A cold, hard winter is coming because of a gas crisis that the Government had years to avert

It’s going to be a cold, hard winter. We’re witnessing a nightmare combination of inflation, soaring gas prices, raised taxes, cut benefits, and food and labour shortages.

Boris Johnson is going to blame the pandemic, as he does for almost everything, but it’s a simplification designed to conceal his own responsibility. We see rising gas prices and labour shortages around the world. But we do not see the same crisis-level outcomes: whole sectors on the verge of collapse and empty shelves in supermarkets. And the reason for that is not due to Covid, but government policy.

There is a global surge in demand for gas, but the situation is particularly severe in the UK. This isn’t because of Brexit. Somewhere down the line, the UK’s departure from the EU’s internal energy market will lead to increased electricity prices, but that hasn’t meaningfully impacted us yet. It’s due to a lack of flexibility in the system.

In recent years, the Government downgraded coal and ramped up investment in wind power in order to reach climate targets. This was a commendable move, but it came with a risk. Wind is highly weather-dependent, meaning you can’t always rely on it. And Britain’s nuclear reactor stock is aging, meaning it’ll struggle to provide the level of energy needed to make up the shortfall.

That’s exactly what has now happened. Unusually low wind speeds mean production is currently 45 per cent below the five-year-average and several nuclear reactors are out of service. The Government has also not matched declining domestic North Sea gas production and closing coal plants with sufficient new low-carbon capacity. The UK remains reliant on imports of both gas and electricity and is therefore vulnerable to the volatile prices of these imports. 

One way to protect yourself from this kind of outcome is to maintain a large gas storage capacity. In 2010, the House of Commons energy and climate change committee issued precisely this warning, telling the Government that “gas storage could be used to moderate the effects of gas price spikes”. MPs suggested that the amount be doubled by 2020, so that it was roughly in line with other European states, who are faring better than we are during the current crisis.

That advice was not followed. In fact, the opposite happened. In June 2017, Rough, the UK’s only long-range gas storage facility, was closed, despite protests from the Energy and Utilities Alliance trade body.

Appearing in front of the business, energy and industrial strategy committee the next year, Gas Security Group’s Laura Cohen made it clear what that decision entailed. “I feel that there is a very high likelihood of further disruption,” she said, with uncanny prescience. “Historically Rough has played a major role in reducing the market volatility and price spikes… When the wind is not blowing and the sun is not shining, we are going to need that as a back-up fuel.”

The Government didn’t listen. And while it was ignoring one warning it also proceeded to ignore others. For years, climate change campaigners and consumer groups had lobbied No.10 to insulate people’s homes. This would reduce emissions, but it would also lower their energy bills, making them less vulnerable to price rises.

The Conservatives dabbled with the idea, but did not commit to it. An Energy Company Obligation was imposed to help low-income and vulnerable customers, but its budget was reduced and the number of installations fell. A Green Homes Grant was introduced to provide vouchers towards the cost of installing energy efficient improvements, but the Government closed it last March. This failure left consumers exposed.

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The energy prices rise is now juddering out across the economy in unexpected ways. Gas is used to power fertilizer manufacturing by companies like CF Industries Holdings. This produces carbon dioxide, which is then sold off in the secondary market to firms like BOC or Air Liquide, who supply it to the meat industry.

Co2 is used to put pigs and poultry to sleep before slaughter and as an element in meat packaging. The packs of meat you buy at the supermarket contain a mixture of gases – oxygen to keep it looking fresh and red, Co2 to suppress bacteria growth, and a bit of nitrogen to create space in the packaging.

Earlier this week, increased energy costs forced CF Industries to stop production at two of its fertiliser plants. It was a potentially apocalyptic event which could grind the slaughter process to a halt and force farmers to start countenancing the prospect of culls to deal with the livestock backlog. Last night, business secretary Kwasi Kwarteng struck a deal with the company getting it to restart production. But it will only last three weeks, while it renegotiates contracts at a higher price. The meat industry is then likely to pass that higher price on to consumers.

In every aspect of this crisis, you see that same outcome: higher prices. Gas costs are playing into the existing labour and supply shortages created by Brexit. The meat processing industry is currently experiencing labour shortages of around 15 per cent due to a decline in European workers. And even when meat can be processed, the lack of heavy goods vehicle drivers means it is a struggle to get it on supermarket shelves.

Again, the problem was clearly signalled. The Government was asked by businesses and industry bodies to extend the transition period by at least a year, so that Britain’s trading networks were not cut while it was in the middle of a pandemic. It ignored them. And now the consequences are playing out exactly as they were warned they would. At the moment, it is about empty shelves. Soon, it will be about increased prices.

Where there are fewer goods, their price goes up to reflect scarcity. And when there are labour shortages, employers will ramp up wages to make the positions more attractive, which will also lead to a knock-on increase in prices. Some people’s pay will go up, but it will be offset by lower real incomes for most people.

These factors are playing out against an existing inflationary surge, as a result of pent-up savings and changed spending patterns during the lockdown period. Economists are split on how severe inflation will be, how long it will go on for, and how to address it. Some believe that there is a strong inflationary pressure in the economy which threatens to spiral out of control. Others think we’re experiencing a predictable return to pre-pandemic levels. With a bit of luck and some decisive action from the Bank of England, such as raising interest rates, it will eventually stabilise. But under either analysis, this isn’t something that’s going to go away this winter. Inflation will be a major factor for the next few months. And instead of helping address the problem, the Government is exacerbating it.

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The decision to raise National Insurance is particularly pernicious. For employees, especially those on low incomes, this will worsen the cost of living crisis, because it leaves them with even less money. But it also has an under-discussed secondary consequence. National insurance is imposed on the employer too. And they are likely to pass on the extra cost to the consumer through increased prices.

And just as they’re doing that, the Government is pressing ahead with a plan to cut Universal Credit by £20 a week, potentially forcing 840,000 people into poverty.

The crisis in living standards is hitting us as a system-level event: in energy, labour, inflation, tax and spending cuts. In each case we see the same result: rising prices hitting an already vulnerable population. And it’s always accompanied by the same tell-tale sign: a government which does not prepare for negative eventualities, ignores the warnings of incoming trouble, and then implements policies which exacerbate it.

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