Europe's energy crisis queers the pitch horribly for COP26

The right conclusion to draw from spiralling gas, coal, and electricity prices in Europe is that fossil fuels are dangerously volatile. Supply can be manipulated at critical moments by hostile powers playing geostrategic games.

The wrong conclusion is that this month’s energy shock is an indictment of renewable power, or chiefly caused by carbon prices, or that it is the first cruel taste of what awaits us as net-zero tightens, and therefore that decarbonisation should be abandoned.

This is not to deny that the green switch will cause plenty of headaches before we get over the hump and reap the runaway benefits of better technology and the much cheaper energy than fossil combustion could ever achieve - and in Britain’s case, before this country again becomes a net exporter of North Sea energy.

The UK’s energy deficit is 2pc of GDP - or nearer 5pc annualised, this quarter - and is the core component of our chronic structural trade gap. It is beyond me why anybody thinks that transferring so much national income to despotic foreign states is acceptable.

We are living through the gas equivalent of the Opec oil shock of 1973, when the cartel restricted crude supplies to punish America over the Yom Kippur War. The Saudis choose their moment well. Oil prices were already stretched by inflationary monetary policy in the US.

This time the manipulator is Vladimir Putin, the target is Europe, and the pressure tool is pipeline gas. The Kremlin is limiting the normal top-up flows through Ukrainian and Polish pipelines needed to replenish European inventories before winter.

It is not the only reason why UK natural gas prices have risen five-fold in a year, this week hitting an outlandish 192 pence per therm for October contracts. But it is the crucial element that has turned shortage into panic. Goldman Sachs says the futures market is pricing in a “growing winter risk premium” as people brace for potential blackouts and power rationing for European industry.

Mr Putin’s objective is no secret. It is openly discussed in the Moscow media citing official sources. He aims to force Europe to certify the Nord Stream 2 pipeline on his abusive terms - in violation of EU energy law - giving him a greater stranglehold over Eastern Europe.

Britain is a collateral casualty but is nevertheless acutely vulnerable because it closed the Rough gas storage cavern, breaking the unwritten rule that every country must have reserve capacity to cover 20pc of annual demand. It would struggle to cover 4pc.

We rely on Dutch and German storage, at 52pc and 63pc capacity respectively, when they should be nearer 90pc as we approach the Equinox.

Nor can the cross-channel interconnectors be entirely relied on when push comes to shove. Ireland’s operator has cut off the Moyle electricity interconnector across the Irish Sea twice over the last week to avert blackouts at home, invoking “operational security”. Who in their right mind thinks that Germany would allow its precious gas stocks to reach Britain this winter if the industries of the Ruhr are facing blackouts?

Spain is also in the eye of the storm because it relies heavily on imports of liquefied natural gas (LNG), which would have been available in normal times but this year the pandemic has played havoc with the market.

It has to compete with China, Japan, and Korea for scarce global supply. Europe’s LNG spot price has tripled since April to a record $22 (MMBtu) - if you can get it - with a rise in Spanish power prices to match.

The Socialist government and its neo-Marxist allies in Podemos have responded in character, raiding utilities to pay for subsidised home electricity bills. The nuclear industry said the extortionary terms could lead to the “total closure of the Spanish nuclear park”.

Economy minister Nadia Calviño has warned that fuel poverty could trigger “social unrest” and undermine democratic consent for the Green Deal. In that she is right, whether in Europe, or the UK, or the US.

The gilets jaunes spectre haunts each of our countries, which is why free marketeers advocate a "carbon tax and dividend" (such as HR 763 in the US Congress) that redistributes the revenue to households, with a progressive bias towards the poorest. The higher the carbon price money the fatter the dividend. That would end the fuel poverty debate at a stroke.

Mrs Calviño blamed Spain’s travails on the parabolic rise in EU carbon prices this year to €60 a tonne as well as gas costs, a way of lobbying the Commission to relax its emissions trading scheme.

Frans Timmermans, the EU’s climate chief, says rising carbon prices accounts for a fifth of Europe’s electricity price spike this year and is being falsely fingered, but he also acknowledged the political perils of this episode. “One thing we cannot afford is for the social side to be opposed to the climate side: I see this threat very clearly now,” he told MEPs.

The protests are getting louder. Poland’s premier Mateusz Morawiecki says Europe’s green deal is out of control and has ordered Polish utilities to itemise the exact cost of EU climate policies in household energy bills.

Lawson Steele from Berenberg Bank says there is no obvious legal way for Brussels to relax the emissions trading scheme, and it would be fatal to try: “If they panic at the first real test they will destroy their credibility and kill the green deal instantly.”

It would not solve the core problem in any case, and would play to the perversely-false narrative that green policies are at the root of the current crunch. Logic compels to the opposite conclusion: the answer to spiralling gas and coal prices is to use less of the stuff.

In the case of Britain, where frequency problems caused baseload electricity prices to go berserk this week, the authorities are clearly struggling to manage renewable power in an old-fashioned grid built for a former world. What is not true, and cannot be true, is that a lull in offshore wind is today’s culprit.

The energy nexus ought to cover UK power needs in the depths of winter during a doldrum, let alone in September when daily demand is peaking at barely 36 gigawatts, and gas home heating is minimal. What is missing is contingency back-up.

“The capacity mechanisms should have been able to deliver but there are no penalties to enforce it and the system only exists in theory. Now we’ve been hit with a perfect storm,” said Adam Lewis from energy traders Hartree Solutions.

The assumption that LNG gas would always be there at tolerable prices was wishful-thinking. Planners neglected to keep enough coal capacity in reserve, and nuclear output is down to five gigawatts.

It is a sorry state of affairs where the nation cannot endure a few days of calm in the North Sea at a time of low seasonal demand. The roots of this debacle go back a decade or more but the consequences have fallen to this Government. By twist of timing it could reach a crescendo just as the COP26 delegates arrive in Glasgow, and become conflated in the British public mind with net zero.

But let us not muddle matters. This is a fossil fuel shock. Net zero is the solution and not the problem. It will happen because brown energy cannot compete with the rapidly descending cost-curve of green tech.

The process is by now unstoppable for pure cost reasons regardless of climate change imperatives. Any major country that resists this will play itself out of the global economic game. The Government must hold its nerve.