Corrected analysis By Mathew Carr (see note at bottom)
Sept. 6, 2022 (LONDON) — Scanning reports on how the “new” U.K. government is planning to tackle the energy crisis, this chart from the BBC stands out:
Liz Truss is being sworn in today as Britain’s new Prime Minister, replacing Boris Johnson after a decision by the “Conservative and Unionist” political party.
It seems from the chart she’s set on a plan that will see the higher costs for energy over the next several months / couple of years smoothed by decreasing expenses in the following decade or so.
The government creates a fund of about £90 billion to deal with the up-front cost, according to the BBC. Bloomberg reported as much as £130 billion, plus £40 billion for business.
This offsetting is revolutionary, because it sets the forward energy and carbon markets up to trade two decades in advance, rather than three or four years, as they are now.
Risk management for natural gas, coal and carbon allowances becomes a multi-decade obligation or opportunity for the first time, rather than one that applies just a few years out.
This may force business to think longer term, factoring in things like climate change.
ICE, the exchange giant, offers carbon contracts through 2028:
Inspired by Truss’s chart, I sketched out how her plan might help speed Britain’s energy transition.
It’s illustrative to show how the mechanism might work. It’s not proportional to reality. I’ve not seen the plans, other than what’s been reported:
The Big Smooth
— £90 billion financial flip that forces forward thinking in commodity markets
–Otherwise known as the “energy mortgage” option
What the chart shows is how the surge in natural gas and coal prices has driven costs per household much higher than families and businesses can handle.
The fund money helps pay for costs above £2,000 per household per year (paid monthly) during the next 18 months to three years or so.
The high prices abate as the Russia-Ukraine war ends or we learn to live with it …and — other things being equal (which they rarely are) — the fossil-fuel prices then plunge / fall over the next years. Remember the market for crude oil is rigged by OPEC+Russia, so this might not happen.
The need for renewables is clear, and they now cost less than fossil fuels, so the system becomes cheaper over time.
The cost of continuing to build them adds to current costs as consumers effectively pay for two energy systems at once — to build a new clean one (where up-front costs are high but operating costs are low because there is no need for expensive and dirty fuels) and the existing, polluting one.
To spur clean energy and shift away from reliance on Russia’s natgas, carbon prices rise — effectively preventing fossil fuels from being competitive, unless associated with carbon capture. This protects clean-energy investment.
You can see the first dashed semi circle flips and fits into the second, inverted one, allowing costs per family to last for 20 years or so at £2,000 a year — because of the fund’s financial flip.
Families who want to use more energy may face even higher prices per MWh of energy consumed over a set limit — to encourage energy efficiency.
Eventually, by 2040, fossil fuel use is much lower — carbon prices probably keep rising as the climate crisis worsens, which is why I have them jumping close to 2040 (this is for illustration).
One of Truss’s biggest challenges will be to convince the public, starting with her own political party, that the higher carbon prices are not a tax, but rather a payment for damage to the climate.
Indeed, carbon prices will probably need to stay high, providing billions of pounds to the government / taxpayers as polluters pay for carbon allowances as they find a better way to provide energy. Producers of carbon credits will be incentivized to remove heat-trapping gas from the atmosphere, mainly CO2, under better carbon markets.
The politics of this potential plan, including geopolitics, is fascinating.
Liz Truss’s Victory Speech Gives a Glimer of Hope for Her Energy Plan — Yet She Does Not Seem a Saleswoman
The Independent newspaper in the UK published Liz Truss‘s victory speech. She became the Prime Minister of the UK from today.
I want to focus on this section of her victory speech as I’m hoping it’s signalling her promised change in energy and climate policy to deal with the energy crisis. Her comments also demonstrate her appeal to Brexiters (the UK decided to leave the EU in 2016):
“I know that our beliefs resonate with the British people. Our beliefs in freedom, in the ability to control your own life, in low taxes, in personal responsibility. And I know that’s why people voted for us in such numbers in 2019. And as your party leader, I intend to deliver what we promised those voters right across our great country,” Truss said.
Let’s take these beliefs in turn (combining the first two).
