HOWZAT

Energy experts said the Ukraine row has highlighted Britain’s need to act. “The Russian situation has definitely been a wake-up call for Europe and for Britain,” said Berthold Hannes, energy expert at the consultancy AT Kearney. “The UK does not rely on imports right now, but it will do in the future. It is very short-sighted to think that because Russia sent gas during the cold war, it always will. Then they had military power, now they have energy power.”

Hannes said policymakers must wake up to the highly competitive nature of the market. “The other argument is that Russia will always send gas to Europe because it needs the money. But China and India are in the market now — Russia might well be able to find other buyers.”

THE decline of North Sea output is not new. Labour’s much-trumpeted energy white paper, released in February 2003 after what one former civil servant called “the longest consultation and preparation of a policy I have ever known”, made no bones about the dangers facing the nation.

“By 2020 we could be dependent on imported energy for three-quarters of our total primary energy needs ... we may become potentially more vulnerable to price fluctuations and interruptions to supply caused by regulatory failures, political instability or conflict in other parts of the world,” it said.

This warning was largely overlooked. Instead, politicians and commentators spent most of their time on the white paper’s top line — the need to embrace renewable energy to meet commitments to cut greenhouse-gas emissions.

But North Sea production has declined more quickly than was thought possible — at about 10% a year. The tightness of Britain’s gas market has been dramatically revealed in a series of sharp and unforeseen spikes in energy prices.

Wholesale gas prices have more than tripled in the past three years — from about 20p a therm (a unit of energy) to the current level of 70p. A cold snap in February and March last year sent prices rocketing past 100p, and periods of cold weather since have done the same.

“They have gone higher than we ever thought they could,” said Nigel Cornwall, of Cornwall Energy Associates, an independent energy consultancy. “We are talking about prices that are a factor of 10 higher than they were four years ago, all without actual scarcity of supply.”

Domestic consumers have felt the effect through steady if modest price rises. Big industrial users of gas have borne the brunt. They buy in the wholesale market, and have in many cases been forced to halt production in the face of surging tariffs.

Terra Nitrogen’s ammonia plant on Teesside, for example, seems unlikely to reopen in the near future. The company said it “did not anticipate resuming production ... until UK natural-gas costs decrease to a level that allows the ammonia unit to operate with positive cashflow”.

Other energy-intensive industries — those making paper, steel, bricks, and chemicals — fall into this category and face similar tough decisions.

Sir Digby Jones, director-general of the CBI, the employers’ body, recently told The Sunday Times that energy prices were the “biggest immediate issue” facing British business. “What the civil servants have failed to realise is that many of these companies have production sites across Europe or across the world. They can choose to switch production away from Britain, and once it is gone it’s not likely to come back.” ()

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