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Why I’m Paying Close Attention to the Looming UK Blackout

This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The UK is on the verge of another energy crisis. Like clockwork, these seem to hit the country almost every year.

And it’s crucial to pay attention, because what’s happening over there shows the strength and opportunities of the energy market here at home.

Earlier this year, as veteran readers will remember, the Brexit vote led to a drop in the pound sterling, causing North Sea gas being exported to storage in the EU…

Only to be bought back, at a premium, as temperatures in the UK started dropping.

But now, there’s another energy crisis about to hit the UK. This one is about reliability, and the cost to British citizens may be even heavier…

And it shows just how valuable the energy “independence” making the news in the United States really is…

Brexit Spiked UK Energy Prices

ukYou’ve seen before how, reeling from an unexpected Brexit vote, London came up on the short end of natural gas rates in the trading circuit with Europe.

Longtime readers will recall that there’s a “circuit” problem involving natural gas trade between the UK and hubs in Europe, especially in the Netherlands. In short, because of the dramatic post-Brexit decline in the pound sterling against the euro, North Sea gas was being purchased from UK sources by Europe at a discount and then sold back to the island nation at a nice profit.

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Back then the situation was aggravated by a substantial rate hike for end users of electricity by all the power providers in the country, increases that were well beyond the rise in generating costs.

In that move, residential and commercial electricity consumers took it on the chin just as the weather grew colder.

Today’s crisis is even worse…

Brits Might Have to “Sit in the Dark” This Winter

On Monday, Ofgem senior executive Andrew Wright said that some households would have to pay up to keep the lights on while “their neighbors ‘sit in the dark’ because not everyone will be able to use as much electricity as they want.”

Ofgem is the acronym for the Office of Gas and Electricity Markets. This is a non-ministerial UK government department that also serves as an independent National Regulatory Authority, as recognized by the EU. According to its own website, the primary task of Ofgem is “to protect the interests of existing and future electricity and gas consumers.”

Wright’s warning, coming as it does from a top member (and former interim chair) of the agency that is supposed to protect the energy end user, does not bode well for what is unfolding in the UK.

As you’ve seen here before, Britain has embarked on a path of heavy reliance upon renewable energy, especially wind farms. Solar is also being introduced, although to a more limited extent.

At the same time, the country has decided to decrease coal use. That has made natural gas the “heir apparent” for the role of primary energy source in British electricity generation.

The government has also approved the first new power-producing nuclear reactor in decades. But the French-built facility is already years late, will take years longer to be completed, and is way over budget.

So the decision to phase in more wind power was initially regarded as a way of balancing the rise of natural gas as the dominant source for electricity.

Well, things haven’t worked out that way, and the costs of repairing the damage will fall (as it always does) on the consumer…

The UK Is Facing Power Shortages

The resulting crisis can be summed up in two words: electricity shortages.

As you well know, a balance of energy sources, including solar and wind, is the best system for any country. But a quick increase in renewables requires attention to redundancies.

Simply put, you need to keep more “traditional” electricity generation around for the days when the sun doesn’t shine or the wind doesn’t blow.

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In the UK, that means older (and far less efficient) coal-fueled power stations would need to be kept online as backup. Ultimately, newer gas-powered equivalents will come online and provide a hybrid approach to Britain’s electricity needs.

Unfortunately, that’s not going to happen quickly enough, leading to a somewhat unexpected outcome…

Britain, of All Places, Will Have to Import Coal

Get ready for this one.

Britain, in many respects the great grandfather of coal-based economies, has closed so many coal mines that it will need to import coal to provide enough backup power until a more user-friendly balance can be struck between renewables and natural gas.

Power industry costs across the board are already going up more than expected. This crisis is made even worse by the rising expenses of natural gas, wind incentives, and now the added cost of importing coal.

Leading to the two-pronged warning from Ofgem. First, consumers must pay more for electricity, even more than was initially forecast. There will be no government bailout as both Whitehall (the administration) and Westminster (Parliament) is putting this burden squarely on the shoulders of homes and businesses.

That means, as Wright warned, that wealthier homes will be able to afford it; most others will not.

Second, he warned about rationing, which means something quite different than just higher prices – and is much more worrisome. There may not be enough power to go around… at any price.

In short, we’re talking about power outages here.

Absent a radical change in taxation and the introduction of a huge state-supported program of subsidies for a widening percentage of the population (neither of which will come from the current government), this crisis will roil the country.

And with the weak currency continuing throughout next year as the specifics of Brexit take shape, Britain’s energy costs will continue to grow.

Depending on energy imports has a way of doing that.

The U.S. oil and gas industry, of course, is hard at work at making sure we don’t face this problem. Just take a look at my recent 2017 natural gas price forecast.

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