The new prime minister and her cabinet hosted a gathering of world leaders last week, after the state funeral for Queen Elizabeth II. I wonder if the topic of energy and the related cost-of-living crisis came up. It may not have been appropriate, but the meet potentially provided a timely opportunity for some much-needed energy diplomacy. Though the UK government’s response to the Putin-induced energy crisis has thus far been very domestically focused, there are obvious benefits to internationally co-ordinated action. It is, after all, the international nature of the energy market which both pushes up prices to unbearable levels and offers solutions in the short and long term.
The UK is a long way from being self-sufficient in energy—last year net imports amounted to 38 per cent of our energy consumption—as our domestic energy production dropped to a 50-year low. Norway sold us more gas than we produced from the North Sea, providing 63 per cent of our imported gas and also the largest portion of our oil imports (25 per cent).
The cost of supplying fossil fuels in Norway, and in other exporting nations including the UK, has not risen. But market prices have, as more countries clammer to free themselves from Russian imports—leading to huge windfall profits which, in Norway’s case, are now adding to the already full coffers of its Sovereign Wealth Fund. Clearly, when looking at who can afford to pay to keep our bills manageable this winter, we need to be clawing back some of the corporate profits generated from the North Sea and further afield, including by our wealthy maritime neighbours.
The European Commission is alive to this fact and has called for “solidarity contributions” from the extractors of fossil fuels, based on their taxable surplus profits this year. This was one of the key steps announced in the Commission’s three-part plan for this winter, alongside mandatory measures to cut peak demand for energy, and the imposition of profit caps on generators of electricity from non-gas-fuelled power plants, who have also seen windfall profits as the underlying costs of production have remained unchanged.
In the UK, Liz Truss and our new energy secretary Jacob Rees-Mogg used their first days in office to announce a package of energy measures including, in the short term, an Energy Price Guarantee, introducing a cap on the total annual cost of energy bills for consumers of £2,500 for two years, and a six-month measure aimed at providing businesses with similar protection. There were few details about how it will work in practice and even less about where the money to pay for it will come from. (Longer term, Truss has pledged that the UK will be a net exporter of energy by 2040, thanks to an increased pace of investment in nuclear, renewables and domestic fossil fuel production. Unlocking further private investment will be key. Despite promises to extract every last drop of oil from the North Sea and to restart fracking, it’s unlikely this will contribute very much, thanks to the maturity of the oil and gas fields, our geology and also our population density around potential fracking sites.)
Promised emergency legislation, which we believe will replace the current Energy Security Bill making its way through the House of Lords, is eagerly awaited. In the Energy Bill debates thus far, a clear theme has been the need to change the way energy is priced, given that there are wide variations in the costs generators face. The current market settlement system, where every energy generator is paid what the last—and highest—bidder bids for a given trading period, is clearly making bills too expensive. Options exist, such as every generator receiving what they bid rather than the value of the most expensive offer. The possible splitting of the market into fossil-fuel-based and non-fossil-fuel-based generation is another option, with contracts stipulating a maximum price for the latter to ensure affordability. Clearly, whatever changes are settled on, powers should be taken now to enable them to be implemented quickly, to limit excess profiteering and reduce demands on the public purse.
All this is unlikely to be enough, however. One market intervention that could potentially cool prices and provide some much-needed additional income is a fossil fuel commodity trading tax. Liz Truss’s government, with its motto of “you can’t tax your way to growth,” may not at first sight seem likely to endorse such a policy.
The link between trading and liquidity in a market is of course fundamental to keeping markets operating and enabling both buyers and sellers to hedge the future. But, over time, trading has come to be too dominant a function in the finance sector—the older functions of providing investments and debt have shrunk relative to an explosion in derivative trading. And the problem with excessive trading in commodities is that it can quickly raise prices, as second-, third- and fourth-order derivatives extract fees and profits for more players, at the expense of the end users relying on the underlying commodity. It’s for this reason that a very established bank told me recently that they have an automatic screen against trading in soft commodities (such as food) for all their operations, irrespective of any social or environmental criteria.
And it’s an underappreciated fact that energy companies are sometimes themselves the beneficiaries of this trading, employing large teams of traders and hiding the profits in obscure parts of their annual accounts. A proper assessment of how to cool down this aspect of the market, including through taxation, is needed—in collaboration with Europe and other finance hubs.
Two other sources of potential finance could also be harnessed. Firstly, bonds. While some people and countries have clearly suffered through Covid, the energy crisis and related inflation, this pain has not been equally distributed and many have found they’ve accrued large savings. Those with capital should be encouraged to put it to work through clean energy bond issuances. In the UK, the government’s existing (but not well-publicised) national Green Savings Bond could be turbocharged and used to provide capital for all the green investments Truss is seeking to unleash.
The second source is low-cost loans attached to mortgages, to pay for the insulation of our building stock and to finance investments in electricity for our heating, cooking and transportation needs. It’s another under-appreciated fact that electricity is fundamentally much more efficient than fossil fuels (up to six times). This efficiency can help achieve reductions in total energy demand, which can help get us to that 2040 self-sufficiency target and also reduce greenhouse gas emissions.
Our new government will need to demonstrate an understanding of all these options to prevent public borrowing spiralling out of control. As we approach winter, praying for mild, wet and windy weather but bracing ourselves for the opposite, we should, like the rest of Europe, be focused on requiring those who can afford to act to do so. Unfortunately, thus far, creating a climate of solidarity does not appear to be high on the agenda of our new prime minister or chancellor.
