Hunt’s optimism is misplaced – there won’t be growth if energy prices stay this high
He should be in crisis mode, securing new gas supplies, because that is the foundation upon which everything else is built
‘Britain needs you,” Jeremy Hunt declared from the podium, “and we will look at the conditions necessary to make work worth your while.” Lord Kitchener it ain’t.
The Chancellor was addressing retirees who have given up work early, a group now thought to be the largest factor in the shrinkage of Britain’s workforce. He wants to entice them back into work one way or another, he said in part of a 25-minute speech at Bloomberg, where Mr Hunt laid out his recipe for economic success.
Oddly, he termed his list the “four Es” (the last “E” standing for “everywhere”, which I suppose is at least marginally more specific than “everyone” and “everything”). Conspicuous by its absence, however, was any discussion of how to address utterly unsustainable energy costs, even though “energy” would have fitted perfectly easily into the Chancellor’s dreary mnemonic device. It is hard to avoid the conclusion that the Government’s strategy, insofar as it exists, is simply to sit tight and wait for costs to come down. If so, it isn’t going to work.
The optimists point out that gas prices have fallen dramatically from their highest point. They are right, up to a point. The cost of gas per therm in the UK is now around £1.40. At its peak it reached £5. In the two decades before the war in Ukraine, however, it was averaging around 50p. So you can celebrate the lower price all you want. Yes, it represents a fall in energy inflation and, as Mr Hunt said: “The best tax cut right now is a cut in inflation.” But don’t be surprised if households and businesses up and down the land fail to join in the celebrating. Energy costs are still an extraordinary squeeze on economic activity.
Businesses, in particular, are about to face challenges a million miles away from Mr Hunt’s plan for a British “Silicon Valley”. When the Government’s current energy subsidy scheme for them ends on April 1, their energy costs will soar. The Federation of Small Businesses says a survey of its members conducted last autumn suggests that a quarter will “close, downsize or radically restructure”. Hooray for falling gas prices though.
Meanwhile, British car-making, already struggling with Brexit export costs and semiconductor shortages, is also suffering from exceptional energy prices. Car production fell by 10 per cent last year to its lowest level since 1956. That’s a period when nearly 80 per cent of British households didn’t even own a car and a fair chunk of them probably moved around by horse and cart. There is a time for sunny optimism and there is a time for crisis management. This, I would suggest, looks a bit more like the latter than the former.
The trade framework for making electric cars will also be thrown into disarray next year, when a 10 per cent tariff on electric vehicles moving across the Channel will kick in thanks to the expiry of an exemption in the UK-EU trade deal. That isn’t what most people would call a nurturing environment for net zero projects.
And despite the record oil and gas prices, we are seeing even large companies reconsider investments in the sector in Britain thanks to botched government interventions. Harbour Energy, the North Sea’s biggest producer, has shelved plans to explore for more owing to Rishi Sunak’s poorly designed windfall tax. Shell, which stepped in to soak many customers bumped off their contracts by collapsing energy suppliers in the last year, has now said it may sell off or shut down its retail energy business in the UK (plus in the Netherlands and Germany) because of vast losses.
Renewable energy production, which Mr Hunt namechecked repeatedly in his speech, is of course welcome. But at the moment, there is no scalable solution to the problem of storing electric power and no sign of plans to accelerate the building of more nuclear power stations. In the meantime, we need more gas.
To get it, we need to be prepared to sign large long-term contracts with reliable suppliers in the US and Qatar. Otherwise, they simply will not make the investments needed to raise production in the medium term. European gas buyers, however, including the UK, are loath to commit to sufficient long-term contracts to make us secure because of climate change targets.
The Government is failing to learn the lessons from 20 years of mistakes and wrong assumptions on energy policy and persists with the idea that, as Chris Skidmore’s Panglossian review of net zero claimed, “the benefits of investing in net zero today outweigh the costs”. The perverse result of over-optimism, as seen in Europe today, is that the continent is burning more coal.
Net zero may be the right aim in the long term, based on developing technologies to make it work, but without a strategy to increase gas production now, we are simply making the same mistake and somehow expecting a different result.
Indeed, there seems to be just one area of energy policy where anything has actually changed and that is the creation of a £6billion “insulation taskforce” in Mr Hunt’s Budget. This, at least, is clearly the right direction to go in. It’s now a question of whether this project will fare better than the many failed schemes that have gone before.
If we are to reduce the risk of further price spikes, it needs to succeed and quickly.
The next pinch point is likely to come in the spring or summer, as
Europe attempts to refill its gas storage tanks without the use of Russian gas, which we have always relied on in the past. In 2021, when Putin reduced the flow of gas into Europe during this period, it was the trigger that kicked off the whole recent period of rocketing prices. We’d better hope the weather stays exceedingly mild to avoid the same effect this time around.
Mr Hunt’s enthusiasm for tech start-ups and billion-dollar “unicorns” may be appealing, but it is largely irrelevant to the economy’s most pressing challenges. No economy can prosper without a reliable supply of affordable energy. Until that is established, let’s hear less about unicorns and more about utilities.