I am reissuing this given todays news

 

This article was published yesterday on ConservativeHome. I thought readers of my blog might also find it interesting:

We are living with a desperate shortage of energy. Successive governments and Ministers have ignored the need to ensure adequate supplies of electricity and primary fuels in their passion to close down and move out of coal, oil and gas as quickly as possible. Now we are caught up in a worldwide gas shortage, with fertiliser factories closed – and a Business Secretary summoning a meeting to ask what can be done to limit the spreading damage.

The Business Secretary knows enough economics to understand that, if gas is in short supply, the last thing that would help the UK procure more of it would be a series of price controls over those who dare to buy it on the world market and could sell it here.

We will not like it, but these now unruly global gas markets are controlled by Russia, the USA, and various Middle Eastern countries that have a surplus to export. They do not currently have a big enough surplus to need to take low bids.

The EU is already complaining that Russia is driving prices higher by restricting her large export supply. Why, then, did Germany make the world gas position worse by deciding to centre their energy policy on a further major addition to their pipeline capacity to import gas from Russia, ensuring their reliance on this source? They were warned by both Presidents Donald Trump and Joe Biden, as well as other allies not to make this obvious mistake.

The UK, too, has made itself far too dependent on energy imports. I have been warning government for years that we need to do more to generate additional power and extract more primary energy at home, endowed as we are with liberal reserves of oil, gas and coal and with access to water power and biomass.

The Business Secretary could do more than pose as concerned at his meeting if he puts in train work to find longer-term solutions to our chronic dependence on unreliable overseas sources of energy. He could ask why the Rough Field gas store was closed down, greatly reducing our stocks of gas which we now need. He should bring in more gas storage. He could review North Sea oil and gas policy, and see how the industry can be encouraged to tap more reserves from our own fields. He should keep the remaining coal power stations available with secure coal supplies for them, until there is sufficient greener power available to replace them on a reliable basis.

He should know that, at exactly the same time as we hit a world gas shortage, the UK electricity supply is under extreme stress. The remaining three coal power stations have been fired up, because there has been a marked shortage of wind for some weeks.

In recent years I have been wearing my keyboard out raising with Ministers and the wider public the issue of our need for more reliable electrical power to keep the lights on. The overriding preference for wind power was bound to leave us vulnerable to periods of calm weather.

If these coincide with cold winter days, the consequences could be disastrous. A modern sophisticated economy needs electrical power for most things. How would food factories keep working, vulnerable people stay warm at home, hospitals look after patients without sufficient power? It is particularly worrying that the current shortage takes place against a background of limited demand thanks to mild weather. The cool summer in the south did not help, as heating thermostats were triggering as late as May and even in August, needing more gas-fired power even then.

The UK’s passion for imported electricity has further weakened our position. The French interconnector in Kent was badly burned this week, taking out a potential imported supply of top up power which we rely too much on. We may discover soon that, if the shortages worsen, overseas suppliers will see exporting to us as an easy cut to make to husband their own limited supplies for domestic use.

When electricity was first privatised, we made security of supply the prime issue in the new system. There was a substantial margin of extra domestic capacity available to bring on stream if one or more of the baseload generating plants had problems. We did not need imports.  We made price the second important issue, with a system which always ensured the next cheapest power was brought on stream as demand picked up. In the early years of privatisation we both had plenty of capacity at home, and experienced falling prices. The dash for gas, with many new combined cycle gas plants going in, took feedstock from a healthy UK North Sea and replaced some older less fuel efficient and dirtier coal capacity, so the policy was also green.

Today, the Business Secretary needs to review the complex mesh of subsidies, regulations, penalty taxes and import arrangements that passes for an energy policy. It is delivering a shortage of power. It is holding up a good industrial strategy, as industrial expansion needs access to plenty of reliable competitively priced energy. It is now threatening consumers with much higher electricity and gas prices.

He should order changes that will open up more UK primary energy for us to use. He should want an electricity system that has more reliable renewable power which may take the form of hydro, pump storage and battery, but which also has enough back up capacity from biomass or gas, so we can be sure to keep the factories powered up.

Elimination of our dependence on imported electricity and a substantial reduction in our dependence on imported gas should be a minimum objective. The market would do this if it were allowed to function but, because of the comprehensive muddle of government-inspired past interventions, it now needs dramatic government action to put it right for the future.

In the meantime, we rely on the goodwill of the gas and electricity exporters and will have to pay up to secure supplies. It is the perfect storm, with both gas and electricity scarce. At home, an absence of wind leaves us short, and abroad Hurricane Ida closed down some important US gas capacity. Relying on the wind is a dangerous way of living.

