Reducing energy demand and improving efficiency will help prevent the next gas crisis

What steps could the next UK government take to reduce demand for fossil fuels and help prevent gas prices spiking again?

Louis Fletcher, Research Fellow in the Geopolitics of Energy, Warwick Business School, University of Warwick • conversation
May 7, 2024 7 minSource

Gas prices have relaxed, Europe has come out of the winter with record gas storage levels and a surfeit of liquefied natural gas is set to reach the shores of Europe over the coming years. Many commentators are hopeful that the European gas crisis is finally over.

That would end a period of immense energy insecurity in Britain. Gas prices in the year following Russia’s invasion of Ukraine in February 2022 were five times their pre-crisis levels in the UK. That led to a doubling of gas bills , even as the exchequer spent £55 billion on the 2022-2023 energy price guarantee. Inflation surged and household budgets crumbled, pushing a population already punished by austerity and COVID into further hardship.

With a general election looming, what could the next government do to prevent a repeat of the gas crisis? What has the government’s energy security strategy missed?

Perhaps, surprisingly, quite a lot. In 2022, the British energy security strategy framed the energy crisis as a consequence of Britain having “drifted into dependence on foreign sources” and identified its solution as the creation of a “power supply that’s made in Britain”.

Independent, homegrown energy became the goal, including through maximising extraction in the North Sea. Just last month, the government announced its support of the construction of new gas-fired power plants on grounds of “security of supply”.

But this misses out half of the energy equation. An energy system is balanced when supply and demand are equivalent. A jump in demand and a fall in supply have the same functional impact on that balance.

I attended a recent workshop run by the UK Energy Research Centre and Energy Demand Research Centre that called for a “demand-side view of energy security”.

Looking at energy security from the perspective of demand, not supply, reveals several basic but important lessons for how a future government could prevent the next gas crisis.

The North Sea will not save us. It’s declining reserves cannot reverse the UK’s growing gas import dependence. Whatever is produced from the North Sea will be sold on the integrated European gas market at volumes that will have a negligible impact on prevailing prices. That won’t make any difference to UK billpayers.

If the UK’s reliance on expensive and volatile fossil fuel markets cannot be solved on the supply side, the obvious solution is to accelerate our exit from these markets through demand reduction.

This could be done quickly. Modelling of the UK energy system shows that it is feasible to cut fossil fuel demand far more sharply than envisaged by the Climate Change Committee . With ambition, this modelling suggests gas demand could be reduced by as much as 93% by 2040.

To cut demand, the government could have significantly mitigated the impact of the gas crisis with greater support of the roll out of residential insulation and heat pumps. Households would have needed less gas, so gas prices would not have spiked so much. Greenhouse gas emissions would have been cut in the process.

But despite the UK’s low quality and draughty housing stock, insulation improvements under government schemes peaked in 2012 before collapsing . The UK has installed fewer heat pumps than almost any other country in Europe. The government has done nothing to rectify the situation since the eruption of the gas crisis.

It takes time to upgrade a country’s housing stock, so to avoid committing the same mistake again, action is needed immediately.

A crisis of demand

Fixating on security of supply overlooks the fact that in the future, falling demand, not faltering supply, poses the surest risks to UK energy security. The gas system must be rapidly phased out, but if this is handled poorly, it could massively hike gas bills and lead to a chaotic, uncoordinated wind down of gas pipelines.

Investments in the gas system are paid for by billpayers. The current repayment schedule leaves £3 billion of investment costs outstanding in 2050 – by then, there will be no customers left.

Meanwhile, the cost of physically decommissioning the grid could be as much as £50 billion. There is currently no plan for who is going to pay for this huge sum.

As households leave the gas network as they electrify their homes, a shrinking number of customers will have to bear the costs of the gas system. This could create a downward spiral – if high bills force customers off the network, bills will rise for remaining customers in a self-reinforcing feedback loop. The most vulnerable will be the least able to leave the network.

The UK’s energy regulator, Ofgem has already floated the idea of adding all of these costs onto customer bills on an equal per capita basis over time. This means making the most of the large bill-paying customer base while it still exists by ramping up bills in the near future – an unsavoury prospect on the back of the cost-of-living crisis.

This is further complicated by the fragmented private ownership of the UK’s gas system. These companies can hardly be relied upon to effectively wind down their own profit-generating assets or coordinate a coherent decommissioning plan among themselves. Nationalisation could allow for the prioritisation of equity and, potentially, for the state to absorb decommissioning costs. It may also be the only way to ensure that different elements of the gas pipeline network are phased out in a sensible sequence, and in line with the wider transition to net zero.

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Louis Fletcher receives funding from the UK Energy Research Centre.

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