In today’s Exponential Investor:

  • Your heat wave is worse than mine
  • Houses were built on the idea energy would always be cheap
  • The energy crunch will get worse, hot days or not

Of all the things I thought I was going to say today, I never expected I’d start off by comparing my heat wave to yours.

The BBC tells me that London recorded its first ever 40-degree Celsius temperature on Tuesday, beating the record of 38.7 degrees Celsius in 2019.

Yikes!

I live about 20 minutes from the set of where Neighbours is filmed, here in Melbourne where the weather is milder compared to anything in, say, Alice Springs or Darwin.

But when those 40C days hit – take it from this Australian – there’s nothing to do but lay on the floor and not move.

Yet, in what may be a betrayal of my country, I’m here to tell you that your 40-degree day trumps any similar temperature in most of urbanised Australia.

Why? Blame your house.

UK homes weren’t designed for hot days like this. Neither are your trains and tracks, or shops or offices.

Most  homes and offices in the UK are constructed to trap heat. As your climate in the UK is on the cooler side, you use most of your energy keeping the house warm. So, it has generally made more sense to keep the heat in than to let it out.

The highly urbanised nature of cities creates what are called urban heat islands. Heat islands absorb heat, essentially making the surface temperature of the ground hotter than the air.

Not only will it take longer for the temperature to drop inside your house, but the landscape around you traps heat too.

You can thank the oil shock in the 1970s for that one.

Higher energy prices meant few could afford to run their oil heaters.

It caused the overhaul of building codes, and saw the introduction of insulation between external walls, and while not mandatory, double-glazed windows became popular for those who could afford them.  

Which is why you feel like a Sunday roast right now…

… but it is going to get cold soon.

Cheap and suitable for stockpiling

Let’s step a little further back into history.

Prior to the oil shock, the UK was stepping up its exploration in the North Sea. The Continental Shelf Act in 1964 encouraged exploration for hydrocarbons, like oil and gas.

It didn’t take long before a massive natural gas field was discovered in the North Sea in 1967.

Even before the UK’s massive oil reserves were discovered, the new gas field began to change the course of history.

The new offshore natural gas reserves meant that the UK could shift away from “town gas” to natural gas. For those who are too young to remember, town gas was generated by coal power plants and piped to people’s homes. Natural gas is the same composition as town gas, but it is formed in underground rock formations.

It made sense then. Only 5.4% of the UK primary energy consumption came from gas in 1970. For the few who did use gas heating, the argument was that natural gas was “safe, cleaner and a green way” of using energy.

Thanks to the wonders of the internet, I found the Gas and Electricity Bill put to Parliament in 1968, discussing the benefits of converting the UK population from town gas to natural gas, with then Minister of Power, Mr Raymond Gunter, saying:

“In the longer term however, it will be cheaper to convert everybody to take North Sea gas “neat” rather than to put up the additional reforming plant which would be needed to convert all this gas to towns gas. Moreover, by virtue of the higher calorific value of the natural gas, the capacity of mains and storage is greatly increased.”

The clean and green argument may have swayed the public, but the reality is and was that natural gas was cheaper.

The reality was that it was significantly cheaper to use natural gas for homes in the UK then it was to keep the coal-fired power plant running.

And as Gunter noted, this type of gas was more suited storage wise.

But… that’s about to be a problem too.

The energy crunch is gathering momentum

The heat trapped inside your home today will be a distant memory come November.

Houses that were built to withstand the cold were built on the condition that there was abundant cheap energy available to keep them warm.  

Even though the energy crisis triggered sensible policy decisions in the 1970s, subsequent government policies have chipped away at this slowly.

The cost of energy was increasing long before the invasion of the Ukraine. There’s been significant underinvestment in the North Sea in favour of the renewable energy sector. Renewable energy is still a new technology and makes up a fraction of the energy needs in the colder months.

To boot, UK governments closed down large storage facilities on the basis that a secure supply could come from friendly trading partners.

Compounding all of this, is the problem that renewable technology is still not entirely reliable. Solar power requires the sun to shine; wind power, that the breezes blow. Worse still, China is the biggest manufacturer of solar panels, and most of them come from one factory.

Even if geopolitical relations hold up – a hypothetical fire in one of the major factories wipes out a chunk of supply.

All the supports that were assumed to be in place are eroding, and this winter means we are going to be faced with problems that the governments of 50 years ago were hoping to avoid: an energy crunch.

The worst isn’t here yet, but investors should ready their wallets. The opportunity is coming.

Until next time,

Shae Russell
Co-editor, Exponential Investor

PS About that opportunity…

I’m hosting a free event on Tuesday 26 July to show you how to grasp it. I believe we’re approaching an inflection point… we’ve been under-invested in critical resources for far too long, and the chickens are coming home to roost. It’s bad news when you’re putting petrol in your car and seeing empty shelves in the supermarket… but I think there’s good news heading your way, too. News so good, it holds potential for commodity stocks and triple digits to be in the same sentence… but I’m saving all the details for my special briefing! It’s free for you to join me – click here to grab your place.