It was refreshing to hear the PM’s speech yesterday. The world does not owe us a living. The heroes and heroines are all those who get up early and go to work to make sure we have water, power, broadband, food and other supplies. The anti growth coalition opposes practically everything that can keep the lights on, keep us warm, and keep us fed. They are the importers friend and the person on low incomes  nightmare. They stand in the way of doing and producing more for ourselves.

For too many years a combination of EU membership, EU rules and UK political bias against UK manufacture, UK fishing and farming and above all against UK produced energy has made us increasingly import dependent. Foolish CO2 accounting has forced companies and individuals into producing less here to  get our C2 count down, only to import things that have a higher carbon count in their place to prove we have reduced our CO2! We have been retiring our gas fields, failing to renew our gas generators, closing our coalmines  and blowing up our  coalfired power stations, in order to import manufactures from China and Germany that rely much more on coal.

Every time there is a proposal to extract more of our own gas, especially onshore, our own coal, or produce more of our own energy intensive goods there are protesters. Any road scheme to cut congestion which would reduce fuel use for each journey is likely to meet an army of protesters who do not seem to understand it is lorries and vans that keep them in food and Amazon parcels. Lix Truss was right to champion the producers, the workers, the strivers over the protesters, the strikers and the job refusers.

I look forward to a fight back for freedom and commonsense.

The Regulator’s announcement that they are seeking more gas supplies for the winter seems late when it has been obvious for a long time that we could be short of energy . There was a similar delay in coming to the late conclusion we needed to keep some coal fired power stations instead of demolishing them all, given the need for back up power for cold days with no wind. As it has turned out they have been running coal stations on and off throughout the summer on low wind days as well.

The best answer is still to get more UK gas out of the ground. The government changed policy some time ago to urge more UK production. The Chancellor’s Financial Statement included some energy projects without time frames or details of how much extra production they could release. There were several potential prospects that we know about missing from the list. The Energy Ministers need to push hard to get the licencing authorities to expedite additional production on fields already producing, and speed the link in of fields discovered close to existing production capacity and pipelines to be tied into those facilities. None of this need take too long, and the sooner we have more domestic production the better.

This should not be contentious. Home production means the big tax revenues on such activities goes to the UK Treasury, not to a foreign government. It means more better paid jobs here in the the UK rather than abroad. It means less CO2 is generated than if we imported LNG, which creates more than twice as much CO2 as domestic pipelines gas. It takes a lot of energy to compress, cool, transport and convert the gas back which you do not need to do with gas flowing down a domestic pipe. It means more gas delivered to home customers with secure supply.

Yesterday  we heard the Chancellor defend his tax cuts and explain the need for more supply side measures.
He is right to want  to boost the growth rate, and right to fight the recession the Bank is  forecasting. He needs to make numerous changes in a wide range of sectors to boost the growth rate to his target and keep it there.
During  our years in the single market we accepted a major decline in home grown food, home energy production, home produced energy intensive manufactures from steel and glass to building materials and aluminium. Reversing  these trends has to start with supplying more energy,more affordable domestic gas, oil and electricity. Grant  regimes for farming, fishing, green energy and much else need reviewing to see what works and what is necessary.

I would be interested in your views on the Chancellors speech and economic  plan.

As government ministers are talking about some spending reductions let me repeat some of my proposals talked about on this blog. A fuller version of this should be the Daily Telegraph today.

1. Stop the small boat people trade which will save the big hotel costs and the need to build more social houses to house them

2. Stop funding Councils to put in aggressive anti vehicle traffic mismanagement measures on our main local roads

3. Stop making grants to farmers to turn farmland into wilderness

4. Tell the railways the government will not pay increasing subsidy levels for those little used train services that are not wanted by the travelling public. railways should concentrate on increasing use of more popular services.

5.Tell the Bank of England it must not for the next year sell bonds at a loss triggering Treasury/taxpayer reimbursement for their realised losses.

6. Refuse more borrowing to Councils wanting to acquire a property portfolio

7. Remove from the overseas aid list all governments with space programmes, nuclear weapon development or ownership, and abusers of human rights

8.Remove tv licence fee cases from the criminal courts to ease pressure on the justice system.

The government is right to discourage economic migrants coming in to keep wages low and fill low skilled jobs. A points based quota system can let us recruit talent and qualified people for higher paid roles. Whilst some firms and farms would like to have the benefit of more cheap labour we need to consider the strains this places on taxpayers. It also serves to keep low end wages down, hitting the incomes of those already settled here or born here in low paid jobs.

