Energy Crunch: Budgeting for Resilience?

NOTE: Images in this archived article have been removed.

 

East-West tensions spiralled to levels not seen since the end of the cold war as Russia annexed Crimea this week. Energy supplies have not yet been affected but Russian Foreign Minister Sergei Lavrov ominously threatened “consequences” in response to any sanctions imposed by the US and EU.

When Russia cut off gas supplies to Ukraine in 2006 and 2009 the impact was felt throughout Europe. Europe still imports more than a third of its crude from Russia and about a quarter of its gas, meaning sanctions are a two way street – particularly if the crisis drags on. Paolo Scaroni, the chief executive of the Italian oil and gas group, Eni, told the Financial Times the balance of power lies with Russia: “If, in the middle of a tough winter, we don’t have Russian gas, we are in trouble. But Russia is not in trouble if they get our money the day after.”

 

The Ukraine crisis was briefly mentioned in George Osborne’s budget speech on Wednesday because of the risk of higher commodity prices, but the main theme was building a “resilient economy”. Will his latest budget help deliver this?

 

The headline measure was to cap the carbon tax at £18/tonne until the end of the decade instead of £30/tonne as originally intended, just two years after it was established. The cap was one of a number of measures aimed at protecting industry from the cost of decarbonising the energy sector, but some commentators worry it could also now revive coal, skewing the market against cleaner alternatives and creating an uncertain environment for investment. The carbon tax cap is also anticipated to cut £15 from retail consumer bills, another area of high political pressure.

 

If resilience means an economy fit for a future of greater resource competition and the impacts of climate change, then there was little on offer in this week’s package – no additional measures to support renewables or energy efficiency, a frozen fuel price escalator, and the December deal with energy companies to slow the pace of home energy efficiency measures is still in place.

 

The Chancellor also flagged shale gas as another way to cut energy costs for manufacturing: “To those who say manufacturing is finished in the West, I say: look at America”. But since even shale’s biggest British cheerleader, Lord Browne, accepts fracking is unlikely to deliver cheaper gas, this doesn’t look like a strategy for real resilience.