ALTIF Transcripts: Britain’s Energy Mess (Nick Butler)

Hello, and welcome to a long time in finance with Jonathan Ford and Neil Collins, in partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring. Summer is over, temperatures are dropping and the nights are beginning to draw in. It’s that time of year when energy usage starts to go up. Now, let’s trust his government recently promised it would cap prices that were otherwise set to rise to unsustainable levels. Average households will have their bills capped at two and a half thousand pounds a year. Some help to be sure, but that’s still roughly three times where they were not so long ago. Now we’ve been thinking for some time we needed to take a look at the energy system situation, haven’t we, Neil?

Neil Collins 00:53

We have yes, it’s been creeping up on us.

Jonathan Ford 00:57

We’re all bit worried about our bills. And it’s great to have on the show, Nick Butler, whose wisdom on energy matters knows no bounds, formerly head of strategy at BP. He advised Gordon Brown on energy policy, has commentated on energy for the FT, and is a visiting professor at King’s College London. Welcome, Nick.

Nick Butler 01:10

Thank you

Jonathan Ford 01:12

It’s very good to have you. So we thought we’d tried to break this show into two parts. The first is to sort of look at the fix we’ve got ourselves into with energy and figure out how we got there. And then we’ll talk about how the government is trying to fix it and also consider ways in which to make sure this thing doesn’t happen again. So first, let’s talk about the past. And obviously, the immediate cause of the energy crisis we’re going through with spiking prices is Vladimir Putin’s invasion of Ukraine. But how many of the problems we’re seeing were really manufactured in Britain, as opposed to Russia.

Nick Butler 01:49

There are global problems. And the real issue is not Ukraine, it is under-investment over several years, driven, first of all, by the fact that prices have been low, people thought that energy was plentiful, and would never stop coming. And also by the strong focus, and this is where you do come back to the UK and Europe, on the green agenda on moving to renewables, and to a degree neglecting the investment that’s been needed in oil and gas.

Neil Collins 02:20

It’s worse than that, isn’t it? The big oil and gas companies have been bullied into not investing. It’s not that they have been reluctant that they’ve actually failed to do so because they were considered as pariahs for doing just that.

Nick Butler 02:36

Well, that’s a strong view. I think some people will always view them as pariahs, what is clear is that neither they nor the state-owned companies around the world nor anybody else, has invested sufficiently so that when the market got tight after we came out of the COVID pandemic, and now got tighter still, as Russian supplies were cut back, there is just not the surplus there. And that’s what’s going to cause the problem this winter, nobody has any gas available to replace the gas that is no longer coming from Russia.

Jonathan Ford 03:08

It’s interesting what you say about the kind of squeeze and the shortage. And clearly, on the supply side, there’s the question of have we invested enough – Neil obviously thinks we didn’t and I think he’s right. But there’s also this question of not having enough storage capacity. Because if you think back to the distant past, when we had coal-fired power stations, I hesitate to use the word virtue, but one fact about coal-fired power stations was they were pretty effective at storing up fuel supplies, if they needed to, they could pile up coal outside and that would be there to burn when it was needed. We moved obviously away from coal to gas, the first thing we did was we cut in the UK, our gas storage field in rough, presumably because it was uneconomic. And there just seems to have been a kind of view that supplies would always be there and there was absolutely no need to provide any kind of hedge against the possibility of a shortage. And one thing which really strikes me is that even though we aren’t the people who are buying Russian gas, for the most part, we buy most of ours from either the North Sea or Norway or other sources, our energy prices have actually spiked higher than a lot of Europe. It’s very striking how exposed the UK feels to this sudden shortage of gas.