The EU once said that it costs a country about 250,000 Euros to provide all the capital it needs to welcome a new migrant. There is the cost of providing them with a home. There is the need for health capacity. If they have children we need extra school places. As numbers increase we need more transport capacity, more road space, more pipes and cables for utility supplies. It all comes to a big bill as we are all supported by huge sunk capital investment in an advanced country.

The best way of considering it is to see that if we invite in an additional 250,000 a year, each year we need to build the equivalent of an important new city to house them and support them. A new city costs many billions. Those are billions the employer of cheap labour does not have to take into account.

Rapid rates of inward migration also makes CO2 reduction much more difficult to achieve.

There are plenty of independent forecasts around for those interested. No government is exempt from scrutiny, criticism or alternative views and rightly  so. The problem is knowing if any of the independent forecasts are going to be right.

I understand why the government wanted the OBR to offer a new forecast when it has seen the spending plans and the growth measures of the new Ministers as well as the tax cuts.  As revenues, GDP and deficits are very sensitive to whether there is growth or not one needs to form a forecast with all three crucial elements of policy.

As I have pointed out in the past the OBR has in recent years been very wrong in its forecasts. It greatly exaggerated the deficits in the last two years when I queried its view when the budget occurred. Last year it overstated the central government deficit by £131bn which lay  behind Mr Sunak’s tax rises. They also wrongly said inflation would stay around 2% until 2025. This year I said I thought their £99bn deficit forecast would be too low, as it clearly will.

I hope any new forecast they make will try to improve on the last two years. I will continue to look at a range of external forecasts and interpret  them based on recent data and trends.

I have set out before the issues surrounding the Bank of England’s powers . What is not in doubt is the Bank of England has the independent duty to set interest rates. There is political agreement by all main parties that they should have and do  have this power. There is usually no government or official opposition criticism of the way they use this power to show people it is independent.

In a democracy there should however be proper debate about how this aspect of economic policy is conducted, and there are plenty of external commentators who express views and provide free advice to the Bank. The last two weeks have been mainly about the level of interest rates needed in the UK to control the inflation that has been allowed to develop. The important statement came on Thursday of last week from the MPC of the Bank when they told us they were going to start selling bonds out of their portfolio. The purpose of this is to lower the price of bonds and to increase longer term interest rates. The bonds after all had been bought to do the opposite, to raise their price and cut rates. The accompanying statements and forecast were interpreted by the market as meaning there were substantial short and longer term rate rises to come, which triggered a progressive sell off of bonds.This was on top of a global sell off triggered in the USA by the Federal Reserve Board who also signalled higher US rates and a large selling programme of US bonds which hit UK and European bonds too.

Some market participants criticised a couple of the measures in  the Financial Statement on the Friday but the main focus of the gilt market remained on rates and bond prices. The markets had not been unsettled by the very expensive one off help for business and household energy bills announced a week ago Wednesday.  The selling pressures in the market accelerated during the following week, reaching a crescendo on Wednesday.

The Bank then produced a statement which said it was changing policy dramatically to launch a new round of Quantitative easing with  buying of longer bonds because they had come to see long interest rates were too high. This was argued on financial stability grounds. Many pension funds have geared positions in gilts, and were finding it difficult to raise money to pay the extra calls on their geared derivatives. Bond prices on Wednesday were wildly volatile on news of Bank intentions. Nothing changed on Wednesday concerning tax cuts to affect prices .It should be clear to  anyone the extreme volatility on Wednesday was about the Bank’s interest rate policy, not a delayed response to the Financial statement.

The Bank’s statement went on to say the bond buying would end after two weeks and then sales of bonds would resume, and interest rates generally would rise. It seems that the part of the Bank that rightly worries about financial stability wants a different policy to the Monetary Policy Committee. I hope the Bank will think through what level of rates they think necessary to bring inflation down to the targets they now forecast they will hit, to give greater clarity. If it allows markets again to think it wants higher  longer term rates it will create a nasty slump and balloon the very government deficit being argued about.I doubt the Bank can resume bond sales anytime soon without forcing rates too high.

Of course the Bank needs to do enough to bring inflation down. Its own forecasts say it has. It needs to tell us more about how it judges the rates needed to do this. The obvious way would be a money target like the Chinese who have low inflation. Money and credit excess last year could have warned them they were too loose and getting inflation wrong. Money and credit now points to falling inflation as it is tight in real terms.

The Bank of England  yesterday after a bruising few days for them in the bond market decided that they needed to stop selling bonds, driving prices down, and do something to try to rally them. That is good news at last. The Bank’s selling came on top of the bond rout brought on by the US Central Banks interest rate rising policy, and their own sales policy of government bonds. If the Central Banks themselves think bonds are too dear and should be brought down in price, others will agree with them.

