Why you should be worried about the price of energy following Brexit.
Published: 15 August, 2016
Heads up for steep rises in costs, says Lord Redesdale - CEO Of the Energy Manager's Association
There was some surprise following the referendum result that the world still turns on its axis and although there was an initial meltdown on the financial markets they have stabilized even recovered a little, so business as usual? The problem is that we are now entering a period where the implications of the vote are beginning to slowly set in. The housing market in London which usually sets the trend for the rest of the market is almost certainly in the first stage of crashing, which many believe is well over due and the economy is going into recession. How bad the situation gets depends on the outcome of the negotiations. On this issue Brexiteers are glass half full whilst Remain are glass half empty. My own view is that someone has stolen the glass. The markets will only recover once there is certainty and the two sides cannot even agree at what point they should come to the table and whether the terms of what is being negotiated can even be agreed.
What has this got to do with energy policy coming back to the title? Well the immediate effect is that energy prices have already gone up. Sterling devaluation to a thirty year low against the dollar and its subsequent instability has increased the cost of gas by around 10%. The reason is simple gas from which we get more than three quarters of our power is valued in dollars. The UK market also has to buy a year ahead so even if the pound recovers fully we will still have bought next year’s supply at this year’s exchange rate. How come gas is responsible for so much of the proportion of energy? The answer is simple two thirds of our energy use is water and space heating which is mostly powered by gas, also around 55% of all electricity is now generated through gas powered power stations.
The old power make up has changed dramatically. There is little coal powered generation left on the grid, in June for the first time since the 1880’s no electricity was produced through the burning of coal, and at present coal makes up only 4% of the power on the electricity high voltage wires. Three years ago coal provided 40% of our power was coal powered so what has replaced this loss? Simply put not enough. A large amount of renewables such as wind and solar farms have come on-line but the phasing out of subsidies means an almost complete stop in new construction.
There is an energy crunch coming this winter and this will lead to price increases as price is used as a means of reducing demand. This appears to have come out of nowhere but the 2016/17 shortage has been predicted for over a decade the trouble is that little was done. The assumption was that new nukes would come online but in reality 2025 is the earliest Hinkley Point C will be commissioned and it was meant to be the first of eight which are unlikely to be built. The cost of power from Hinkley will add £10 a year to the average bill for the lifetime of the plant.
So what is the solution? Well Demand Response is the issue of the moment but although in theory there are large opportunities there is little appetite amongst energy managers. We could get more electricity form the interconnectors to the continent but whatever the terms that we negotiate it is almost certain that will be pricey. So unless Theresa May manages to pull off a blinder in her talks energy prices are on the rise. This could make the whole area of energy efficiency a priority. How long before buildings are commissioned or even rented with the first question being asked, how much is the energy bill. Energy bills have been seen as a minor matter in the past but what if rent is negotiated on energy use and cost? Brexit could well make this a reality.
For the last 3 years, EMEX organised in partnership with the Energy Managers Association (EMA, www.theema.org.uk), has helped thousands of businesses from all sectors to reduce their energy bills.
Taking place on Wednesday 16 and Thursday 17 November 2016 at ExCeL in London, EMEX is the energy management show that connects all energy users with leading experts, policy makers, suppliers and technical solutions. 80+ CPD accredited free seminars and 100+ Exhibitors. For more info, visit www.emexlondon.com
Member of the House of Lords, CEO of The Energy Managers Association and Co-Organiser of the Energy Management Exhibition (EMEX)