Nick Butler 04:20

Well, gas is a global market, 50% of all the gas used is now through LNG which is traded internationally and very easily. We import half of all the gas we use in this country, and that is in the form of LNG, so we are vulnerable. When there’s a shortage anywhere in the world and prices go up we are more vulnerable than many countries. And what strikes me in the last few months is that the Germans who you might think were more affected by the cut in supplies from Russia, have actually got a full management system in place. They have been going around the world buying supplies from other people, where they are available, they’ve put in place a plan for rationing, if that is necessary. They’re encouraging people to use less, they know what they’re doing. And the sad thing about UK energy policy is that they don’t look as if they know what they’re doing.

Neil Collins 05:17

That applies to quite a few things. At the moment, I think you can see that reflected in the markets.

Jonathan Ford 05:23

Why do you think we’re proving ourselves to be so behind the curve on this?

Nick Butler 05:28

I don’t know. But I just see a series of decisions being taken, probably for other reasons that have ended up with this result. So the lack of storage is just one, the rough field could have been kept open. But it was a decision by the Treasury, that it would be uneconomic to support it, and that the market would always solve the problem. There’s been this sort of love affair with the new nuclear reactors from EDF, not one of those reactors in Europe is yet working properly. And now we’re on the verge of buying another. This is just the absence of an overview by anyone in any of the departments, and they’ve had various names over the years, to take an overview and realise that we’re part of the world energy system, and that we have to manage and take precautionary action and be prepared for a market that is historically extremely volatile.

Jonathan Ford 06:31

When was the last time you think the government took a kind of sensible energy decision in the UK?

Nick Butler 06:37

Well, I think the last time when we had someone with that overview, and I wouldn’t agree with everything they did, but they did have that overview was the early 80s. David Howell, and then Nigel Lawson, actually understood what the system was – they wanted to move it in a particular way, which I think they went too far. But they did understand what they were doing.

Neil Collins 06:57

Certainly, I’m afraid I would agree with nearly all of that, I suppose one can say that we have the makings or the beginnings of a new policy now, with encouraging companies to return to the North Sea, which will help. Nobody believes it’s going to solve all our problems, but at least a change in attitude towards North Sea exploration is a small step in the right direction. Would you agree?

Nick Butler 07:25

No, I think it’s another mistake and an illusion, now that being out of Europe, we are sovereign in this world, and that we can do it all ourselves – getting new resources out to the North Sea will be expensive, it’ll take years, the licensing process will not even begin until next year, according to the department. And I think they will not get very much in the end, nor will they get very much from fracking. And I think companies will be wary now of putting money into these sorts of activities. Because I suspect within five years, the price will be down again.

Jonathan Ford 08:00

We should move on to the challenges of the present day. We’ve talked a bit about the past. But let’s look at what the government has decided to do. And obviously, they’ve decided to go for this flat support package where there’s just across the board, limit of price increases on households and businesses. Now, most people seem to think that it’s not a perfect solution. But given the scale of the increases, you’ve got no choice. But to do that…

Nick Butler 08:26

it gets you through the next few weeks. What I think it doesn’t do is explain how that’s going to be paid for. And that’s why the currency markets are going in the way they are. I think that to do unfunded support on this level is quite risky, given the level of borrowing the UK has already. Let’s say you have to do something in the short term, is to look at what you’re doing. And I think the idea that the price of power should be driven by the wholesale price of natural gas is just a mistake. If it’s gas supply, and if people are having to pay global prices, that sort of levels you’ve talked about, then yes, that’s fair enough. I see no reason why the suppliers of nuclear or wind power should get a windfall when their costs have not gone up at all.

Jonathan Ford 09:20

So what’s the answer to that? Do you split the market, or?

Nick Butler 09:22

I think in the market, you split the market, and you take account of what the actual costs of supply are. And for some people, it has gone up dramatically because of Russia and everything else that’s going on. For others, it’s not gone up. And I think we need a forensic audit of all the energy suppliers to households and business. Let’s see what their real costs are, what margins they make. And I think you need a new regulator, because the regulator has just failed – they let all these companies sell us power. And now I think 31 of those companies went broke, cost of over three 3 billion which goes on the bills as well. Ridiculous. So I think they need to and let me say I hope Mr. Reese Mogg, again, I don’t always agree with, I hope he’ll go into this in great detail and see who is really making exploitative profits.

