Energy bills: no relief in sight
The bearded and splendidly mustachioed Chris O’Shea, CEO of Centrica, has been a busy bee this morning with a timely warning to UK consumers that energy bills are likely to stay high for the foreseeable future. Not as high as they might have been in the immediate aftermath of Russia’s invasion of Ukraine but high enough. And he’s right: the gas price today is around 80p/therm which is double the long-term average of 40p/therm. Although it’s reasonable to expect the spot price to fall during the summer, forward prices into winter 2023/24 are currently 138p/therm. This is on low volumes of trading so the price may well come down but, of course, what can go down can also go up.
O’Shea is not wringing his hands about this. Centrica has, as this column recommended a long time ago, begun the process of increasing gas storage at its Rough field in the North Sea but needs a substantial subsidy from the UK government if gas storage is to be extended from 12 days currently to a more prudent 27 days. As Centrica’s press release put it, they’ll use the field for gas storage first but then, as we wean ourselves off gas, they “stand ready to invest £2 billion to repurpose the Rough field into the world’s biggest methane and hydrogen storage facility… but to do this we need the right regulatory support framework.” In other words: to reach your Net Zero target, you need to show us the money.
So, unsurprisingly, we have yet another supplicant for the government to handle but it’s curious that O’Shea and Centrica don’t follow up their own logic by making the point that ongoing gas exploration and production from UK fields is what makes gas storage viable. As we know, the UK’s access to its own gas resources means that gas storage is a lot less necessary here than in France, Germany or the Baltic states but we still need the production to make sure this is the case. Furthermore, the simple knowledge that the UK has a month’s worth of storage that it’s bought cheaply would act as a drag on gas prices in itself.
Perhaps Centrica’s reluctance to criticise – even obliquely – the Labour Party’s policy around oil and gas exploration in the UK explains why O’Shea hasn’t confined himself just to gas markets this morning: he made a plea for a social tariff so that poorer consumers’ bills were protected but not richer consumers. Let’s call this the free school meals problem – that the energy cap creates a situation where the better off get the same benefit as lower income households. This is a tad more complicated from O’Shea: why should he or Centrica care who gets the benefit from the government funded energy cap? Centrica gets its money whether it’s from the consumer or from the government. Tails they win. Heads you lose.
But also, if gas prices get to 600p/therm, as happened last summer, this makes everyone a lot poorer. If higher-rate taxpayers get no benefit from paying tax, they may begin to wonder why they bother paying tax at all and all the progressive beard and moustache wax in the world won’t make that problem go away.
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