Monday, 1 August 2022

The Energy Crisis - A Few Thoughts

I’m no expert on energy but in recent months I have been concerned about my ever-increasing energy bills so I decided to take a look at what’s causing these increases...here’s a few observations.

So, we have an energy crisis which will cause real hardship to millions over the coming winter months. The latest forecast from BFY suggests that the average family could be paying close to £4,000 by January compared to a price cap of just £1,270 earlier this year. That would be around 40% of the average state pension.

Millions of people will be forced into fuel poverty - you would need a household income in excess of £40,000 to not be caught!

Why?

The government can throw billions at the problem to try and help the poorest households but it seems they are unable to offer a long term fix. That’s mainly because this is a global energy problem and the price of oil and more so gas has risen dramatically all around the world. Energy is a global commodity and although the markets are very complex, the bottom line is that it's basically a supply and demand equation and energy is sold to the highest bidder...and when its in short supply - partly because Russia controls a significant proportion of oil and gas - the price goes up.

Wholesale price of gas rises 5x

Of course the big beneficiaries are the countries and big oil companies that extract and supply oil and gas - so USA, Russia, Saudi Arabia and then the likes of Shell, Exxon, BP and Chevron with combined profits of $50bn in just the past 3 months on the back of the high oil and gas prices.

Unfortunately, here in the UK we import most of the oil and gas we require...for example last year we imported 60% of natural gas and with the huge increase in prices this year, it works out at around £70bn which is around 3% of our GDP and roughly equivalent to the amount we spend on education.

The Grid and our Bills

We have made good progress on expanding renewable energy such as wind and solar over recent years. It currently accounts for around 40% of our grid energy. However it is intermittent so we continue to rely heavily on gas and nuclear for baseload energy to ensure continuity and grid stability. We rely on gas for a further 40% of electricity generation with 85% of homes using a gas boiler for heating and hot water.

With our system, gas usually determines the price we pay for our electricity. We have just one market in the UK for electricity which is traded every half hour between suppliers and utility providers. The price will fluctuate according to demand and variable factors such as wind generation. Renewables are the cheapest so they will always be snapped up first followed by the next cheapest which is nuclear/biomass but then the balance of of our requirements at any particular period will have to be gas which is the most expensive. 

credit: Good Energy 

Under the current system, the price we end up paying in any half-hour period is determined by the marginal cost of the last generating unit to be turned off to meet demand...which is inevitably a gas-fired power plant with high marginal costs. Even if we double our renewables capacity to 80%, we would probably still end up paying high bills determined by gas under this system.

So What Can be Done?

Well, one solution would be for the government to bail out every household with continued support - say £3,000 for each household but with around 30m homes, that works out at £90bn per year which is not far off what is paid for state pensions! Maybe it could do this for one year but these high wholesale energy prices could well continue for several years.

We could speed up the roll out of cheaper renewable energy but we are realistically looking at a decade but the faster we become less reliant on imported fossil fuels the better and certainly this is what we should be doing anyway to tackle the climate crisis.

Insulating our homes will dramatically reduce energy use in the winter months - this is relatively cheap and quick so really is a no-brainer.

Heat pumps are around 3x more efficient than gas boilers so it makes sense to speed up the roll out of UK-made heat pumps.


Conclusion

Whoever becomes our new PM next month will be faced with some very urgent issues but the most pressing will be to provide more support this winter on top of the measures already in force to cope with surging bills. At the same time they will need to urgently look at the way our electricity is priced and find a system which more fairly reflects the lower costs associated with renewable energy. The government’s energy department have recently started to look at reforms to the electricity market that would stop volatile gas prices setting the price of our energy supply.(REMA)

Of course, the only long term fix is to move quickly to reduce our dependence on imported fossil fuels and to generate and store much more of the energy we need from renewables. This will take time so we should find ways to use less energy and certainly a public information and education campaign on the simple ways to immediately save on energy would be a good start.

The Boiler Upgrade Scheme was introduced in April giving us a £5,000 towards the cost of a heat pump but the take-up has been slow and the public are skeptical on the benefits. The scheme should be extended to cover the installation of solar PV and back-up storage which would be far more cost effective and certainly quicker than new nuclear power.

