U.K Energy Poverty
The £80bN solution to eradicating energy poverty in the U.K.
Energy Poverty? A Reality.
Friday, 7 Oct 2022 will be remembered, for decades, as the day when papers were splashed with these headlines.
UK warned it could face winter blackouts, The Daily Telegraph (7 Oct 2022)
Warning over blackouts - Return to the Dark Ages, Daily Mirror (7 Oct 2022)
Rolling Power cuts could put lives at risk, charities tell National Grid, The Guardian (7 Oct 2022)
These headlines are not of any Third World country - these are for the UK.
Blackouts will affect everyone. But they will especially affect those who are at the lower end of the prosperity ladder. Spending on energy varies less by income than any other spending category. This means lower income households have to spend a much larger share of their family budgets on energy than higher income groups. Recent sharp increases in energy prices will have a disproportionate impact on lower income households.
It would cost the poorest 20% of households an additional £1,000-1,100, and pensioner households around an additional £1,400, to use as much energy in financial year 2022-23 as they did in 2020-21. This is before the extra support the Government has announced is taken into account.
The purpose of this article is to explore options to build a future strategy for the energy sector. This article has borrowed data heavily from reliable sources, such as The Office for National Statistics (ONS) and other global data providers. All commentary is based on our evaluation of the data with a view to enabling the development of an acceptable scenario for energy independence.
Geo-Political Reality.
Oil Wars - a term coined to suggest that states go to war to seize natural resources, especially oil and gas, seems like a truism. Emily Meierding of the Naval Postgraduate School argues that such wars for oil are in reality exceptionally rare. In her book “The Exaggerated Threat of Oil Wars” she explains that the costs and risks of such conflicts are almost always too high for would be aggressors to pay.
Emily continues to explain that between 1912-2010 countries fought 180 times over territories that contained - or were believed to contain - oil or natural resources. However, a closer look at these conflicts reveals that none merit classic ‘oil war’ label. Although countries did fight over oil-endowed territories, they usually fought for other reasons, including aspirations to regional hegemony, domestic politics, national pride, or contested territories’ other strategic, economic or symbolic assets. Oil was an uncommon trigger for international confrontations and never caused major conflicts.
Let’s play - The “Blame Game”.
“Einstein Insanity” - Insanity is doing the same thing over and over and expecting different results, Albert Einstein.
For decades Public Policy has relied overtly on a rather simplistic assumption that Oil & Gas (OnG) producing nations can be persuaded through diplomatic and/or coercive channels to keep supply, and therefore prices, in favour of importing countries. Public Policy is focused narrowly on ‘energy security’ as defined only by reliable access to fuel supplies. And the policy may have succeeded in achieving it’s limited purpose, but this policy seems to be faltering. The inability of the USA to persuade Saudi Arabia to keep its oil taps open (to bring prices down) in the wake of the Ukraine crisis, is a case in point.
Let’s not try to over-complicate this issue. It’s a simple case of Demand and Supply. Let’s stop accusing OnG producing nations of playing truant with us. They are just protecting their interests, I am sure we would have done likewise had we been in their situation.
If Public Policy is therefore a simple matter of securing ‘energy security’ for it’s needs, then a solution has to be found using ones’ own resources, those that are in your own control, within your own territory, rather than expending energy and resources relying on an ‘unreliable source’, not my language - this is a term often used by importing nations.
So, let’s not lay the blame of our predicament on the Ukraine crisis, for headlines that appeared across all major newspapers in the UK on 7 Oct 2022. Or the decision by OPEC+ to curtail production on 6 Oct 2022.
Let’s blame it on our complacency. We just buried our heads in the sand.
Our Public Policy has to change. This cannot go on forever.
Reality Bites.
Energy inflation and Price Cap strategy
On 8 September, the then UK Prime Minister (Ms Liz Truss) announced that a new Energy Price Guarantee would be introduced from 1 October 2022. This has been set at £2,500 a year for typical levels of consumption (13,600 Kwh of Gas and 3,600 Kwh for for Electricity) and will last two years (amended whilst we write this article). It is lower than the original Q4-2022 price cap, substantially lower than forecasts for 2023, but still 27% above the summer 2022 cap. The gas element is increasing by 37%, electricity by 17%.
The monthly increases in both gas and electricity prices in April 2022 alone were by far the largest ever recorded on a series going back to 1988. The annual increases to April 2022 were also the largest ever recorded on a series going back to 1970.
