Insiders working on Britain’s energy policy call it the ‘trilemma’. It’s a perpetual triangular puzzle, with three discrete issues at each tip: energy prices, the security of supply and polar bears.
Tampering with one element of the triangle has a direct impact on the other two sides, and balancing the interests of consumers, energy producers and the environment has been a dominant theme as nations tackle the climate emergency.
In early March, the world changed. Vladimir Putin’s invasion of Ukraine and the ongoing war - cynically dubbed by the Kremlin as a 'special military operation' - with the sanctions imposed by western governments, has cranked up the debate on national energy security.
Russia was supplying 10 to 25% of the world’s oil, gas and coal, and Europe - especially Germany - has been sleepwalking into a dangerous reliance on Russia’s gas. Even before the invasion, consumers and industry were facing the largest hike in energy costs in the last 20 years.
And the polar bears?
The UN secretary-general António Guterres cautioned that “investing in new fossil fuels infrastructure is moral and economic madness”. His comments came after the latest UN climate communiqué showed it was 'now or never' for action to limit dangerous warming, which is now melting the polar ice caps.
The impact of Russia’s invasion was immediate, with companies such as Centrica - the owners of British Gas - battling to exit contracts to buy energy from Gazprom. BP offloaded its stake in Russian oil giant, Rosneft, while Independent Oil and Gas, operating in the North Sea, also terminated contracts to supply Gazprom in the UK.
Shell said it was exiting its partnership with Gazprom in the massive Sakhalin-2 liquefied natural gas project in the far east of Russia, with Business Secretary Kwasi Kwarteng stating there was “a strong moral imperative on companies to isolate Russia” and Economy Secretary Kate Forbes asking companies to take “economic action” by severing links to Russia.
But the massive stumbling block was the $11bn Nord Stream 2 gas pipeline about to go on stream bringing gas 767-miles across Russia, under the Baltic Sea to Germany. Five western energy companies: Shell, Austria’s OMV, Engie in France and Uniper and Wintershall in Germany, were all investors in financing the project.
Recent revelations suggest that senior Social Democrat politicians in Germany “colluded with a Russian company and deliberately mislead the public” over the pipeline, which was backed by the Kremlin.
In response, in early April, the long-awaited British Energy Security Strategy was published, delayed by wrangling over how the UK should respond to the new energy challenge from Russia. What emerged was an announcement of a return to drilling for gas and oil in the North Sea, including renewed interest in the controversial Cambo oil field, off Shetland, and the announcement of eight new nuclear power stations which would be part of the UK’s move to achieve better national energy security.
This infuriated the environmental lobby.
Caroline Rance, energy campaigner at Friends of the Earth Scotland, said it was reckless for the UK Government to put its foot down and expand the production of oil and gas. “By doubling down on oil and gas they are keeping us locked in an unaffordable and destructive energy system that is only delivering billions in profits for oil companies whilst millions of people are forced to choose between heating and eating.
“There is a massive gaping hole where there should have been energy efficiency measures to improve people’s homes to make them warmer, greener and cut their bills.”
Richard Goodfellow, a partner with Addleshaw Goddard and an energy industry adviser to a number of UK and Scottish companies - including National Grid, BP and SSE - explains that our national UK politicians have little control over energy pricing.
“Unlike other areas, such as education, health and the media, for example, where ministers can make a decision to privatise Channel 4 or determine policy on how we handle the pandemic, a lot of energy policy, whether it is UK or Scottish, is like bobbing up and down in a little boat in a wide ocean.
“You can turn the rudder or the sail in whatever direction you like, but you are not in charge of the sea – that is the issue with the UK’s energy policy.”
For those who have lived in Aberdeen or the North East of Scotland all their lives, no matter how fortunate they may feel to have worked in the offshore oil industry, the fact remains that the entire economic survival of the region has depended on a price mechanism over which the UK has no control.
Indeed, the vagaries of the global pricing of energy are at the forefront of the public’s mind, as the cost of domestic energy has forced millions of Britons into a state of fuel poverty.
“The point is that the challenge for people who are trying to set and implement our national policy is much harder than in a lot of other areas,” Goodfellow said, noting that an area that has been consistently ignored is that of reducing energy demand.
“The whole conversation is about how we generate more - the conversation that is utterly absent is how we use less of it - that is a very immature debate in the UK.