Bonds are parts of the debt the UK government has borrowed from pension funds, insurance companies and others. They are the government promises to repay the money they borrowed. They can be sold on by the people and institutions that first lent the money to the government, so they do not have to wait for the repayment date of the loan. If the prices of the bond fall then the rate of interest you get on it goes up, and if the price rises interest rates go down. If you bought a bond where the government promised to pay just 1% interest but interest rates meanwhile had gone up to 2% then you would sell the money you lent to the government for less so the next person receiving the interest on the bond would get a 2% return on his investment. How much the bond falls by depends on when the government is going to repay the full amount anyway.

The biggest buyer of these bonds in recent years has been the Bank itself since Labour introduced the policy of the Bank buying up state debt, continued by the Coalition and the Conservatives. At its peak the Bank owned £875bn of government debt. It rightly stopped buying up more of it last year, as the policy was proving inflationary. More recently it said it would start selling some of the bonds it owns. It said it wanted to shrink its balance sheet, swollen by the large amount of bonds it owns as an asset. They started selling very recently just as global bond markets led by the USA took another nose dive on interest rate rises announced by many Central Banks and in anticipation of more rises to come. The addition of Bank of England selling  implied that they wanted to see the bonds go down in value and  added to the general selling pressures on UK bonds.

Yesterday the Bank acknowledged that selling now with bonds so  much lower in price would not be good idea. They did not, however, say they would end the sales programme unless and until bonds had picked up substantially. That was a pity, as the value of these bonds matters to families with mortgages and businesses with longer term borrowings. All the time the Bank says it will sell  as the largest potential seller it can spook the market. The Bank’s wish to shrink its balance sheet has ironically been achieved in the last few weeks by the fall in the value of the bonds it holds. Crystalizing the loss makes no sense.

These interest rates matter. There are 2,5, 10, 20,30 year rates and others in between. If the 10 year or 20 year bond rate goes up so bank lending for people to buy homes will also go up, as will the cost to business of a longer term loan to invest in their company. Mortgage holders and businesses do not want their Central Bank actively intervening in the markets to drive these interest rates higher. The Bank should believe its own forecasts which show inflation tumbling next year. High energy prices and dearer mortgages are already taking too much demand out of the economy. Thank you Bank for at least a temporary pause to your driving the mortgage rates up.

I am receiving several copies of a lobbying letter condemning fracking in particular and the new government’s approach to energy and the road to net zero. The general complaint is we should not extract any more fossil fuel at home, run down our oil and gas industry quickly and  accelerate renewable electricity.

I disagree with these emails. Let me begin by explaining they are wrong in their own terms. Substituting imported gas for home produced gas  increases the amount of CO 2 produced globally. LNG in particular requires substantial energy use to liquefy, transport and convert back the gas compared to pipeline gas from the North Sea. Importing energy intensive products similarly entails more global CO 2 whilst cutting U.K. output of energy intensive products. The net zero movement must look at global impact, not just national generation. Every extra amount of home produced gas  eases the global shortage a little, and cuts the overall output of CO2 by saving on LNG volumes.

The pressure to go faster with expanding renewable electricity comes up against the inconvenient  fact that most U.K. people heat their homes and water with gas or other fossil fuels, and most drive petrol or diesel vehicles. All the time this is true we need fossil fuels to live.  If we accelerated the rate of converting our vehicle fleet to electric it would raise CO2 output from the scrappage processing and from  the manufacture of  new electric vehicles. You need to drive a lot more miles than most car owners  to make the switch favourable on CO2 accounting instead of running your older vehicle for its full useful life. The CO 2 accounting for replacing good functioning gas boilers with electric heat pumps is also problematic. Anyway governments cannot make people rip out their gas boilers or replace their cars, especially at a time of income squeeze when most cannot afford to do so.

Meanwhile government has a duty to ensure there is sufficient energy at affordable prices to keep us warm, provide necessary supplies and buttress jobs at home.  On any analysis the next few years will see the need for plenty of gas, whether from home or foreign sources and whether used to make things here or imported things from overseas. Indeed if we import more from places like China and Germany more will be made with coal based power, producing more emissions than using  gas.  The greens say there will be new jobs making wind turbines. There will not be enough to offset the big hit to jobs if we fail to keep enough sensibly priced hydrocarbons for the period of transition. The West is already too dependent on China and her satellites for raw materials and products required in wind farm and battery production. We also need to consider the environmental impact of mining the materials and handling the waste from battery and other electrical products.