So, more immediate financial support, change the structure of pricing, a speedy transition to renewables and a move to energy independence.

We have many of the solutions to these issues but currently lack the political will to implement them so I am not so optimistic for the next couple of years of any significant changes.

As always, if you have any thoughts on this subject, feel free to leave a comment below.

8 comments:

  1. It seems that the war in Ukraine has brought to our attention the problem with the push for renewables, and the denigration of fossil fuels.
    After spending mega billions (trillions?) on renewables, the world is now hyper-focussed on securing gas supplies!
    As you rightly mention, intermittency is the problem. Check out the National Grid site here: https://grid.iamkate.com/
    Scroll down to the Production charts and hover over the Past Day chart. At 5 am this morning UK demand was 19 GW, and renewables were providing 0.5 GW. Sometimes renewables provide over 50% of demand, but we need energy ALL the time.

    Simply providing more renewables does not solve the problem (until storage becomes a commercial reality - how many years/decades away is that?). We need secure supplies and to me that means UK gas for many years to come.

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    1. Good to hear from you steveal.
      Yes, the conflict in Ukraine has certainly brought into sharp focus just how dependent we still are on gas...and of course the worlds biggest supplier of gas is Russia!
      The upside is that it will accelerate the transition to renewables but of course this will take time and as we get more wind and solar capacity, the problems of intermittency become a larger problem for the Grid.
      So, we will require far more storage capacity but also find a way to retire our dependence on gas by 2035 as part of the push to net zero emissions. Storage can take many forms - battery, pumped hydro, long duration flow and hydrogen but I hope the government will switch on to the huge potential offered by tidal stream currently demonstrated by the likes of Orbital which importantly overcomes the intermittency issue.
      https://orbitalmarine.com/
      Of course energy security is critical but it has to be affordable which puts a question mark against gas, and it has to be part of the solution when it comes to addressing the climate crisis...which puts another question mark against fossil gas.
      Challenging times for everyone - we have the solutions and it just requires those in power to make the right calls...I'm not holding my breath on that one!

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  2. I saw this interesting (or frightening) graph today. Net zero by 2050 anyone?


    https://twitter.com/BjornLomborg/status/1554078288380891138?s=20&t=mAAmBgrhSzKZWY6jakQoJg

    [I should say thank you for your work on this blog. It's always informative and thoughful.]

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  3. Rather than give 3K per household it might be better to roll out solar PV and batteries for every house, factory, office and warehouse south of Sheffield (further North is not so good). At the very least planning rules should be changed to include PV on all new builds and substantially higher u valve for insulation. The North sea should be filled with wind turbines, we would then have more energy than you can shake a stick at. The excess to be exported to mainland Europe.

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    1. How do solar panels perform at night? Maybe you just want energy during sunny days? Or would you like to fill your house with expensive, environmentally unfriendly batteries?

      How do wind turbines perform when the wind doesn't blow? Wind can theoretically provide about 25% of our energy needs and yet on a still day is only providing 3% of those needs.
      If you could multiply the number of wind turbines by 4 right now, it would be useless because on a still day that would provide only 12% of our energy, at a cost of £billions.
      Where does the rest come from?

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    2. Sorry to be brutal but that's a defeatist attitude. To answer your question the grid needs to be smarter with usage profiled to availability. You are incorrect about wind only being able to provide 25% in actual fact it coukd supply 300% or more depending on how many are installed. Nuclear is still required to manage peaks and troughs but less so as more storage is brought online

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  4. Defeatist? I look forward to the time when energy is all renewable or nuclear. I'm 72, so it won't be in my lifetime. That's realism.
    The 25% wind capacity is current availability. Where does your 300% come from? Why not 1000% if you are plucking figures out of thin air?
    Currently after spending hundreds of £billions of tax payers money, we are searching the earth for more gas (just like the rest of Europe).
    It would be funny if it wasn't our money...

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    1. "Currently after spending hundreds of £billions of tax payers money" on renewables.

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