Jonathan Ford 10:15

Okay, so I want to, before we move on from that, splitting the market strikes me as sort of interesting because there are obviously different ways of skinning that cat or whatever you can leave in place the arrangements as they stand. Clearly, the problem is, as you say it, it’s not so much with the people who have what are called Contracts for Difference if they have renewable turbines in the North Sea or wherever, because they’re just getting a fixed price. And that fixed price is theoretically related to what their costs are, they will be, if you like, some of them will be paying back money. The clear profiteers are the people who have those previous arrangements, which were just sort of top-up payments known as renewable obligations certificates, or rocks. So they get the market price, which is very high. Plus, they get amazingly a top up. So they’re absolutely making incredible super profits. And then you have obviously the Nuclear Suppliers whose cost, as you say, haven’t moved and are just able to sell for much higher prices. There are various you could leave that in place, but simply tax them while prices are high, and say, we’re not going to change the market structure, we’re just going to tax away your profits, because they’re excess and they’re unacceptable. The only thing about rejigging the market is whether you run into the law of unintended consequences, or by changing the contracts – actually, you make life more difficult in some way for the system in future.

Nick Butler 11:44

Well, I think they’re soon going to be a vacancy at OFGEM. And I think you’d be very good Jonathan to take that on. 

Jonathan Ford 11:51

I’ve got a podcast to do!

Neil Collins 11:56

Proper employment at last.

Nick Butler 12:00

I think the thing to look at is what is the rate of return? And I think the regulator should be regulating the rate of return. And that means some intrusive auditing of who is making reasonable profits, which is fine, and who is making exploitative profits. And there are, as you say, numerous different ways of doing it. But to do nothing and leave it as it is, is quite the wrong choice.

Neil Collins 12:27

I agree entirely. That’s the sensible way forward. I’m not convinced that it’s as easy to do because you do have all these contractual arrangements, whether or not OFGEM actually has the power to do anything material about this – I would very much like to know, perhaps you can tell us.

Nick Butler 12:48

I think it may need primary legislation to change the role of OFGEM. I think it certainly needs new leadership. But these things aren’t impossible. I mean, we’re in a very difficult situation. I think there’s a general, on all sides, a view that the system hasn’t been working. So yes, we may well need a new system, which may well need new legislation.

Neil Collins 13:09

Primary legislation is never quick nor easy. It may produce a solution, or it may produce a result, which is even worse than that which it’s designed to try and combat.

Nick Butler 13:23

One way to do this, which has been suggested is a renegotiation of the contracts. I think if that were acceptable, that would be another short-term measure. But I think if the companies resist completely, then then we are back on to additional charges on them, which does not need primary legislation, as I understand it.

Jonathan Ford 13:44

I do think it’s very interesting that at the end of this very long cycle, you see this across a lot of different privatised industries, we are essentially moving towards an American-style rate of return regulation, which was explicitly rejected by Mrs. Thatcher in the 1980s, as not the way to go, but after this long learning process, we seem to be finally room devolving back to realise that actually, let’s just do it the way the simple way.

Nick Butler 14:13

Well, I think you’re right. And I do see in this crisis, a shift from the private back to the public sector in terms of control of the energy market in one way or another, they are intervening more, because when you have energy prices going up, as we’re threatened, when you have a real shortage of supply threatened, the government is held responsible, and so the government has to do something. I hope they know enough about the industry to do it in a logical and sensible, practical way.

Jonathan Ford 14:44

Well, as you say, that was very clearly shown in the electricity distributors, sales companies, people like those bulb & co who basically ran businesses with absolutely no capital behind them kind of one way bet on building up a customer base, and when they all failed, as you say the public sector, the government was left picking up the pieces, and it’s really embarrassing what’s been happening.

