heat-policy

As you can see, the UK went form exporting gas to importing in 2004 and since then import dependency has increased quickly so we are now importing well over 50% of our gas. The UK continental shelf supplies were relatively rapidly depleted with the UK’s dash for gas for both power and heat generation. Because of this dash, we are now effectively locked-in to an energy system where gas is incredibly important. If you were to redesign the UK’s energy system from scratch today based on current gas availability it would certainly not look like it does and gas would not be so important.

There are often fairly philosophical debates around whether importing energy is actually that bad a thing and I’m not going to go into the detail of that. However clearly the UK’s direction of travel with regard to gas is not a good thing. If the graph above plays true, the UK will be increasingly reliant on foreign gas with the associated physical supply risks and price volatility. Furthermore, the macroeconomic impacts of importing more and more gas are negative for UK Plc. I’ll drill down a bit more into each of these points.

So firstly, the physical supply risks are considered a potential problem however the current physical entry capacity into the UK is very large. We are physically connected to Norway through the Langeled line, connected to Belgium through the Interconnector and also received supplies via the Netherlands through the BBL (Balgzand Bacton Line). We also have the massive capacity of the Teeside, Milford Haven and Isle of Grain LNG facilities which are very underused. The most likely causes of security of supply issues for gas are geo-political however the UK’s reliance on Norweigan gas (not Russian which supplies minute quantities of gas to the UK) means that currently the UK has a pretty secure supply of gas and potential to quickly switch to LNG if required.

However, just because you can potentially buy something doesn’t mean you can afford it and associated with reliance on global markets is the potential for price volatility with global issues more likely to affect UK prices and therefore impact on consumers bills. One example of global impact on the gas market is the Japanese tsunami which caused the shutdown of a number of their nuclear reactors. These were replaced with imported LNG and this remains to be the case. As a result global LNG prices rose meaning the UK market switched to relatively lower prices (though more expensive than was originally expected) sources thereby increasing prices for UK consumers. It’s worth remembering however that as both an importing and exporting market participant, the UK’s gas prices are increasingly becoming linked to international prices anyway and just because the cost of a unit of gas in the UK may be cheaper than a unit in Russia to produce at a well, the price will still reflect the wider market cost of a unit of gas.

But there is one other major issue with importing gas which is generally forgotten about which relates to the benefit on UK Plc. For 2012/13 Government ‘tax’ income from gas production was £6.5 billion. I say ‘tax’ because basically the high tax rate is the way the the Government receives its value from the national gas asset (i.e. the country’s gas). This is not the way Oil and Gas UK frame it when they compare themselves to other businesses (see below) but there are clear differences between the primary energy extraction industry and say a shop. There is of course also all of the associated businesses and supply chains which Oil and Gas UK suggest is worth about £27 billion each year.

As we increasingly import more gas two interesting things happen. Firstly, we produce less gas ourselves and therefore the direct financial benefits from the gas industry reduce. This could be a significant problem if the above numbers from Oil and Gas UK are to be trusted as that is potentially a lot of jobs and a big reduction to the UK’s GDP. Unfortunately there’s not a lot that can be done about this as the gas is a finite resource. This is hardly new news.

Secondly, as we import more gas we widen the UK’s trade deficit which is already near its record high. Not only does this directly reduce the UK’s GDP as UK money goes abroad, but there are wider economic effects as the benefit of all that cash being spent in the UK (multiplier effect) is no longer there. WWF and Greenpeace commissioned Cambridge Econometrics to look at the wider GDP effects of either investing in offshore wind or gas capacity for electricity generation. This showed that because of the benefits to GDP of the wind turbine investment in the UK, despite slightly higher power prices the overall benefits to the country were better in the offshore wind scenario. I am sure that the numbers in the study could be questioned but nonetheless, the economic theory is clear that a country should be importing less and exporting more.

So hopefully I’ve shown that the increasing reliance on gas imports is not just bad for the reasons usually mentioned, i.e. security and price volatility but also because of the wider macroeconomic impacts. The question I now have is what is the actual cost of this expected shift to the UK and how does this cost relate to the future of how we use gas. Surely this must make the relative costs of non-gas sources of heat (i.e renewable and low-carbon heat) closer to the costs of gas heating and policy must therefore consider this when thinking about the wider benefits of a heat transition.