Oh no! Don’t let it snow, let it snow, let it snow

Rising out of the sands of the small coastal resort of Lubmin in Germany’s North-eastern coastline State of Mecklenburg-Vorpommern are the final few metres of an engineering marvel and a source of energy with the capacity to power 26 million European households. The Nord Stream 2 gas pipeline (in fact, two of them side by side) lie deep in the waters of the Baltic Sea and stretch from Russia over 1230 kms before reaching those Lubmin sands. As we live through an energy crisis that has seen the price of natural gas rise over 5 fold since the beginning of the year, you’d imagine gas would be flowing at full throttle, but the pipeline sits all but idle as it has found greater value being politicised during construction and now on completion.

Russia – Nord Stream 2 – in the eye of a storm

The decision by the German regulator to suspend the approval process for Nord Stream 2 is set to further delay the opening of the project that has been beset by political interference. The fear of an even greater reliance on an intransigent and sabre-rattling Russia in the supply of energy into the European economy lies at the root of much of the political friction. The US has employed sanctions against companies operating on the pipeline as it fears its opening undermines the stability of Ukraine, who is set to lose out on transit fees from gas flowing through its own pipelines from Russia to Europe and increases its susceptibility to a Russian invasion (by bypassing Ukraine, its economic usefulness to Russia declines). For its part, Russia has been building a troop presence along the Ukrainian border increasing tensions in the region, which remains a geopolitical hotspot since the Russian annexation of Crimea in 2014. Even as the leaders of the US and Russia met in an attempt to diffuse the crisis, Russia was transporting medium range surface to air missile systems towards Ukraine, the likes of which so devastatingly brought down a civilian airliner in 2014 with total loss of life.

Problems closer to home

It is too simplistic to argue that all the problems we are seeing with rising gas prices lie at the steps of the Kremlin and Russia’s muscle-flexing geopolitical moves. There are some self-inflicted wounds and it is briefly worth looking at how we produce and maintain our current domestic energy supply. Bear with me.

The UK’s energy requirements are satisfied from multiple different sources. A ‘typical’ picture of supply would be to see the UK’s energy needs being met by a relatively small but stable supply of nuclear power that can deliver up to approximately 20% of our average daily requirements. At a stretch, wind and solar can deliver up to 50%, but typically this is much lower (2020 was a record year for wind generated energy and this accounted for c25%). The great makeweight bridging the gap between demand and supply is the energy generated from domestic gas power stations plus electric interconnectors linking us to France, Belgium, Norway, Ireland and the Netherlands. When demand is still not met, then coal-fuelled power stations get used.

With gas-produced energy being the key that underpins the varying supply that can be delivered by the country’s renewable supply, you would anticipate our ability to store some gas reserves would be a sensible, strategic decision. It is then a surprise to find that our ability to store gas to smooth out any temporary surge in gas prices and secure our supply is hampered by how little storage capacity we have. There are no strategic reserves. At all. Following the closure of an underwater storage facility in 2017, Britain can store just 2% of its annual demand, in comparison to peers such as Germany who can store well over 10x that amount. This increases our sensitivity to short-term gas prices, particularly when large numbers of smaller scale energy suppliers are going bust, not helped by failing to employ reasonable protections against rising prices. This is a consequence of the deregulation of the energy industry since the 1990’s, which saw the sector open up to smaller energy firms which offered low fixed-price contracts to customers but who bought energy from the unreliable and volatile wholesale markets. However the government decides to square the circle of this energy conundrum, higher costs for customers are likely as a result.

The first crisis of the green energy transition

In turn, increasing prices represent a challenge to the green energy transition and to an economy fuelled and supplied from more climate-friendly sources. Higher prices hurt households, particularly acutely for those on lower incomes. With broad popular support for investment in new, clean energy still in place, there has been scant recognition that this transition is going to be a volatile and costly process. Failing to answer questions on how to build out and manage a variable source of renewable energy with a constant demand, how to rein back on subsidising carbon-intensive energy production, how to accommodate an increased need for nuclear power in being part of this transition are the tough, practical questions that need to come in to the limelight more than the easy ‘sell’ of the high wage, green economy.

We are living through the first crisis of the green energy transition. It is unlikely to be the last.

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