Nick Butler 15:09

I can’t believe the regulators who allowed that are still in post.

Neil Collins 15:15

I agree with that entirely.

Jonathan Ford 15:17

So let’s, let’s pair into Jacob Rees Mogg, because he’s the New Energy Secretary, who has to mop up this elephant product. He’s got a whole heap of things he needs to think about. One is we talked about at the beginning is storage, which is the government just had to go and incentivize people to create strategic reserves.

Nick Butler 15:36

Yes, in the short term, that’s exactly what you have to do. And look at the German model. I mean, companies are just required as part of their business dealings and licensing process to, to hold stocks, right to a reasonable level, and almost every European country now has several weeks, even months of stocks, we have next to nothing.

Jonathan Ford 15:59

I find that incredible, that we’ve done nothing.

Neil Collins 16:04

The people who would have enforced that have been too busy trying to find a new prime minister. And so nothing got done at all. And the problems were never really confronted.

Nick Butler 16:17

I think it’s an issue that we’ve had these low prices from 2014 onwards, people thought everything was plentiful. The challenge for Mr. Rees Mogg is an intellectual challenge. He doesn’t believe in government intervention, I understand that position. It’s an honourable position. Now he’s going to have to intervene on this and a number of other things.

Jonathan Ford 16:37

Just to go back to Germany, though, for a second. And because I’ve been watching the photographs of Olaf Schultz turning up in various Middle Eastern countries and other places. But the other thing about the Germans is the Germans are more willing to burn coal than we are to get through. We’ve obviously completely rejected that option. Pretty much now. Do we have any coal power stations left?

Nick Butler 16:58

No. There are one or two I believe that could be reopened.

Jonathan Ford 17:03

But isn’t that a mistake?  If the government ends up having to ration power over the winter, because it hasn’t got what it takes…

Nick Butler 17:09

It would take far too long to open them. I don’t think you can go back quickly. I think we may need to open over time, some of the mothballed gas stations that we need – but we need the gas. And that will have to be important. I mean, to go back to Neil’s point on the North Sea and fracking, that is not going to create any new supply this winter or next winter or probably the winter after that. We’re going to have to import. And I think the next task on Mr Rees Mogg’s agenda is to find as much gas as he can just in case there is a complete shortage in Europe, a cold winter, plus a Mr. Putin using the gas supply – turning it on and off as he has been doing – so that there’s a real shortage, because Europe will look after itself. That’s part of the Union. We’re outside it, they won’t look after us. And with the French problems of nuclear and so on. I think there’s a risk over this winter of real shortage in the UK, something to look forward to.

Jonathan Ford 18:08

Just like 1973, we’ll have a three-day week again.

Neil Collins 18:13

I think that your comments on reform are extremely sensible. But what would you suggest apart from going out with an open checkbook that the government can do in the short term?

Nick Butler 18:26

I think they can do what some of the European countries are doing and encourage reduced use.

Neil Collins 18:32

I must say I agree with that – absolutely extraordinary that no government minister that I have heard has said, please try and use less. It’s in your own interests to bet on another vest.

Nick Butler 18:45

That’s right, I think we can do that investment in energy efficiency is obviously useful, but it won’t come in time for this winter. So I think encouraging people to save would be helpful. I think putting in emergency storage or buying storage overseas is perfectly possible. And I think we should be doing that too. I think we should try and get a very big energy deal with Norway to secure some supplies – further supplies from there

Jonathan Ford 19:12

Just thinking about the longer term as well, you made a few remarks about the government’s approach, for example, to nuclear, which is obviously one of the longer-term ways forward that certainly Boris Johnson identified.

Nick Butler 19:26

I think he said a new reactor every year.

Jonathan Ford 19:28

New reactor every year, which seems…

Neil Collins 19:30

Yeah, he said 14 hospitals too, we haven’t seen them either.