- Freedom / Controlling Your Own Life
Truss is setting out why she thinks it’s great to be free of the EU (even though she used to be a remainer). She wants the UK to be to be able to make its own choices. Britain does not need to buy products from Europe if it can buy better stuff for cheaper prices in, say, Africa, or Asia. With energy costs surging in the UK by triple (or 10 fold according to one of my contacts in the retail sector) buying stuff more cheaply is a plus.
Similarly, Truss is appealing to the UK’s ability to deal with its poly crisies in its own way. Truss is facing strife inside her political party and country because of her plans to expand domestic oil and natural gas production. Scotland wants more focus on renewables. I’m hoping the expansion of British natgas production comes as part of the deal with developing nations, who would supply rare earths, green hydrogen and finished clean-energy products back to Britain. It’s maybe cheaper to expand the fossil-fuel industry in the UK, where the infrastructure already exists, than create a new one in Africa or Asia. This could be a sort-of carbon trade, where an African country let’s Britain “borrow” its space in the atmosphere for heat-trapping gas as long as the U.K. buys green hydrogen from the same African nation using Article 6 of the Paris climate deal, for instance. Britain is already striking trade deals that could potentially help boost supplies of the equipment and minerals needed for clean energy. This, it can be argued, is “true freedom”. Britain is seeking to sell its services too, of course. Check out this Net Zero trade guide published a few days ago. I include a few slides from it below, but downloading the document is “forbidden.”
- Low Taxes
As I mentioned above – this is the big one. Should Truss be brave enough to use carbon pricing overtly to help the transition, she needs to explain the pricing is not a tax, but a payment required because of the clear damage to the climate. In fact Britain has had higher carbon prices than the EU for a decade because it has a “floor support” mechanism. The China heatwaves and Pakistan floods the past few months show just how clear the climate damage is. The magic, politically speaking, might be in the third Tory belief — “personal responsibility.” Jacob Rees-Mogg, apparently the new business, energy and climate secretary, might be perfect to wield this magic.
- Personal responsibility
Rich countries who have caused the climate crisis are promising to form a voluntary “climate club” via the G7, or even the G20. This Truss plan could be replicated there, where membership rules would require a speedy climate transition and access to better trade terms. Should Truss truly be braver than Mr Johnson and her main rival in her appointment process Rishi Sunak, she can argue that her party’s members (and all richer people around the world) need to start paying for the damage they are causing the planet. And they need to take some “personal responsibility” for the past 100+ years of damage to the climate. If you don’t want to pay the carbon price, go green. That’s freedom (if you are wealthy enough). That’s responsibility.
Only time will tell whether Truss (and Rees-Mogg) indeed have enough heft to make these arguments.
She does not seem to be a salesperson, yet she has busily put together many trade deals in her time as foreign secretary.
The UK’s presidency of COP26 in Glasgow — which oversees the Paris climate deal — might also have helped burnish Britain’s global credibility on climate action.
Making reparations for past colonial brutality would also help Britain’s case.
Indeed, Truss can perhaps win where others have failed BECAUSE she is no slick salesperson.
This could be a truely “Conservative” plan because it relies on markets, trade and individuals rather than huge government. (Sturdy guardrails will still need to be set by strong governments, as opposed to big ones. Tough regulation will still be needed.)
It also could be a “Unionist” plan because it has the potential to unify the world and even deal with inequality by narrowing the gap between rich and poor countries and people, (not something the Tories are known for but it would probably see them back in office after the next election in 2024 as they eat the Labour opposition’s lunch).
(Changes confusing reference to “carbon tax.” Made the chart clearer; updates to add more on politics; earlier to explain the possible process more clearly. Message feedback, suggestions, corrections to Mathew@carrzee.net)
Slides from the net zero book mentioned above:
(NOTE: Corrected Sept. 9 to say the £2,000 payment is per year [usually paid monthly] not per month. Also note that the so-called guaranteed price ended up being £2,500 / y rather than £2,000 /y as in the chart flagged by the BBC. Also, this “energy mortgage” option appears to have been rejected in the end by the government — in favor of the public purse borrowing the £170 billion or so. Funding details are to come. CarrZee maintains something like this “energy mortgage” option could work, but I’m not completely convinced the natural gas and power markets are robust enough [or regulated well enough] to handle it)