough storage, as this will be an issue as our North Sea reserves decline over time.”
However, Professor Watson says that “the issue of energy security is never going to go away,” and regardless of whether sanctions are lifted, EU countries will never allow Russia to provide it with around 40 percent of its gas again.”
So, if there is peace in Ukraine, and Russia is welcomed back into the international fold, just how much gas is Europe likely to import from Russia and in the meantime can Europe survive without importing any Russian gas?
Mike Fulwood, a senior research fellow at the Oxford Institute for Energy Studies (OIES), says that in the future – providing the sanctions are lifted – “Europe could import around 20 percent of its gas from Russia”. However, if there was no Russian gas for the next five years, Fulwood believes that “it would be very problematic for Europe and there could be more blackouts.” That said, he thinks that “in seven to eight years the market would naturally rebalance itself as more LNG supply comes on in the latter half of this decade.”
In the interim period, therefore, Europe must find ways to address the shortfall in gas, while Russia is already seeking out new markets. But, in the meantime what happens to the 155 billion cubic metres of gas that flowed into the EU from the Nord Steam 1 pipeline, which accounted for 20 percent of Russia’s total gas production? According to research from the consultancy Rystad Energy, Russia is burning around US$10 million of natural gas each day, which equates to 4.34 million cubic metres.
This, of course, only represents a tiny proportion of Russia’s natural gas reserves, but Watson, the UCL professor, thinks that in the short-term “some gas may be left stranded” in Russia because infrastructure constraints mean that it can’t be diverted quickly to other countries.
He adds: “Many people assume that Russia can simply send the natural gas – that was previously bound for Europe – to China. But the gas going to China is quite distinct and geographically separate. China watchers also believe that China will drive a hard bargain, which could mean fewer roubles coming into the Kremlin’s coffers. In the long-term, if Europe can wean itself off Russian gas, Gazprom will lose customers and may not be able to develop its fields.”
But Fulwood, from the OIES, has a slightly different view in the short term. “Even though gas flows to Europe are down by some 60 percent, the price of gas has increased at such an exorbitant rate that the revenues received from exporting far less gas are actually much higher. Therefore, even if Gazprom reduces total production by 10 percent, it will still be receiving more revenue than before and so – in the short and mid-term at least – will be relatively unaffected. Longer term, yes, they will lose customers, damaging revenues,” he adds.
That will bring little comfort to Liz Truss, millions in the UK who will face much higher bills this winter, and most importantly, the Ukrainian people who are paying a much higher price for their gas.