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The Sennen Roundup | Article 1 | 01.09.2022

What really lies behind the ‘cost of living crisis’

BY: Gaby Amiel, Sennen Co-Founder & CEO

 

Seismic changes are disrupting energy markets in 2022.

The average wholesale power price in Europe is up 400% from the previous year. For energy consumers the cost increases are eye-watering. The UK domestic price cap from 1st October will be £3,549 per year for a typical household. A much higher price cap is expected in January.

The media and politicians have declared a “cost of living crisis”. I dislike this term as it seems intentional to disguise the true nature of the issue. It would be more honest and more helpful to talk about ‘the energy deficit’.

It’s not just domestic energy consumers feeling the impact. With gas prices 10 times higher in Europe than in the US, our industrial base will be wiped out if energy prices remain at current levels.

The current crisis

There are three serious factors that are driving up energy prices right now:

First, gas supply is being withheld by Russia in retaliation for economic sanctions. Shortages are so severe that gas will almost certainly be rationed in Germany and the EU this winter.

Second, there has been a collapse in output from nuclear reactors in France. The average reactor is now 34 years old. Serious corrosion issues have been discovered and output is down by more than 30%. Historically a net power exporter, France is now reliant on imports from neighbouring countries to keep the lights on.

Third, severe drought conditions have severely reduced output from hydropower in Norway and France.

The situation has laid bare a long-term structural problem, namely Europe’s dependence on fossil-fuel imports from overseas and, in particular, from Russia.

The energy deficit has emerged from 20 years of under-investment in new energy generation despite declining output from nuclear’s ageing reactors and the phase-out of coal.

Worryingly, supply shortage has led many countries to burn more coal and in Turkey last week, construction started on a new coal-fired power station. This regressive relapse towards coal is understandable but dangerous.

How can we bridge the gap?

Nuclear energy was born as a result of the last energy crisis in the 1970s (incidentally, so was wind power). Now, with options limited, attitudes to nuclear energy are softening even in nuclear sceptic Germany. But this time, despite a swelling in support, nuclear will not be the solution to the energy deficit. At least, not a major one. That’s because it is just too slow, expensive and risky to build new reactors. Witness the EPR reactor at Flamanville: once hailed as the first of a new generation of reactors, it is 10+ years late and 400% over budget with no clear end in sight.

Investments on the scale of Hinkley C (same design as Flamanville) are not commercially attractive either to the private or public sector. For that simple reason, it is currently almost impossible to envisage a significant number of reactors being built in Europe or elsewhere. Even if they are, it will likely be 30+ years before they can make a significant contribution.

On the other hand, the growth of renewable energy has been staggering. From almost zero 15 years ago, 40% of Europe’s power is now generated from renewables. Offshore wind is proving its capability to provide base-load power (>40% capacity factor on new sites) at exceptionally low, fixed prices (<£40/MWh at the latest UK auction). Solar gives a cheap and predictable energy supply, close to the source of demand and will continue to grow rapidly.

More than 88% of new energy capacity built in 2021 was renewables. The rocketing gas and coal prices will only accelerate this trend.

Gas still sets the price

In the UK, as in many places in Europe, gas is the most popular choice for heating homes, with gas prices strongly influencing the price of electricity.

It follows that to achieve stable energy prices and wean ourselves off gas, we have two long-term strategic goals. These are achievable with current technology but require radical and coordinated political change across nations:

  • Insulate homes and electrify heating and industry to reduce gas demand. The continued rollout of air source heat pumps must remain a matter of strategic importance.

  • Decouple power costs from the whims of the international gas market through the rapid development of new energy generation (the overwhelming majority of which will be renewable sources). This should be accompanied by grid-scale batteries and interconnectors between countries to replicate the flexibility that gas currently provides.

A warming planet, an unfolding tragedy

It’s plain to see that society and governments are yet to grasp the sheer scale of the problem we face. Whether it is floods, wildfires or glacier melt, catastrophic climate events keep coming and although the IPCC calls for immediate and steep cuts in carbon emissions, global emissions are at record highs with no sign of abating.

Fossil fuel dependence is causing drought, food shortages, higher living costs, homes destroyed, refugees and war. In a short time, perhaps as little as 30 years, our world will be a far harsher and more dangerous place.

The UK government is complicit in this by failing to educate the population about the kind of future we and our kids will experience in our own lifetimes. Where is the much-needed information campaign on this most vital of subjects?

The policies and actions we need to achieve the clean energy transition require the population to have an understanding of the urgency of climate change but also to understand the economic threat we face from the energy deficit. This must now be placed front and centre of the cost of living debate.

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