Gas price surge before COP26 highlights energy system flaws

Following a surge in wholesale gas prices that has fuelled fears of an inflationary spiral developing and highlighted the risk of the UK relying on imported supplies, a series of energy suppliers have gone bust. Some found the obligations imposed by the cap unsustainable. The problems resulted from the fact that following the gas price spike the cap required them to sell energy at around £1,000 a year less than it cost to provide the supplies to each customer concerned.

Mr Anderson warned that if things continue as they are more suppliers will go bust in coming weeks. He reckons the UK could be left with six. That would take things back to roughly where they were before the regulator, Ofgem, launched a drive to get lots of new independents to take on the giants that dominated the market, such as ScottishPower. This followed claims incumbents were making excess profits at the expense of customers.

Some giants have been adding customers in recent months after taking over the operations of failed operators at the behest of Ofgem, under the supplier of last resort principle.

This involves them taking on loss-making business in the short-term. However, the regulatory regime allows the firms concerned to pass the costs on to customers through their bills.

READ MORE: ScottishPower hit by gas price surge as windfarm output drops

In advance of Ofgem last week announcing that it would review the price cap methodology to ensure it reflected the costs and uncertainties facing suppliers, Mr Anderson proposed what may sound to some like sensible solutions to this unfortunate state of affairs. These include allowing the regulator to modify the cap applied to the bills of people on standard variable tariffs every quarter rather than only twice a year. This will allow charges to be adapted more quickly to reflect changes in market conditions, although sceptics might suggest that decent hedging strategies would allow suppliers to achieve the required degree of protection from market shifts without requiring consumers to pick up the tab.

Mr Anderson, who was outspoken in his opposition to the cap when it was proposed, also has more radical changes in mind. He thinks people for whom energy bills represent the biggest burden could have their prices limited through the introduction of a social tariff. The costs could be covered by other consumers or picked up by the government.

The regulator should also set tougher tests before allowing firms to enter the market to ensure that firms that provide such a vital service for consumers should be able to survive storms that could reasonably be expected to hit the sector.

Ironically, ScottishPower has had to buy costly gas in recent months to meet its supply commitments because weather conditions have resulted in relatively low output from its windfarms.

Firms that operate generating facilities and/or run networks that carry power across the country, as well as selling energy to consumers, such as ScottishPower, will be expected to help upgrade the country’s infrastructure to support the effort to meet the net zero challenge.

Mr Anderson’s critique poses awkward questions for Boris Johnson as he mingles with global leaders who are in town to attend the COP26 climate summit in Glasgow.

READ MORE: Scottish city plans to become world class hydrogen hub with help of oil giant

It should be remembered that plans to introduce the cap were confirmed in 2017 by the Conservative Government led by Theresa May , in what looked like an attempt to stymy the opposition. Former Labour leaded Ed Miliband had championed the imposition of a cap.

A child of privilege, Boris Johnson has enjoyed huge success after following Ms May’s lead by posing as a champion of the interests of ordinary working people. The associated rhetoric helped the Tories blow holes in the so-called Red Wall of Labour seats that ran across northern England.

The Government-led by Mr Johnson has helped ensure Teesside will be a big beneficiary of the huge investment it plans to make in the development of the clean energy infrastructure that will be required to achieve its Net Zero ambitions.

Against that backdrop, a decision made last month about a key emerging energy sector by the Government set alarm bells ringing.

A range of experts agree that Carbon Capture and Storage schemes will have a key role to play in the global effort to tackle the threat posed by greenhouse gas emissions.

While critics claim that CCS is unproven at scale and could be used as an excuse to keep producing gas, investors from around the world have backed ventures that are developing what could become huge schemes in the UK.

READ MORE: Backers say Aberdeenshire carbon capture cluster could create many jobs

These include plans for a Scottish cluster that would involve shipping emissions collected from across the country for storage in depleted North Sea fields.

The Government appears to have decided that we have no choice but to adopt CCS big time. While work continues on the design of the market mechanisms that will be required to incentivise private sector players that generate emissions to participate, the Government has decided to commit hundreds of millions of pounds to support the development of clusters in coming years.

It sparked outrage by deciding to fast track two schemes that are focused on Northern England and Wales leaving the Scottish cluster plan in the slow lane.

The decision left the Government vulnerable to claims that the choice to prioritise projects covering Red Wall areas was politically motivated, particularly as it said the Scottish cluster met the standards required.

If carbon capture and storage can be expected to have such an important impact on emissions, surely it would make sense to get moving as fast as possible on all suitable projects. Delaying one for the sake of tens of millions of pounds does not make sense.

READ MORE: Boris Johnson told snub for Scottish cluster makes no economic or environmental sense

The decision gave Scotland’s First Minister Nicola Sturgeon another opportunity to try to score political points, while claiming to be above such behaviour.

In a carefully-crafted speech at Strathclyde University, she said “absolutely nothing - and certainly not party politics – should stand in the way of” the Scottish and UK goverments working together towards a successful outcome to the COP26 summit.”

Describing the Scottish Government as a strong supporter of the Scottish Cluster plan, she said the decision not to fast track it was “inexplicable on any objective grounds”.

Ms Sturgeon added: “The Scottish cluster would support approximately 15,000 jobs over the next three decades or so – many of them in the North East and around Grangemouth, which of course are currently highly dependent on high-carbon industries.

“It could also have stored up to five to six million tonnes of carbon dioxide a year by 2030 – approximately 10% of Scotland’s current emissions.”

Ms Sturgeon wants to maintain support for the SNP in the North East Scotland heartlands of the oil and gas industry.

READ MORE: Warning on gas supplies outlook as experts warn Nicola Sturgeon has stoked North Sea project uncertainty

Yet she continues to stoke uncertainty by making statements that are designed to keep the Scottish Greens onside. In her Strathclyde University speech, Ms Sturgeon said CCS “does not, and must not mean that fossil fuel extraction in Scotland can continue without limit”. She did not say who has said it should continue without limit.

Ms Sturgeon reiterated calls for the Government to reassess the licence covering the huge Cambo find off Shetland, which Siccar Point Energy and Shell have applied to develop. Once again she stopped short of saying that the application should be blocked.

Those who want to know how the Scottish Government plans to support the energy transition in Scotland in practice will have to be patient. After missing emissions reduction targets repeatedly it plans to publish a new energy strategy, but not until next year.