A new world order - the implications for energy

Since February 24th the whole world order has changed; there is a major state-on-state land war in Europe, Russia has become a pariah state, NATO has been re-united and now likely to expand to Finland and Sweden, the EU has also been (mostly) united in its response, the USA political parties have decided, for the moment at least, that Russia is the enemy instead of each other. Perhaps most significantly, the western democracies have belatedly realised that freedom of expression and the ability to choose one’s government are values worth fighting and dying for.

None of us know how the Ukrainian war is going to end, but we can say now with some confidence that the global energy markets are never going to be the same again. The European countries that have had a heavy dependency on Russian gas and oil have finally realised that this is a serious vulnerability in geopolitical terms, so are already changing their policies to reduce or eliminate that dependency. The Ukraine-Russia war is causing even higher gas prices than the already higher levels experienced in the latter half of 2021, and it seems very likely that gas prices will stay high for the medium term. This is interesting because it completely changes the payback periods and ROIs for energy-saving and renewable energy investments. If the gas price is twice as high, what was less than compelling 6-year payback now becomes a very attractive 3-year payback. Since most such investments last for a long time (insulation measures for decades, solar panels for 25 years and heat pumps for 15 years or so) these now look like highly compelling opportunities. Previously rejected proposals can now be revisited with these changed economics, and the biggest issue going forward is likely to be insufficient contractors with the skills required to install such measures.

Personally, I had an air-source heat pump installed in my house in January, primarily to reduce our carbon footprint (since we buy 100% renewable electricity), not really expecting to get a payback for about 7 years. Now I’m expecting a much more favourable outcome. Two years ago (pre-COVID) I evaluated solar PV and a battery installation, but the 15-year payback looked unattractive. Now I’m re-visiting this option as PV panel efficiency has been gradually improving and associated costs coming down, and with the higher electricity prices the payback could now be much better, especially since I now have the heatpump…

Since I am often asked by friends about energy-related matters I’ve also been investigating alternative replacement options for gas-fired boilers, which are the normal heating source in UK residential and commercial buildings, motivated by the realisation that although there is much publicity about heatpumps, there are many situations in which they cannot be used. In residential applications, the lack of a suitable exterior location is frequently an issue, and for multi-dwelling buildings, there is usually no outside space option at all (I’m lucky to have a nice wide alley space along one side of my house). Meanwhile, ground-source heatpumps are highly disruptive to retrofit (due to the ground trenching required, or the borehole drilling) and are considerably more expensive to install. In contrast, for new build housing, ground-source heatpumps look like a very good way forward as the trenching can be made part of the work required to dig the building foundations, and the water-to-water heatpumps can be mounted internally within each dwelling, taking up less space than a gas boiler would. Because the water is at ambient temperatures the supply and return pipes do not even need to be insulated.  The downside is that such schemes are currently only usually cost-effective on a communal basis where the ground loop is shared between houses/apartments, which creates the need for a shared billing and maintenance scheme. Such installations are more efficient in very cold weather compared to air-source heatpumps whose COPs fall dramatically in lower ambient conditions. One alternative I recently stumbled across is an innovative high-density thermal storage solution that could work well for smaller 2-3 bedroom properties, but the cost-effectiveness of this approach depends critically on the availability of low-cost night rate electricity, which cannot be assumed in the longer term. It does however provide a roue for decarbonising existing houses without the need to change out radiators or incur the complexities of a heatpump installation.

Here in the UK we have a very old housing stock, which is generally very poorly insulated, so the best way to reduce energy bills and contribute to de-carbonisation is to reduce the need for heat by upgrading the insulation standard. The downside to this is that most of the available measures are quite disruptive (e.g. internal wall insulation), and have had long payback periods due to the high cost of the installation, so most people have not seriously considered these options. Now the shock of the massive energy price rises could stir much greater interest in insulation options, although it has to be admitted that house insulation is a rather unglamorous topic and consequently never gets much media “air-time” compared to the solar PV or heatpump options. For those who don’t yet have cavity wall insulation, or have the loft access to increase the thickness of loft insulation, these two measures have now become complete “no-brainers” – do it now! While I’m dishing out advice, the other completely obvious way to save energy cost-effectively is to draught-proof all windows and doors since on cold winter days the excess air changes caused by draughts is a significant waste of heat energy.

Addressing the consequences of the new world order created by the Russian invasion as it relates to energy, and the even bigger crisis of global warming that has been steadily creeping into public consciousness over the last decade, will require a complete re-thinking of our relationship to energy usage. The assumption until now has been that there will always be enough energy for our needs and that it will be easily affordable. For most people this has now changed since their energy bills are more than doubling in the space of a few months. A change in mindset to consider more carefully whether the energy usage is required and adapting behaviour to use it when it is less expensive and adaptations we could make to manage this new situation. Some in society have been doing this for a long time already, either because they are poor, so energy has already been a significant cost in their weekly budget, or because, like me, they have been motivated by the desire not to waste such resources since by doing so I am contributing to catastrophic climate change.  What we need, as a society now, is for everyone to start caring more about energy usage, so that this thinking can inform both personal and boardroom decisions on a daily basis. The corporate environment has already been changing for some years driven by the green agenda, but now the higher energy prices can drive much greater investment in retrofit measures to reduce energy consumption since the ROI will be so much better. In the UK the government recently decided to reduce from 5% to zero the VAT on energy-saving and renewable energy products, but although this modest change is in the right direction is far from enough – much more must be done to incentivise decision-making and behaviours that are, ultimately, in all our interests, since by saving energy and reducing carbon emissions we can save our climate. Until now it has been a case of “The poor have no capital. The rich have no interest” – let's fix that by making capital available and starting to care.

Please do share your thoughts and comments on the topics I’ve raised.