Jonathan Ford 19:34

Anyway, yes, they’ve put that one in the same bucket as the Royal flagship or whatever it was. What is the place for nuclear in the system? Because I think I think you’re gonna have to have some of it.

Nick Butler 19:44

Yes. And it’s going to be a challenge because the existing nuclear stations are getting very tired and, weeell, we didn’t invest, but they’re now just getting on 40 years old, on average, I think they’ve had their lives extended and that’s fine and that cheap and low cost so long as they keep working. And I think there is a schedule now where they reached the end of their working lives. And so nuclear will go down as a share of UK energy supply before it goes up again. I think that relying on Hinkley was a big mistake, because the technology works, but the construction doesn’t. These are just far too complex to build, and now where

Jonathan Ford 20:25

You don’t think we’ve learned to build them efficiently.

Nick Butler 20:28

When I was working in number 10 In 2009, we were assured that the UK would benefit from being, having the second of these reactors because Flamanville, the first of them in northern France, would be finished by an onstream by 2013 – so the whole construction process of Hinkley would be informed by everything in Flamanville.  Flamanville has still not opened.

Jonathan Ford 20:54

A little known fact, of course, was that Gordon Brown who you’re working for, the public relations department of EDF, which was building flamanville, was his brother. So what should we do? We don’t buy EPR’s, what should we buy, SMR’s?

Nick Butler 21:10

I think they are the best bet in the nuclear world now, so long as we’re not prepared to do business with the Russians. So some of the best (inaudible) but I think they are some of the most efficient reactors in the world. I think the next best bet is the small modular reactors that Rolls Royce are doing. I think they should be fast tracked, if the government is taking a new look at the regulatory barriers to this, they should be brought forward as much as possible. They can be built in a factory, they can be put on a on a low loader and put on sites including the existing nuclear sites. So there’s very limited planning problems. And I think they would actually be a British business which could be developed over time to sell to the world market.

Jonathan Ford 22:02

You could put them in Drax instead of that biomass.

Nick Butler 22:03

You can put them anywhere.

Neil Collins 22:07

I’m not as pessimistic as the markets generally seem to think is warranted at the moment, I come back to my first law of commodities, which is that today’s shortage is tomorrow’s glut. And it’s always true. Well, you don’t obviously quite know when the sun’s going to rise tomorrow. Goldman Sachs are now forecasting a halving of the world gas price by spring next year, it is possible that we will find that we have passed peak pain, as far as this part of the energy cycle is concerned. I don’t for a minute think that we should not do a lot of things you’re suggesting, which is just common sense. And you should have an insurance policy, whatever you think that the future holds. But I’m not anything like as pessimistic as the general mood in this area.

Nick Butler 23:07

Well, that’s interesting. I think there’s a very good case to be made for the fact that prices, particularly of gas will be lower. I wouldn’t say by next spring, I’d say at some point after that, unless there is some sort of deal with Russia. If there were a ceasefire, then the gas which we fear might be cut off this year would not be cut off, things would go into a long Korean-style negotiation. I think there is a possibility, but then you have to take into account Neil, you said a cycle. Yes, I agree always cycles, but then there’d be another cycle – a shortage, and we’re going to import both oil and gas for a long time to come. And therefore we have to be very careful about the vulnerability that that puts on this country, and therefore you need, as any good business would, you have to be resilient against quite big changes.

Jonathan Ford 24:01

So I want a bet from you; percentage chance of blackouts this winter. How high

Nick Butler 24:05

15%

Jonathan Ford 24:10

One five? That’s a bit lower than I expected. Put the kettle on!

Nick Butler 24:15

Depends on Mr. Putin.

Neil Collins 24:21

That was a long time in finance with Jonathan Ford and Neil Collins, editing and production, Spy Nick Hilton, and our sponsorship partner is briefcase dot news. Join us again next week.