The Single Market Britain never left
Not long after the UK voted to leave the European Union in 2016, it transpired that Theresa May’s new government had determined that this would mean leaving the single market - the economic deal at the heart of EU membership.
It’s worth noting in passing that this was hardly an inevitability or indeed an entirely logical outcome. The referendum itself was about EU membership, not single market membership. The two things are certainly related but they’re also substantively different: it’s quite possible to be outside the EU but inside the single market. Ask Norway.
Anyway, you all know what happened next. Some of those who campaigned to leave insisted that Brexit meant leaving the single market; how else could one gain true control of our borders? Others said it didn’t; they saw a distinction between the political and the economic relationship, and no contradiction in wanting the former to be a bit more distant while the latter stayed close. The former won out against the latter and we got the Brexit we got.
Yet here’s the funny thing. At that very point, even as Britain undertook to cut the cord with Europe’s single market for goods and services it was actually in the process of strengthening its membership of another element of European integration. Nothing was said about this at the time, for a couple of reasons. The first is that the market I’m referring to is the one for energy and no-one pays much attention to energy until it is in short supply. The second is that, well, no-one pays much attention to energy full stop.
The upshot is very few people are aware of the single market in energy, which is a shame because in many senses it is more of a fully-functioning single market than the single market everyone else talks about. While there are vast sectors of goods and services which remain unharmonised, the energy single market - the system of pipelines and electricity interconnectors splayed across the European continent and the UK - is about as functional as you get.
What does functional mean in practice? Well there are really two things you need to know about the market. The first is that, as with most functioning markets, the gas tends to travel to where the price is highest. The second is that, well, gas can only flow where it can flow. That might seem like a statement of the bleeding obvious, but it’s critical. The main way of getting gas from A to B is via pipelines, and while Europe is certainly criss-crossed with pipes, the capacity of those pipelines has an enormous bearing on the price and availability of gas in certain parts of the continent.
What maps like the one above can’t really show you is the extent to which this economic geography matters. You might just about be able to discern where those pipes go, but not that much of Eastern Europe is reliant on the pipes coming from the east rather than the west. In other words, if Russia cuts off the supply, then even if there were an unlimited amount of gas coming from the west, certain countries, for instance Germany, the Slovak Republic and Hungary, might still have a shortfall of gas, purely because the western pipeline network can’t get the gas across to them. The chart below from a recentish Oxford Energy paper (pdf) tells some of that story: here’s what happens without Russian gas:
Geography, in other words, matters. As does physical infrastructure. Europe has lots of gas storage in old salt caverns and depleted gas reservoirs dotted around the continent. Lots. The UK, on the other hand, has shockingly little in the way of storage.
And as you’ll probably be aware, in 2017 the UK shut down its very biggest storage facility, the Rough field off the coast of the North Sea. Much ink has been spilled about this decision, and the extent to which it’s coming back to bite us. For one thing, it means we have far less ability to store the gas we may need this winter, when it is in very short supply. It has been held up as the prime example of Britain’s disastrous (lack of an) energy strategy. Actually the reality is somewhat more nuanced and much more interesting - we’ll get to that in a second.
But the key point to note for our purposes is what this did to the UK’s relationship with the European single energy market. All else equal, the more storage Britain has, the less reliant it will be on Europe for gas imports. The less it has, the more reliant it’ll be on Europe. By reducing our storage, the UK became more enmeshed in the European system.
You get a sense of this relationship when you look at a chart of flows between the UK and EU via the two gas transit pipes, BBL and Interconnector, that pass between Norfolk and the continent. Look: in the summer, we send gas to Europe. This makes sense: we produce a fair amount of it and don’t need to heat our homes.
That gas needs to go somewhere, so it goes to Europe, where it, among other things, helps replenish the storage facilities in Germany and elsewhere. In the winters, we then become reliant on imports from Europe. Net the inflows and outflows out and actually we send more into Europe than we extract but by now you can perhaps see what’s happening here: the UK uses Europe as a kind of bank to store its gas until it needs to “withdraw” it.
To put it another way, that decision to shut down Rough in 2017 - even as the UK was deciding to pull out of the European single market - had the consequence of redoubling our reliance on the European energy market. Instead of storing gas ourselves, we opted to store it in Europe instead. We became more European, not less, at least when it came to gas. Not that anyone either in Parliament or Fleet Street noticed any of this at the time because, yes, no-one pays much attention to this critical infrastructure until it goes wrong.
That brings us to the events of recent months. All of a sudden there is far less gas coming from those eastern pipelines into Europe. Meaning we are having to find our gas from elsewhere. And since it’s hard to squeeze all that much more out of the North Sea or Groningen, that means shipping it in from overseas in the form of liquefied natural gas (LNG).
This brings us to the other side of the storage story. For while it’s certainly fair to coruscate the UK government for shutting down Rough, that’s only half of the picture. Even as it was shutting down its storage in recent years, the UK was also investing heavily in LNG facilities, to the extent that these days there is more LNG import capacity in the UK than in Belgium, the Netherlands, Germany and Poland combined. The construction of these facilities has turned out to be one of the single most consequential decisions in recent British history, since it means we can suck in a lot of LNG from overseas.*
And that’s precisely what’s been happening over the past year. I discussed this in a piece earlier this year for Sky, the condensed point being that because the UK is part of the European energy market and because it has more LNG capacity than the rest of Northern Europe combined, it would become a kind of energy “land bridge” to the rest of the continent. This caused all sorts of oddities in the behaviour of prices.
Because there was so much gas trying to find its way into the European system and because the UK was one of the best places to receive that gas, this country has been awash with the stuff. And because the pipes between here and northern Europe are only so big, that bottleneck caused day-ahead prices here in the UK to collapse, even as they rose in Europe.
Anyway, the long and the short of this is that Europe was able to replenish its storage in part thanks to the enormous flows of LNG coming into the UK and then across to the Netherlands and Belgium. And this is before you consider the other way the UK “helped out” (I put the words in inverted commas because this was less about concerted political solidarity than the market simply doing what the market does): by providing a lot of electricity to France, even as its nuclear power stations were shut down this summer.
The point of all of this is to underline that in many senses, this single market - the one the UK never discussed but doubled down on even as it was leaving the other single market - has actually been working very well this past year. Prices have gone to stratospheric levels but those prices have helped lure gas to where it’s needed. The UK has been a model citizen, without whose infrastructure Europe might never have replenished its gas storage ahead of this winter. The real question is what happens next. That’s something I explored in a Twitter thread and piece for Sky News a couple of days ago.
It’s easy to forget how much geography and infrastructure matters. But the energy crisis is a signal lesson in its importance. What happens if some of these pipelines stop flowing, or are destroyed? Short answer: disaster. The single greatest fear of most industrial firms around the country is that Russia sabotages the Langeled pipeline from Norway which these days provides this country with an enormous chunk of its gas. All of which is why there are Navy ships constantly patrolling up and down its length, and they’ll probably carry on doing that all winter. It is so, so important.
Anyway, here's a thread which touches on a lot of this. More to come in the next few weeks/months.
* It wasn't a government decision. More a market response to the likely impending demand for LNG as the UK's domestic supplies were run down.