Gas prices were stable or falling for much of the period from 2013 to 2020. They started to increase towards the end of 2021. The average bill for the year was £575 compared with almost £700 in 2014.
Electricity prices, though, increased for much of the last decade. Average bills were £760 in 2021 compared to £450 in 2020, a 36% real increase.
The Government has said that the Energy Price Guarantee will cost £31 billion in the first sixth months of the scheme. The Institute of Fiscal Studies (IFS) has estimated that the scheme, together with support for non-domestic consumers could cost £100 billion in its first year.
Let’s take a look at what the consumer is facing day-in and day-out. The following figure illustrates the average price movement of Gas and Electricity bills for the period 2010-2021, for typical levels of consumption.
Average UK domestic bills for typical levels of consumption (in £ per annum)
Source: Office for National Statistics - UK trade statistics
Projected Primary Energy Demand.
A review of the UK Department for Business, Energy and Industrial Strategy statistics reveals that the primary source of energy in the UK will remain unchanged. In other words, there is little or no change in future strategy towards replacing fossil fuels as the main driver of energy demand. Hence, this policy or lack thereof, will continue to impact energy independence of the UK in the near future.
Fossil fuels, such as natural gas and oil are forecast to be the primary energy in terms of demand in the United Kingdom. Primary energy demand of natural gas is projected to reach 63 million metric tons (MMT) of oil equivalent in 2040 down from 69 MMT of oil equivalent in 2015. By comparison, renewables and waste sources primary energy demand is expected to increase from 19 MMT of oil equivalent in 2015 to 26 MMT of oil equivalent in 2040.
Let’s take a quick look at the import energy dependency percentage of the UK over the period of 2010-2021. Has the country done anything different in the last decade to secure its energy independence?
Let’s also take a quick look at the ‘Projected primary energy demand in the United Kingdom (UK) 2015-2040, by source’, a measure of the strategic intent of the UK energy policy.
Import Energy Dependency Percentage (in million metric tons of oil equivalent).
Source: Office for National Statistics - UK trade statistics
Projected Primary Energy Demand in U.K.: 2015-2020, by source.
Installed Capacity - Renewables, by Country 2021 (in Gigawatts)
Source: Office for National Statistics - UK trade statistics & IRENA
Energy Company profits & Consumer Energy Prices.
An oft repeated concern and accusation hurled at energy companies is that they profit while consumers suffer. It is interesting to look at two figures alongside one another. On one hand energy companies are making record profits, and on the other, UK residents are the third highest paying consumers across 30 countries.
The rapid increase in buying price of oil and gas in late 2021 led suppliers to withdraw cheaper fixed price tariffs, and households collectively spent £35.4 billion on energy in 2021. £22.2 billion of this was for electricity (its highest ever level) and £13.2 billion for gas.
The question on everybody’s mind is:
How can energy companies more than treble profits when oil and gas prices are at record highs?
And are these profits purely due to exorbitant prices charged to consumers?
Focus on prices in the UK, the average price is $0.33 per kWh, which is third highest in the world.
Any policy initiative should address this anomaly. Corporates cannot be allowed, and should not be allowed, to profit at the expense of the consumer. And hold the Government to ransom. The windfall tax paid by energy companies pales in comparison to the cost of the Price Cap Scheme announced by the Government.
And the critical question that one needs to ask is - who will ultimately foot the bill of this Price Cap Scheme?
The Treasury expects to raise £5Bn from windfall tax in the first year. Compare this against the cost of the Price Cap Scheme of £31Bn in the first six months the Scheme runs - and this is only for domestic consumers. The total bill including non-domestic consumers is expected to be £100Bn in the first year. So, in other words, it will take roughly 20 years of windfall tax revenues to fund one year’s cost of the Price Cap Scheme.
Installed Capacity - Renewables, by Country 2021 (in Gigawatts)
Source: The Guardian: Global Electricity Prices compared: 2021 by Country (in US$ per KWH)
Global Household Electricity Prices 2021, by Country (in US$ per KWH)
Source: Global Petrol Prices
Balance of Payments - The Unfolding Crisis.
Increasing quantities and prices of fossil fuels have had a negative impact on the financials of the country. A quick look at the figures alongside illustrates the exposure to the economy of £39bn (in the 12 month period preceding Apr 2022) on acquiring fossil fuels to run the economy and heat our homes, an increase of £36.3bn over the same period in 2021.