“The only real technological innovation for consumers has been for them to get a smart meter, there has to be much more,” he continued, adding: “When you think about this impact and the journey, if we tackled energy demand, then there is a great deal to do.”
Nigel Ellis, an investor with the Dunelm Energy Group, a private family office backed by former SSE chief executive Ian Marchant, and his wife Liz, agreed that not enough is being done to tackle rampant energy consumption.
The company is working with Scotland’s angel investment syndicates, investing in new disruptive clean technology companies.
“The energy transition is trying to move at a great rate but the incumbents, who are owners of the energy infrastructure, are struggling with the application of innovation, and engaging with new technology companies and new ideas,” he commented.
Yet Dunelm Energy is seeing a raft of smaller Scottish with the solutions, such as green hydrogen, that could help in moving to a greener, more secure, future.
Ellis, who spent 35 years with SSE, said that legislation always drives a top-down strategy when solutions are emerging from smaller green start-ups able to resolve a myriad of problems to do with more efficient network distribution.
“The UK Government’s Energy Security Strategy said nothing about the demand side, it’s all 'let’s throw big nuclear, big wind or big hydrogen at the problem' to produce more energy, rather than tackle the issue of the demand side,” said Ellis.
Goodfellow reckons more of his clients want help in trying to reduce their carbon footprint, but often don’t know where to start.
“How can we meaningfully advance the climate change agenda after the COP26 announcements made in Glasgow? Since the war in Ukraine, people are asking, has the net zero agenda got smaller, and the security of supply more important at this stage?
“Our response is: the reason you need to do things has changed, but the things you need to do have stayed the same,” he added.
All sides of the trilemma triangle are under intensive stress.
Scotland, as the hosts of COP26, has certainly been moving toward a greener energy transition, and on a separate track from the rest of the UK.
However, ScottishPower’s chief executive Keith Anderson, whose business has been investing massively in onshore wind, spoke bluntly at the UK’s Business, Energy and Industrial Strategy Committee, warning that domestic energy prices will be ‘horrendous’ in October, urging the government to help consumers by taking £1,000 off the bills of the poorest people.
“I think the problem’s got to the size and scale that it requires something significant of that nature where those people who are deemed to be in fuel poverty or vulnerable need something of the size and scale that puts their bills back to where it used to be before the gas crisis,” he told MPs.
Rance is on a similar page: “The Scottish Government is due to publish its own Energy Strategy later this year and it must deliver what the UK Government has failed to do – commit to an end to new fossil fuels, increase renewables, provide support for insulating homes and deliver a just transition for workers and communities.”
With all this bubbling up, how long will our energy transition take?
Deirdre Michie, chief executive of Offshore Energies UK, which represents 400 offshore energy companies - including the oil, gas and offshore wind sectors - wants a “national consensus” to be agreed upon around what energy future we have.
“Our industry has provided the UK with secure, safe energy for the last five decades and we can do the same for another five decades – while also helping the nation reach carbon neutrality by 2050.”
She pointed out that infrastructure projects, such as the laying of undersea cable grids from the North Sea to take power from offshore wind farms to towns and cities, can take many years or even decades to come to fruition, and that the industry has to think in those kinds of timescales.
Michie stated the North Sea can supply “secure, safe energy for the next 50 years”.
Neil Burgess, partner and head of corporate and commercial at Brodies, who has been involved in several major sector deals, said there is no doubt that financial backers are now almost universally interested in ESG credentials, particularly as they seek to satisfy stakeholders.
“Appetite is strong for businesses that can demonstrate transition and good sustainability practices, which presents a great opportunity for energy businesses in the wider sense, such as those in the cleantech sector and those assisting the drive towards net zero.”
He believes that private equity can “act as a force for good” in accelerating progress on the transition journey. “The North East of Scotland has a business environment which historically, has embraced private equity more readily.
“This is partly due to oil and gas service companies operating against the backdrop of a rapidly growing industry over the past few decades, often being more able to satisfy private equity growth imperatives.”
This, Burgess said, has fed the confidence of management teams to take that leap of faith in private equity; a confidence that has perhaps not been shared across other areas of Scotland.
“Arguably, businesses in the North East have been more attuned to what private equity is and the benefits it can bring,” he concluded.
“However, there are signs of that changing in, for example, the central belt, with reservations being eroded by a fuller understanding of what private equity investment can offer – be that providing patient capital, driving accelerated growth, delivering strategic support and guidance to management, de-risking ownership or aiding management succession.”
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