As Liz Truss takes office against the backdrop of the worst economic crisis in a generation, she must immediately address two key issues: the immediate energy crisis, and the longer-term structural issues in the market.
Truss will announce her plans for tackling the short-term problem today. Along with giving support to individuals facing rapidly inflating energy bills, Truss is expected to unveil a moratorium on the North Sea drilling and fracking bans. While such a postponement would decrease the supply chain uncertainty that is driving current inflation and help the short- and medium-term issues afflicting the UK gas market, Truss must not lose sight of the greener, and ultimately cheaper, solutions renewable energy will bring to the long-term.
In an interview with Laura Kuenssberg, Liz Truss announced her intention to tackle the energy crisis by extracting shale gas with onshore drilling, confirming reports that she planned to lift a fracking ban “within days” of taking office. Weeks earlier she confirmed her intention to lift a ban on North Sea drilling upon taking office, again to improve the consistency of energy supply.
Neither serves as an immediate solution to average energy bills hitting £3,549 per household from October – creating the infrastructure for such projects would inevitably take time. But these measures could increase the UK’s energy self-sufficiency and gradually slide energy prices back to a commercially acceptable level. Much like the improvement America has seen in recent weeks, the UK’s greater resilience could make household bills less vulnerable to protracted war in Ukraine or future geopolitical pressures, and could prevent an equally dismal winter outlook next year.
Much of the current high pricing is based on potential shortages throughout the energy market, caused primarily by Vladimir Putin’s continued threats to hold Europe’s energy for ransom. The Russian leader extended gas flow shutdowns of the Nord Stream 1 pipeline, creating further difficulties for suppliers, and pushing prices higher.
By lifting the bans, Liz Truss could ensure a more consistent energy supply, and fortify the United Kingdom against future geopolitical pressures.
However, lifting these bans could reemphasise UK energy policy and inadvertently create higher long-run energy prices. If Liz Truss allows a realignment of energy policy along the lines of oil and gas, it could set back the green agenda and the energy transition – something which proved Boris Johnson’s most substantial policy achievement.
It’s false to say – as some climate change sceptics have suggested – that the current energy crisis is caused by a push to transition the economy towards being a more renewable-focused sector. Studies by the International Renewable Energy Agency found that the cost of renewable-generated electricity continues to fall in 2021 and 2022, being consistently cheaper to produce than oil and gas generated electricity.
As former health secretary, Matt Hancock, pointed out at an FTLive event, electricity in this country is still priced on the gas market, not on renewable energy. This ties renewable electricity pricing to oil and gas pricing, keeping it artificially high despite the consistent fall in production costs. Instead, separating these costs, shows that renewable generated electricity is far cheaper, and pricing based on this more consistent market would reduce prices for consumers.
The energy price cap’s wild increases are caused primarily by fluctuation and uncertainty in global supply, fuelled by the war in Ukraine. This is having a knock-on effect on the price of electricity – which is being charged at a high marginal cost, rather than the cost of production – in order to insulate suppliers from global political risks. The result is bumper prices for consumers across electricity, oil and gas, yet predictions of £170 billion in profits for producers and suppliers over the next two years.
A temporary moratorium on the North Sea oil drilling and fracking bans will help increase consistent gas supply, calming the current price fluctuation at the heart of this crisis. But it will not serve the long-term aims that a Truss government should be focused on — a renewable-driven energy policy.
In taking care of the short term, Truss should not ignore the long-term consequences. The lifting of the ban should be used to fill the gap in the market, and bridge the UK’s current energy crisis by increasing the consistency of supply. But after Truss addresses the immediate issues, she must place renewable energy front and centre of her longer-term solutions to prevent future geopolitical uncertainty from hitting UK consumers.