If demand for fossil fuels and the prices continue on the current trajectory, and in the absence of any concrete measures to reduce dependence on fossil fuels, this will unfurl into a Balance of Payments crisis.
So the focus should be on becoming energy independent.
Impact of Importing fossil fuels on Balance of Payments (in £Bn)
Source: Office for National Statistics - UK Trade Statistics, Current prices, seasonally adjusted
Net Imports of fuels by commodity type (in £Bn)
Climate Change.
Households are a big emitter of greenhouse gases, accounting for 26% of total emissions in the UK, on a residency basis.
Impacts of climate change include direct weather-related impacts such as heatwaves, flooding and extreme weather events on homes, local areas and personal wellbeing, among others. The heatwave experienced in the UK in July 2022 not only broke temperature records, but also led to serious wildfires - major incidents were declared by fire services in London, Leicestershire, Hertfordshire, Suffolk, Norfolk, Lincolnshire, and Yorkshire. There was also disruption to public services and electricity because of damage to infrastructure, causing power failures and cancellations of trains and flights.
Despite recent heatwaves and dry weather, flooding continues to be a serious concern for many households and data on flooding are widely available. There has been an increase in intensive rainfall events, causing river- and surface water-flooding. The mean sea level around the UK has also risen by approximately 1.5 mm per year on average since 1901, excluding the effect of natural vertical land movement, resulting in an overall rise of 16.5 centimetres over that period according to the Met Office.
The Met Office found that 2022 has so far been both warmer and drier than average. Met Office data released show the following differences compared with the 1991 to 2020 seasonal averages for UK temperature and rainfall:
summer (so far) was 0.9°C above average with 34% less rainfall
spring was 0.8°C above average with 24% less rainfall
winter was 1.1°C above average with 7% less rainfall
The figure below illustrates the growth in Number of heavy rainfall days Vs Number of summer days over the years.
All gains that humanity has made are bound to bear NO fruit if we continue on this path of destruction of the planet. Sustainability has to be enshrined in the very fabric of our being, if humankind is to exist.
The following figure illustrates the Domestic greenhouse gas emissions (MtCO2e) by region in the year 2020.
Domestic greenhouse emissions by region, 2020 (MtCO2e).
Source: Office for National Statistics - UK Trade Statistics, Current prices, seasonally adjusted
Number of heavy rainfall days Vs Number of summer days
Source: Office for National Statistics - UK Trade Statistics, Current prices, not seasonally adjusted
Is there an appetite to move to Net Zero?
Data from the Opinions and Lifestyle Survey (20 to 31 July 2022) show that 77% of adults have made some or a lot of changes to their lifestyle to help tackle climate change. Around 7 in 10 (72%) of women reported making some changes to their lifestyle to help tackle climate change, compared with 6 in 10 (62%) men.
Among those who said they have made no change to their lifestyle to help tackle climate change (23%), the most common reasons for this were:
the belief that large polluters should make changes before individuals (34%)
feeling that their changes will have no effect (32%)
too expensive to make changes (30%)
The following figure illustrates key reasons cited for not making changes required to achieve Net Zero.
If the Policy has to succeed, then it has to address these key reasons, that deter people from making the right choices. Net Zero is not just a fancy term - its full impact has to be shown to the country. A concerted effort has to be made by every section of society to move towards this goal. The Government has a role to play, in fact a large role to play in raising awareness. We have paid enough lip service to the Net Zero target, what is required now is concrete action.
Reasons for not making any changes to achieve Net Zero.
Source: Office for National Statistics - UK Trade Statistics
Mortality from Climate Change.
A study of the causes of deaths in England and Wales during the period 2001-2020 reveals that deaths by temperature related causes are nearly 4-times higher than other causes. This should be a wake up call for all concerned. Not only does this mean higher burden on already beleaguered healthcare services, but a much larger catastrophe waiting to strike. And the rise is even more pronounced during the periods from 2010 when deaths from temperature related events have consistently grown. And a lot of this has to do with our love for fossil fuels.
So, any Public Policy has to take into account the impact on health of the population as well as the associated burden placed on essential healthcare services.
Deaths from Temperature and Non-Temperature related causes (2001-2020).
Source: Office for National Statistics
The Strategy - Going Forward.
