The UK can learn from the past to avoid geopolitics impacting energy prices

The first says that the best way to derisk energy security and energy cost in the UK is to remove oil and gas from the mix – if generation of electricity isn’t dependent on oil and gas, then not only will the UK’s carbon emissions be minimised, but the country will also be unaffected at times of geopolitical turmoil when supplies of hydrocarbons are tight and prices are high.

Given the UK’s success in decarbonising Britain’s electricity system there is clearly some momentum behind making this a reality. As highlighted by the UK Climate Change Committee in its supplementary analysis of the seventh carbon budget published on 11 March, this represents an economic opportunity for the UK and could actually cost less to deliver than a single fossil fuel crisis.

The second narrative highlights that in all net zero scenarios – including that put forward by the Climate Change Committee – the UK will continue to consume oil and gas, as much as 13 to 15 billion barrels of oil equivalent by 2050.

Not all of this can be produced domestically, but at least half of it could be. A number of material new North Sea projects could be producing within the next 12 months or sooner. Given the fragility of the global energy supply chain, increasing domestic supplies to mitigate the risk of reliance on imports, the extraction and supply of which the UK cannot control, seems the right thing to do. According to a poll commissioned by Offshore Energies UK published on Monday, 76% of the UK population agree.

An additional argument is that increasing domestic gas production will have no impact on UK energy prices for businesses or consumers, because electricity prices in the UK are based on “marginal pricing”, which is almost always the market price of gas which isn’t set domestically. That market price will remain high if supply is limited and demand is high, whether the gas is produced here or imported from overseas. Based on current energy pricing policy, this is true.

So, is there a way to decouple our electricity prices from the market price for gas?

The 1970s success of the transition from coal to gas was underpinned by long term gas purchase agreements between the state, through British Gas at the time, and the owners of UK offshore fields, which guaranteed supplies to power stations at contract prices which weren’t dependent on what the market price was doing.

These contracts – most now terminated – derisked the purchaser’s exposure to market gas prices for the contract duration whilst providing the certainty that was needed for investment offshore by the operators and producers.

The oil that came from those fields was still traded on the market, and that gave upside to producers, but the UK received the gas it needed to keep the wheels of industry turning and the lights on at an affordable cost. The rationale for the energy profits levy or “windfall tax” would fall away if a similar contractual model were used now. Such a model could utilise GB Energy as the purchasing entity, which could then sell on the gas to the generators that need it.

This would be similar to the way contracts for difference have underpinned the successful growth in offshore wind: guaranteed supply, because the investment case is derisked, and guaranteed return on investment, because the minimum price for the commodity is known.

Given the UK’s demand for electricity will only grow over the coming decades, especially with the increase of electric vehicles, heat pumps and the energy hungry demands of data centres, there is an argument that it is time to revisit 1970s energy policy to address today’s challenges.