UK's Energy Crisis Preparedness Questioned
Many decisions contributing to the UK's current energy price shock predate the current government, yet the belief that Britain was better prepared for this crisis is unrealistic.
“Because of the choices we made before the conflict in the Middle East began, we are better prepared for a more volatile world”,claimed James Murray, the chief secretary to the Treasury. However, this statement did not reassure bond investors, who had driven the yield on 10-year government debt to a steep 5% before a slight decline on Monday.
Murray appeared to reference tax increases and the policy to shift £150 of green levies from energy bills into general taxation. While these measures exist, they are relatively minor. The UK's vulnerability to energy price shocks stems from larger factors, notably its significant and increasing reliance on energy imports.
Energy Dependency and Import Statistics
The UK is not unique in this dependency, but two statistics from the latest Dukes report, published annually by the Department for Energy Security and Net Zero, are critical for government awareness. In 2024, the UK sourced 75.2% of its primary energy from fossil fuels, primarily oil and gas, which are mainly used for transport and heating. Although this figure was described as a “record low” by the report, it was only marginally lower than the 76.6% recorded in 2023 and 76.8% in 2020, highlighting the slow pace of energy transition.
Another key figure is the net import dependency, which rose to 43.8% in 2024, an increase of 3.4 percentage points from 2023. This figure has hovered around 40% since 2010. While renewable energy, nuclear power, and battery storage represent the desired future, these sources are not yet sufficient to significantly reduce import dependency.
Government Preparations and Consumer Support
It is reasonable to question what measures the current and previous Conservative governments have implemented to enhance the UK's resilience to energy shocks. Evidence suggests limited progress.
Regarding consumer support, a universal package similar to that of 2022, which cost £44 billion, is now considered unaffordable. The Public Accounts Committee warned a year ago about the government's slow learning in responding to future energy price spikes. The first line of the committee's report stated:
“The department has been slow to learn lessons about how to respond in the event of a future spike in energy prices.”
Retail energy suppliers, who would likely administer any new support schemes, report that if the government has developed a new data-driven model to identify those most in need, it has not yet been shared. Currently, the only reliable tool for targeted support remains the warm homes discount, despite its imperfections.
Wholesale Market and Gas-Electricity Price Link
It is widely known that the government has not acted to decouple gas and electricity prices in the wholesale market. A three-year review, initiated under the previous government, concluded in favor of maintaining the status quo with minor adjustments to fees paid by generators for transmission network access. Concerns were raised that changes could deter renewable projects and grid upgrades, but as a result, gas continues to set wholesale prices approximately 80% of the time, according to the energy minister last week. This benefits not only gas-fired power stations but also nuclear plants and wind farms with subsidies granted before 2017.
North Sea Drilling and Domestic Production
The government has also opted not to increase drilling in the North Sea. While greater domestic oil and gas production may not significantly influence market prices, it would offer advantages in terms of the balance of payments, medium-term tax revenues, employment, and supply security. This issue is expected to become more contentious, especially considering the costs associated with imported liquefied natural gas (LNG) compared to domestic supplies.
Gas Storage and Strategic Reserves
Furthermore, no significant steps have been taken to enhance the UK's limited gas storage capacity. Centrica's Rough facility off the Yorkshire coast was partially reopened in 2022 but with limited capacity. Ministers have yet to address whether the UK requires a strategic gas reserve, which could prove valuable now. An official report has warned of potential shortages if decarbonization slows or if critical infrastructure, such as the pipeline supplying gas from Norway, becomes unavailable during a critical period. A government response is expected later this year.
Conclusion: Sleepwalking into Crisis
Considering all these factors, the idea that the UK was better prepared for an energy crisis is unrealistic. The country appears to have been sleepwalking and avoiding difficult trade-offs. While many decisions were made before the current government, the bond market's negative reaction is understandable. On major issues, there appears to be little change from previous times.
