Left in the Dark

Six million homes could face power cuts this winter if the war in Ukraine continues and sanctions remain in place against Russia. This grim picture is set out in a ‘reasonable worst-case scenario’ prepared for the government. If Russia cut off all gas supplies to the EU, then contingency measures could see energy rationing for up to 3-months. Gas supplies to homes would not be affected. Not great news for households, businesses or the UK economy as a whole.

However, this is a worst-case scenario. The government is now scrambling to keep the lights on this winter. It has written to the operators of three coal-fired power stations, which were due to shut in September, to remain open. Centrica has also been asked about the possibility of re-opening its gas storage facility off the coast of Yorkshire that could hold up to a 10-day supply for the UK. The government was hopeful that the Hinkley Point B nuclear power plant might continue beyond its planned life but operator EDF is believed to have said that time has run out.

The government also has a big push underway in renewables and Boris Johnson has pledged to make the UK ‘the Saudi Arabia of wind energy’. A few weeks ago, wind farms across the UK produced 19,835 megawatts according to the National Grid, enough to cover more than half of the country’s needs.  However, wind farms produced more electricity than the grid could cope with, forcing National Grid to ask some operators in west Scotland to reduce output by 25 megawatts. The optimal speed for wind turbines is about 33mph- fast enough to turn the blades without risking damage. When storms earlier this year set UK wind speed records, some turbines were shut down for protection. This highlights the difficulties of a network still unable to store large amounts of electricity. Until reliable energy storage capacity is in place we risk being left in the dark.

Talking of a possible loss of power, is Boris about to pay the price for ‘party gate’?

What have we been watching?

A quieter week in the UK with half-term and the Queen’s Platinum Jubilee holiday. Meanwhile, global investors took comfort from an easing of lockdown measures in Beijing and Shanghai which should provide support for China’s economy in the second half of 2022. It may also help to begin to ease some of the global supply chain disruption as Chinese factories return to normal working conditions.  Strong US job data raised the possibility of a faster pace of interest rate hikes by the Federal Reserve and Sterling edged back to $1.25.

Russian forces continued to tighten their grip on the Donbas region of Ukraine with their troops taking control of parts of a key city Severodonetsk. Meanwhile, the EU agreed to ban most imports of Russian oil, but with key exemptions for Hungary. The EU ban will hit about 75% of oil imports but no block has been placed on gas imports. However, Russia’s Gazprom halted gas supplies to the Netherlands after Dutch energy provider Gas Terra refused to pay in roubles.

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In the UK, is Boris Johnson’s time up? A vote of no confidence has been triggered and a ballot will be held by Conservative MPs this evening.  Meanwhile, the Bank of England warned that credit card borrowing is rising at its fastest annual rate in 17-years as more households go into debt to make ends meet.

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The European Central Bank looks even further behind the inflation curve than the Bank of England. German ‘flash’ CPI inflation hit a record high in May of 8.7% which will not make for comfortable reading at the Bundesbank. Spain’s CPI was 8.5% but in France it was 5.2% reflecting a €25bn government package and cap on energy prices. Eurozone inflation hit 8.1% in May.

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Days after President Joe Biden warned China against invading Taiwan, it saw the biggest incursion by Chinese fighter jets into its air defence zone since January. Meanwhile, the contraction gripping the country’s manufacturing sector slowed in May with the PMI activity index edging up to 49.6 -albeit this is still marginally in contraction territory. The easing of lockdown measures should drive a pick-up in activity. Beijing will gradually lift lockdown restrictions this week. Over the weekend, the US Commerce Secretary said that President Biden is considering removing some tariffs on China in a bid to lower US inflation.

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Brent oil moved up to $120 on easing of Chinese lockdown measures and the EU partial ban on Russian oil imports. OPEC+ decided to raise output from an additional 432,000 barrels of oil a day to 648,000 from July.

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Finally, the fall-out from the war in Ukraine is far reaching. More than one in five people in Limassol, Cyprus is Russian -some 50,000 people. The island has long served as a banking home for Russian fortunes and is jokingly known as ‘Limassolgrad’. Unfortunately, besides western sanctions on Russia, the Kremlin has imposed its own restrictions on foreign bank transactions. Local Russians are having their assets frozen in a place where the temperature regularly exceeds 30C!

 

Read Last Week’s Alpha Bites – Who’s Swimming Naked?

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.