In this earlier article written in January 2019, I described the Welsh gas industry and its impact on the Welsh economy.  At the time I estimated that the value of the Gas industry to the Welsh economy was around £2 billion per year, but that this figure was not reflected in Welsh GDP and none of the associated tax revenue was attributed to Wales.

Earlier this year I intended to update my original article to reflect the latest import figures and current market price, but the more I looked into the subject the more I realized that we are being systematically cheated. The Welsh economy is being cheated out of tax revenues and GDP and Welsh consumers (along with all UK consumers) are being cheated into paying inflated energy prices. We are being cheated by the energy industry which is hiding blatant profiteering behind the mask of a global energy crisis, partially driven by the Ukrainian war – and this is encouraged by the UK Government to disguise hidden and unnecessary tax increases.

To put things in perspective, the total gas imports into Milford Haven were 143,642 GWh in 2020 (or 9.1 million tonnes). This figure fell to 101,712 GWh in 2021 – partially as a result of reduced demand due to COVID, but is expected to return to 2020 levels in 2022.

Meanwhile, the cost of this gas increased from around 15,000 £/GWh (or 6.0 $/mmBTU) in 2020 to around 93,000 £/GWh (34.0 $/mmBTU). This means that the value of gas imports through Milford Haven has increased from around £2 billion in 2020 to potentially over £13 billion in 2022.  This forms part of Gross Domestic Product (GDP) which is a measure of our underlying economic wealth – but this is only accounted for at a UK level and not allocated to Wales.  If properly attributed to Wales, this would increase our GDP by around 15%.  We are richer that we are led to believe!!

The Energy Supply Market

Historically, gas and electricity producers and importers sold their energy to consumers through regional distributers such as Wales Gas, SWALEC, Manweb etc. which operated integrated distribution and retail networks.  These regional suppliers were progressively lost in a series of corporate mergers and there are now 6 large energy Companies serving the UK (British Gas, EDF, Eon, NPower, SSE & Scottish Power).

The UK Conservative government also adopted a policy of encouraging smaller companies to enter the market place – enabling consumers to buy their power from new companies such as Octopus Energy, who offered more competitive deals than the major suppliers. These new companies did not invest in any production or transportation infrastructure – they were simply energy traders who bought energy on the spot market and used the existing distribution networks to get it to the customer. These ‘traders’ relied on the fact that they could buy energy cheaply on the spot market, and even after paying a transportation fee to the network owners, could undercut the larger companies and give the consumer a better deal.

Unfortunately this model only worked when there was a ready supply of cheap energy available on the spot market. As spot market prices increased, these Companies found that they were locked into sales agreements with their customers at a lower price than they were able to buy energy at, and more than 30 such trading companies have gone bust in 2021 – notably including Bulb Energy who had 4 million customers and which required a significant bailout from the UK Government to maintain supplies to affected consumers.  In case anyone says that this was due to exceptional circumstances and could not have been foreseen, then I suggest that they Google ‘Enron’.

My point here is that UK Government policies created a situation which led to short term profitability for some smaller companies, but who were really just skimming revenue off the top of the established energy Companies. The major suppliers were then disincentivised from investing in new production and storage facilities as they were forced to cut prices to maintain market share. Or to put it another way, UK Government policies have directly resulted in a reduction in energy security of the UK.

The Hidden Increase

Meanwhile, in order to regulate these new energy supply companies, the UK Government established an Energy Cap mechanism which was linked to the spot price of gas. As the spot price of gas has risen sharply, then so the energy cap has followed accordingly, and the UK Government can simply blame the increase in domestic bills on worldwide energy prices. But lets just consider how electricity is generated in the UK – the latest data indicates that electricity is generated from:

An increase in the cost of gas has no impact on the cost of producing Nuclear Energy, Wind Power, Hydroelectric, etc, yet these producers are able to sell their electricity at inflated prices linked to the gas price. It is the suppliers of nuclear & renewable energy (eg EDF, RWE) that are making windfall profits – not the Oil & Gas majors such as Shell who are usually the most loudly criticized.

The UK Government are happy for these Companies to increase their prices as they generate windfall tax revenues including increased VAT and Corporation Tax. All of this goes to UK Treasury and none of it is attributed to Wales – despite us representing around 5% of the retail market and a proportionately higher share of the renewable energy production. The Welsh operations of South Hook LNG and Dragon LNG are also generating excess profits from their LNG import operations, but which again are not attributed to Wales.

What can we do?

Firstly, as I have called for a number of times, we need to establish a Welsh Financial Authority to accurately record our true economic activity and to ensure that all taxes generated in Wales are properly attributed to Wales.  I believe that our annual GDP is being underestimated by around £10 billion and we are losing out on tax revenues of £300-500 million per year relating to energy alone.

Secondly, we need to remove the energy traders from the market place and re-establish the integrated energy supply companies to increase the resilience of energy supplies.  I propose that we establish a ‘not-for-profit’ energy company ‘Ynni Cymru’ who would take over the electricity and gas supply networks in Wales. Instead of paying energy subsidies/rebates to consumers, these should be paid to the supply Company to provide a more stable operating environment and subsidise the price of spot-market purchased gas. This is the approach adopted by French Government which has kept consumer price increases to a minimum.

Thirdly, we should support the establishment of a ‘Swansea Bay Freeport’ – not a ‘free-for-all’ port as currently proposed by UK Conservative Government and which is simply used to disguise widespread deregulation – but an activity-limited zone specifically targeting the renewable energy sector, and particularly Tidal Energy.  A Freeport based on the ports of Swansea and Port Talbot could be used to directly support the development of the Swansea Bay Barrage and establish the necessary infrastructure and support industries to develop further Tidal Barrages at Cardiff and Colwyn Bay as discussed in this earlier article.