Energy poverty has to be tackled on multiple fronts - the approach has to be eco-system wide. Public Policy cannot be implemented piece-meal. Efforts in the past, though laudable, keeping in mind what we knew at the time, were a little more than knee-jerk reactions. Which is why they failed to make a dent - an installed capacity of 50GW in 2021 in the UK compared to 1,020GW in China, says a lot about UK’s energy policy.
With the benefit of hindsight, the Target Operating Model has to be constructed with the following building blocks.
£80Bn solution to eradicate Energy Poverty.
Here is a description of a Public Policy that will create an eco-system to fund the country out of energy poverty, is one that will incentivise households to invest in renewable energy. Our solution is built on SMART Performance metrics. And above all it is simple to understand.
The UK has 29Mn households, of which only 0.97Mn have solar installed rooftops. Which is just 3.3% of total households.
It is well publicised that the current cost of managing the Price Cap will cost the economy about £31Bn in supporting households in the first six months of the program. This cost of £31Bn is currently unfunded, and future generations will have to bear the burden of our excesses.
Our proposal for Residential and Commercial is explained below.
Proposal to eradicate energy poverty - Residential.
Make investment by individual tax payer in renewable energy tax deductible.
For example: Tax payer invests £7,000 in renewable installation (based on typical levels of consumption). Reduce the investment of £7,000 from Tax Payers’ Taxable Income for the Year. Impact on Personal Tax - Reduction of tax by £2,800 (assuming Tax Payer is in the 40% tax bracket) or reduction of tax by £1,400 (assuming Tax Payer is in the 20% tax bracket). Plus give a Grant of £1,400 to those who qualify as Tax Payers in the 20% tax, so as to make it equitable for high and low tax payers. This reduction in taxable income can be spread over 3 years to smooth out the impact on tax revenue to the Government.
Assuming that the consumer spends an average of £2,500 per annum on energy, then this cost saving will go directly into their account as a surplus to spend within the economy.
And how will this proposal help the UK economy?
Spur economic activity: Converting 28Mn+ households to solar is no mean feat. It will take years. But the positive is - it will spur demand and therefore attract investment by installation companies. PV panel manufacturers and battery manufacturers may come on board to set up manufacturing facilities in the country to meet demand. Our excellent source of engineering talent will get a brilliant opportunity to showcase their skills. This demand will also create opportunities to up-skill the workforce of installers. New training facilities will need to be set up, or current trainers will have to extend their services, which in turn will create further earning opportunities for them. All these companies will be subject to Corporation Tax, which will create tax revenue opportunities for the country.
Employment: This proposal will create millions of well paid jobs for years to come. The country will earn through PAYE and NI contributions, which will go towards investing in nation building.
Cost savings: The average energy spend, based on typical levels of consumption per annum, is around £2,500. Saving this would bring the cost of living down for each household, a significant saving. This cost saving is spent in the economy and gives the economy a much needed boost.
Tax savings: We are constantly talking about making the UK a globally-competitive low-tax economy. What better way to make it a low tax economy, while at the same time creating more productive opportunities for the population. A Tax saving of £2,800 over a 3 year period is a significant step in achieving a low tax economy.
Import substitution: The UK imported around £39Bn of fossil fuels in the 12 month period ended Apr 2022. Moving over to renewable energy, will surely reduce the burden on the exchequer and conserve precious foreign exchange. The Pound stands to strengthen against other currencies. Reducing dependence on fossil fuels means the country is not at the mercy of the OnG producing nations.
Healthcare: Moving to a clean energy economy will reduce fossil fuel emissions and the effect it has on the health of the population. Our overburdened healthcare system will be able to better manage its resources and move away from the drastic effects on mortality from extreme temperatures.
Net Zero commitment: The UK’s commitment to climate change will receive a boost due to a move towards clean energy. Imagine being the first country to achieve Net Zero carbon emission status in the world.
Proposal to eradicate energy poverty - Commercial & Community.
On the commercial & community side, we propose the following. For this Policy to be effective, a definite time frame should be given, after which planning Permission to trade should be withdrawn.
All standalone establishments should mandatorily become energy self sufficient.
All current and future developments (residential and commercial) should mandatorily require developers to be energy self sufficient. Energy self sufficiency should be a pre-requisite to according Planning Approval.
Where existing properties are not viable for renewable energy production, Councils should offer common land to set up renewable energy farms that residents and commercial establishments can buy into (based on their individual requirements).