Energy prices: How can Scotland reach net zero targets but also cut rising fuel poverty?

For many years the idea has been accepted that a sensible policy should provide for security of supply of energy at affordable prices as well as giving full attention to the environmental consequences of energy production and consumption. If attention is not given to all of these, painful unintended consequences may emerge. The unintended consequences may not only adversely affect the economic welfare of our population but even jeopardise the efficient attainment of the climate change objective.

The current situation is one where the UK is a substantial net importer of both oil and gas. We import 52 per cent of our natural gas requirements. Over 80% of our houses are heated directly from natural gas. Further, a significant amount of our electricity is generated from gas.

What lies ahead? In the recently-published Department for Business, Energy and Industrial Strategy consultation paper “Designing a climate compatibility checkpoint for future oil and gas licensing in the UK Continental Shelf” the projections of UK oil and gas demand consistent with the attainment of net zero emissions by 2050 are produced by the Climate Change Committee along with the latest estimates of production from the UKCS from the Oil and Gas Authority. The key findings are that the excess of UK demand for both oil and gas over domestic production remains substantial until 2050. The excess exceeds 50% with natural gas throughout the period.

The implication is that, for the UK’s consumption of oil and gas to be fully compatible with net zero emissions by 2050, substantial imports would be required. This raises the question of carbon leakage from receiving imports from distant locations where regard for reducing emissions may well be less than in the UK. Further, significant emissions are related to the transportation process itself, such as by LNG tankers over the long distances involved. In turn this raises the issue of security of energy supply, particularly in the situation of tight world markets such as is currently being experienced.

This prospect then raises the question of policy towards new field developments from the UKCS. This has been the subject of much controversy with some arguing that there should be no more in order to reduce emissions. The UK Government has not taken such a blanket approach but has made it clear that new field development approvals and future new licensing generally will be dependent on the production of plans compatible with the net zero commitment.

Alex Kemp

Currently there are around 20 fields being actively assessed for development. How should national policy discussions be made in the defined circumstances deserves further thought. In principle, to be consistent with the net zero commitment an effective carbon price reflecting the damage to the climate should be incorporated in the costs of investors and thus in the ultimate decision-making. In turn this raises difficult questions as there are many guesstimates of this and how it should be phased over time.

According to estimates by the present writer it is likely some of the fields currently being assessed will pass the relevant investment hurdles. The result would be a worthwhile increment to oil and gas production with some moderation to the long-term decline rate. There should be a significant increase in employment for the currently hard-pressed supply chain. Furthermore, there would be extra tax payments to the Government. The North Sea tax system is progressive which means that when oil and gas prices increase not only does the absolute amount payable increase, but the share of the cash flows also increases.

It should be noted that the conceivable increment to overall production would still leave the total over the period to 2050 below the consumption levels indicated by the calculations of the Climate Change Committee. It would thus be consistent with our net zero targets.

Recent months have seen dramatic increases in wholesale gas prices and significant increases in oil prices. The increase in gas prices will result in very substantial rises in bills faced by households, particularly those relying on gas for heating their houses, but also those relying on oil products for heating and transport. It is certain that there will be an increase in fuel poverty which is officially defined as the circumstance when fuel expenditure accounts for 10% or more of disposable income.

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The large increase in gas prices has arisen particularly because of the major increase in gas demand in China and India. In these countries a major effort is being made to reduce consumption of coal and switch to natural gas as part of policies to reduce CO2 emissions. On the supply side the very low wholesale gas prices in recent years has led to reduced investment in new field developments. It will take some time for the current high prices to bring forth significant extra supplies.

In the case of the UK there is an additional problem of lack of gas storage capacity. Only a very few days of annual consumption is available as storage following the closure of the Rough field a few years ago. By comparison storage capacity in Germany and France exceeds 20% of annual consumption. This problem generally becomes greater at the end of winter.

Measures to deal with fuel poverty and the possibility of supply deficits in the economy more widely are required. Various ideas regarding alleviation of fuel poverty have been suggested. All have problems. The most efficient would be in the form of targeted relief to households clearly suffering from fuel poverty through the wider benefit system. There are already such schemes but they need to be enhanced to deal with what will hopefully be a temporary problem.

In general, what is required in the UK is an integrated energy policy which considers not only measures to reduce emissions and progress to net zero, but increases domestic production of gas and oil to enhance security of supply and reduce imports, and targeted help for those clearly in fuel poverty.

Alex Kemp is Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance.