Foundations of UK Energy Security: The Shifting Sands of Oil and Gas

pdf
Download PDF(2MB)

incamerastock / Alamy Stock Photo


This paper looks at the UK’s energy security strategy with respect to the challenges posed by oil and gas dependence.

Developments in the energy system are shifting the foundations of energy security in the UK and across the world. Technological advances, alterations to demand patterns, and climate imperatives, combined with geopolitical tensions, mean that the potential causes of a crisis – and how the energy system responds – are changing. New strategies are required for energy sector challenges which threaten to undermine political and geopolitical goals, while new technologies make new approaches possible.

This paper looks at the UK’s energy security strategy with respect to the challenges posed by oil and gas dependence, with a particular focus on the latter. It asks what national strategies are deployed, as highlighted during the crisis which followed Russia’s invasion of Ukraine, and the conditions which must be in place for these strategies to be effective. It then explores how these strategies might need to change due to the energy transition.

The paper finds that while government documents emphasise the need to reduce dependence on oil and gas for both climate and energy security reasons, treatment of extreme energy prices as an economic shock to be managed outside of the energy system means that ministers and civil servants receive insufficient guidance about which policies should be prioritised to ensure both energy security and decarbonisation over the short, medium and long term.

As Russian gas was withdrawn from the European market, the UK government allowed prices to rise to attract supply, while subsidising energy consumers. The strategy is typical of the government's approach to the supply of commodities – that market actors should be allowed to arrange supply as they see fit, but with consumers and the UK economy protected in the event of extreme supply disruption. This strategy depends on and is constrained by the ways in which energy markets function, energy is used, and the infrastructure available, as well as by fiscal constraints. The extent of economic exposure – both through the impact of higher energy costs and the fiscal cost of subsidies – is strongly influenced by the level of energy efficiency and the ability to manage demand, as well as by the influence on pricing of non-oil and gas technologies – such as renewable power generation, electric vehicles (EVs) and heat pumps – and the possibility of extending their use.

The UK will face continued risks from oil and gas dependence for some time, which can best be managed through reduced oil and gas use, incremental measures to reduce market and infrastructural vulnerabilities in oil and gas supply, and careful consideration of upstream oil and gas policy in alignment with other oil and gas consumer countries.

The paper makes a number of recommendations.

To reduce oil and gas use, the UK should:

  • Accelerate and increase the ambition of energy efficiency measures, particularly for buildings.
     
  • Focus on implementing soft and hard infrastructure rollouts alongside R&D for the electrification of oil and gas demand, most importantly EVs and heat pumps.
     
  • Reform markets to better reflect the cost of energy supply through different systems, notably electricity market reform and rebalancing policy and network costs.
     
  • Roll out smart infrastructure, and demand management and tariff structures which make use of it, to provide a variety of options for different energy consumers.
     
  • Support the scaling and security of supply chains for renewable generation and technologies displacing oil and gas demand, particularly with respect to an adequate supply of critical minerals and supply chain diversity.
     

To mitigate market and infrastructural vulnerabilities in oil and gas supply, the UK should consider:

  • Options for bilateral agreements with neighbouring countries (or the EU more broadly) on energy sharing and the operation of interconnectors during emergencies, including formal obligations, penalties and redress.
     
  • Engagement with proposals for global strategic gas reserves.
     
  • Additional market or public incentives for long-range gas storage as an emergency reserve under full sovereign control.
     
  • Ensuring that institutional arrangements for infrastructure transitions – particularly changes in demand patterns for gas, and potentially conversion of part of the network to hydrogen and carbon capture and storage (CCS) – are delivered in a timely manner and with careful consideration of ongoing and future security of supply for those dependent on them.
     
  • Formal engagement with major market providers, including data sharing and the introduction of a market data analytics capacity and regular monitoring of market data at the Department for Energy Security and Net Zero, the Treasury, and regulators Ofgem, the Prudential Regulation Authority and the Financial Conduct Authority.
     
  • Designating responsibility for assessing energy sector requirements and interdependence for a 10-year period, including security considerations, in a regularly updated integrated energy planning document. Responsibility might naturally fit under the remit of the Future Systems Operator.
     

To better balance requirements for stable and diverse oil and gas markets and reduced greenhouse gas emissions globally, the UK might be assisted by:

  • An approach which starts from the position that demand for oil and gas will need to be met securely in the future from a diverse pool of producers, but that demand should also be as low as possible, and that markets are best placed to assess the level of supply required to meet demand.
     
  • Preparation for strategic shifts in major oil and gas producer countries that might occur should a settled view become established that oil and gas demand is irreversibly falling, particularly if the decrease is faster than anticipated.
     
  • Consideration of limiting direct intervention to prevent upstream developments in the UK and abroad, whether through licensing or financing, while increasing support for reducing demand globally.
     
  • An international development policy which emphasises sustainable economic growth in low- and lower-middle-income countries and considers separating climate mitigation support to focus on the largest polluters.

WRITTEN BY

Dan Marks

Research Fellow for Energy Security

Cyber

View profile


Footnotes


Explore our related content