UK’S declining energy use signals looming crisis

Economists link falling fuel demand with decline, report Melissa Lawford and Jonathan Leake

Doomsayers warn that Britain is returning to the bad old days of the 1970s – yet by one measure, we are already there. Energy usage has tumbled to its lowest level since the era of Edward Heath’s three-day week, official figures show.

In 2022, excluding the 2020 Covid lockdown, the country used less energy than in any year since at least 1970. This figure includes energy generated from all sources including coal, gas and renewables.

The Government puts the decline down to “a variety of reasons, including unseasonably warm weather and continued improvements in energy efficiency”.

Officials add that energy usage is expected to decline because of net zero “as we transition to a more efficient use of energy through electrification”.

Yet experts argue the numbers tell a story of economic decline rather than energy efficiency improvements.

“Electricity consumption isn’t an independent variable. It is linked to the fact that we’re not equipping ourselves to maintain our living standards,” says Gordon Hughes, a former senior adviser to the World Bank. Hughes, who is also a former professor of economics at the University of Edinburgh, believes the economy is in a similar state to the dark years of the 1970s when dysfunction forced the country into an IMF bailout.

Domestic capacity is winnowing away and the country is increasingly reliant on infusions of foreign cash. Energy use is falling as factories and businesses close and as families become poorer, not because of efficiency benefits. Britain used enough energy to power 155m homes for a year in 2005. By 2022, the equivalent figure had fallen to 128m – a slump of 17pc in less than 20 years.

Historically, there has been a strong correlation between higher energy consumption and faster growth, says Ben Mcwilliams, an affiliate fellow at Bruegel, a Brussels-based think tank.

“That goes back to the industrial revolution,” says Mcwilliams. “Ever since then, you typically see there’s an association between high energy consumption and higher GDP.”

The link will eventually break as energy efficiency improves. But this is not what is happening now, he says.

There were some exceptional circumstances in 2022 that should be taken into account. Massive jumps in energy prices after Russia’s invasion of Ukraine reduced usage as people and businesses could simply not afford as much. Warm weather also meant there was less demand for heating or electricity-sapping indoor entertainment such as watching TV. Domestic energy consumption fell by 14pc year-on-year to hit a record low.

However, the record forms part of a longer-term trend. Energy use peaked in the UK just before the financial crisis and has been in decline ever since.

Since then, falling energy consumption has mirrored snail-like productivity growth and snail-like economic growth. The UK’S GDP per capita has never recovered and is still 8pc below where it was in 2007, according to the World Bank.

“Declining energy consumption is definitely not on the back of efficiency,” says Jorge León, who leads oil market research at Rystad Energy.

He believes the fall in energy consumption is a direct proxy for economic decline. No coincidence, then, that the economy tipped into a technical recession at the end of last year as the effects of tumbling energy use began to be felt.

Hughes says: “[Falling energy use] is a symptom of economic stagnation and a symptom of the fact that we are not investing enough as a country to maintain our infrastructure and maintain our level of income.”

Investment in Britain is equivalent to 13pc of GDP annually. That is the money spent on new technologies, buying or fixing machinery, training staff – all drivers of economic growth. “Historically, it averaged somewhere around 17pc or 18pc,” Hughes points out. “In other countries in the world, it is significantly above 20pc.”

Investment is falling just as our population is growing, which should be driving up the need for spending.

While declining energy use is happening across the economy, a large part of the story is the ongoing demise of Britain’s manufacturing sector.

The first – and best known – wave of deindustrialisation came between 1970 and 1990, when Margaret Thatcher closed down Britain’s steelworks and coal mines. Manufacturing shrank from 27pc of the economy to 17pc.

Since then, however, the sector has continued to decline as factories struggle to compete with China. Thousands of steel job losses have been announced in recent months as Port Talbot and British Steel’s Scunthorpe plant shut their blast furnaces, changes partly driven by struggles to produce competitively priced metals. “For energy intensive industries, energy costs have increased massively,” says León.

Industrial energy consumption hit a record low in 2022, down 35pc since its pre-financial crisis peak.

Households have also been crippled by high energy costs and high inflation, which triggered the biggest drop in real household disposable incomes in 70 years. “People might be using less energy but it’s not because their homes have become more efficient, it’s just because it’s more expensive,” says Jess Ralston at the Energy & Climate Intelligence Unit.

Government support for homeowners to improve insulation is at its lowest level since 2012, she says.

Paradoxically, falling energy consumption also puts our net zero goals in jeopardy, economists warn. Britain and the rest of the world must spend heavily on building new infrastructure to deliver more electricity and cut out oil and gas use. That investment activity will be power-hungry.

European countries need to double their electricity consumption over the next 20 years to get to net zero, says Mcwilliams. But in Britain electricity use hit its lowest level since 1989 in 2022. It has dropped by 21pc since its pre-financial crisis peak.

A Government spokesman said: “Since 2010, the UK has grown faster than France, Japan, Italy and Germany, with the OBR predicting growth in every year for the next five years.

“We expect overall energy demand to continue to fall as we transition to a more efficient use of energy.”

‘People might be using less energy but it’s not because their homes are more efficient, it just costs more’