Jeremy Warner's Outlook: Blaming Europe won't help solve Britain's energy crisis, which is of our own making

Emirates shows way in low-cost long haul; Rates conundrum for currency markets
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The Independent Online

When all else fails, blame the dastardly Europeans. This is one of the oldest tricks in the political lexicon when it comes to trying to deflect attention from the mote in the Government's own eye, and Malcolm Wicks is at it again in a speech today about the iniquities of high energy prices.

As the wholesale, spot gas price continues to soar, the UK energy minister promises "full and frank discussions" with our European neighbours about "serious malfunctions" in the European energy market when he comes to chair the EU Energy Council next month. It's really not good enough, he says, stamping his feet, and it's all your fault he insists, waving his finger at the Europeans.

Yet a large part of the blame with the Government itself, which has failed adequately to ensure a plentiful supply of cheap energy. Whatever else the duties of government, keeping the lights on must surely be towards the top of the list.

Yet energy policy has been chopped and changed so many times over the past 10 years that it can scarcely be called an energy policy at all any longer. The upshot has been to make Britain's energy needs increasingly dependent on gas at a time when our own North Sea gas production is falling off a cliff; ergo, we have made ourselves a hostage to whatever the Continent wants to throw at us.

Energy prices tend to be higher on the Continent because both energy supply and transmission is still largely dominated by vertically integrated monopoly providers. As a net importer of energy, this is increasingly affecting British prices.

Even where energy prices are lower - for instance, gas prices in the Netherlands are less than half what they are in Britain at the moment - it is frequently not possible to access them because transmission is controlled by monopoly suppliers on less than transparent terms. Continental gas supply contracts also tend to be indexed to the price of oil, even though gas is in plentiful supply, causing the price artificially to rise with the cost of the black stuff.

All these are good reasons for Mr Wicks to want to shake up the European energy market. The European Commission itself said in a report published only last week that European directives on gas and electricity market liberalisation were being widely flouted and called on member states urgently to implement them not only in letter, but also in spirit.

Don't hold your breath. It might seem like cutting your own throat to allow high energy prices to continue through support for entrenched monopoly, but some member states don't see it that way, preferring to protect jobs in established suppliers to creating them elsewhere through free competition.

As Continental suppliers grow rich on their captive domestic markets, many of them have used the surplus cash to come shopping over here, buying up the British supply and generator market in a manner which would be virtually impossible almost anywhere else in Europe.

It is all very well being a guinea pig in the effectiveness of liberalised utility markets, but there may be a price. Received wisdom is that the policy broadly works, with energy prices still some of the lowest in Europe. Yet as the temperature plummets and the prices rocket, there is good reason to doubt whether our market-driven approach to these matters is adequately safeguarding our long-term energy needs and supply.

A Siberian winter with widescale blackouts and enforced factory closures would seriously challenge these assumptions and further strengthen the case for new nuclear build to shore up our future energy needs. It scarcely needs saying that if it were left to the markets to decide, there would be no new nuclear capacity at all.

Nuclear is just too high risk for the private sector to want to finance off its own back. The Government has expensively committed the country to renewables. It may similarly have to underwrite nuclear's position in the energy mix if Britain is both to meet her emissions targets and safeguard her long-term needs.

The gas crisis should begin to ease from 2007 onwards, as new pipelines and LNG terminals come on stream. But do we really want to be so dependent on the price of imported gas? Whether it is the cold weather or anger which is causing Mr Wicks to stamp his feet, the present row will look tame indeed compared to the "energy wars" that threaten if we make ourselves wholly dependent on the vicissitudes of overseas supply.

Emirates shows way in low-cost long haul

Here's a statistic to make you wake up and realise how much the world has changed. Emirates, the fast growing Dubai based airline which has sponsored the new Arsenal stadium, has more wide-bodied aircraft on order than the entire existing long-haul fleet of British Airways.

The Emirates order announced at the weekend for 42 Boeing 777s adds to an outstanding order for 45 Airbus superjumbos, which itself is the biggest of its kind for the 555 seater monster. Plainly this is an airline with ambition. Emirates aims to be the biggest long-haul carrier in the world by the end of the decade, and to the consternation and growing anger of established players, there is every chance it will succeed.

Qantas is leading from the front in alleging unfair competition. Yet the reality may be not so much unfair practice as natural advantage. Emirates is a young airline without the legacy cost base of established rivals which is also geographically incredibly well placed to reap the benefits of the big growth markets in airline travel to Asia and the Far East.

Research by Goldman Sachs shows that Emirates has some of the lowest costs per passenger mile of anyone in the industry, making it the first genuinely low cost, long-haul carrier around.

Low-cost operators such as Ryanair and easyJet have to date tended to be confined to short-haul routes with fast turnaround times and no inflight services. Yet Emirates seems to be managing the trick on long-haul routes too despite award-winning product and lounge facilities. This in turn allows the company to be significantly cheaper on price.

How does the airline do it? It plainly helps to have your capital and borrowings underwritten by the royal family of the United Arab Emirates. It's not paid anything for its capital so far, nor despite hints of an eventual IPO, is it likely to so long as Sheikh Ahmed bin Saeed al-Maktoum remains chairman and controlling shareholder.

The suspicion, quite widely held in the industry, that the company also pays virtually nothing for its jet fuel is almost certainly wide of the mark. Even so, the airline's home base of Dubai has plainly been a boon. The landing charges are low to non-existent, the turnaround times much swifter than at almost any other hub airport, and the labour costs are but a fraction of mature, European counterparts.

By using the hub as a stop-off point for long-haul flights between Europe and Asia, the company manages further to lower its costs without significantly adding to journey times. Emirates is also not averse to using other low-cost airports such as Manchester to fly from. And Dubai is in itself becoming an attractive tourist destination. BA and others with still burgeoning pension costs and cripplingly expensive cost bases will need to sprint to keep up. With all that excess baggage on board, it is not at all clear how they can.

Rates conundrum for currency markets

The pound has already fallen a long way against both the dollar and the euro, yet if the markets are right about interest rates, then it may have further to go. More cuts are anticipated for the UK, while in Europe and the US, the outlook is for rate rises. Ironically, the further the pound falls, the less likely a rate cut becomes, which is one of the reasons Mervyn King, Governor of the Bank of England, is more cautious about rates than both the markets and some of his MPC colleagues.

j.warner@independent.co.uk

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