Energy and Infrastructure Report 2022
Wider Context
Global tensions
Russia’s devastating invasion of Ukraine has caused shock and condemnation worldwide.
The war has also affected global markets, with impacts seen across commodities and stock markets. Following the launch of the invasion, Brent crude oil surged above $100 per barrel for the first time since 2014. Natural gas prices, which shot up in 2021, also saw renewed increases.
Russia is one of the world’s top energy producers. Data from Eurostat, the statistical office of the EU, shows wide-ranging dependence on imported energy, a sizeable proportion of which comes from Russia.
The main origin of primary energy imports to EU in 2020 (Percentage of EU imports) — Eurostat
It is anticipated that Russia’s global influence will reduce
EU countries mainly rely on Russia for supplies of natural gas. Construction of Nord Stream 2, a 1,200 km pipeline running parallel to the existing Nord Stream pipeline between Russia and Germany, was completed in September 2021. Together, the two pipelines could deliver over a quarter of the gas used each year by EU countries. However, other countries noted concern that the second pipeline would give Russia a greater stranglehold over gas supplies to Europe. Germany put the final approval of Nord Stream 2 on hold due to Russia’s actions in Ukraine. Shell also announced that it would end all joint ventures with Gazprom, including its 10 percent stake in Nord Stream 2.
A recent Bloomberg analysis indicated that until recent measures were announced, the EU, UK and USA bought $700 million (£523 million) of commodities from Russia each day. The EU, UK and USA have committed to reduce energy imports from Russia in response to the conflict. On 8 March 2022, the USA announced that it was banning imports of oil and gas energy. The UK said it would phase out Russian oil imports by the end of 2022. The EU set its intention to be independent of Russian fossil fuels well before 2030 and reduce its imports of natural gas from Russia by two-thirds in the coming year.
Commentators expect Russia’s aggression to lead to expedition of the clean energy transition and reduce dependence upon Russian gas. Although alternative sources of liquid natural gas (LNG) could be imported by sea from places such as the U.S. and Qatar, it would take time for infrastructure to be developed and would contradict emissions reduction targets.
Transition from fossil fuels and inflation
While the Russia-Ukraine war is not being fought over resources, it highlights the impact on economies of moving away from fossil fuels. Russia’s economy primarily exports fossil fuels, mineral resources and agriculture. As the world becomes less reliant on fossil fuels, it is anticipated that Russia’s global influence will reduce. Countries with economies reliant on fossil fuels will need to consider alternatives as the transition to net zero carbon progresses.
Before the crisis, UK inflation was forecast to peak in April with the implementation of the updated energy price cap. Now forecasters suggest inflation is likely to remain raised for a more extended period, elevating concerns for the cost of living. Although Russian gas accounts for less than five percent of the UK’s energy mix, there is greater demand across global energy markets, leading to price increases. Rises in food costs seen in recent months are likely to be ongoing; Russia and Ukraine are amongst the top exporters of wheat in the world.
The global economy is still recovering from the COVID-19 pandemic and the Ukrainian crisis is expected to have an impact. Goldman Sachs forecast global growth to be 0.5 percentage points weaker this year due to the conflict, with rising energy prices depressing production and squeezing consumption. There are also worries that the war could encourage/exacerbate other global tensions.
The Ukrainian crisis is escalating some of the issues being seen in the construction industry, such as:
- Increased energy costs are impacting materials and product production
- Oil price rises are impacting petrol costs, affecting deliveries and increasing delivery costs
- The supplies of some materials may be impacted, for instance, cement, bitumen and bentonite are imported to the UK.
End of the red diesel rebate for construction plant and machinery
Red diesel (rebated gas oil) and rebated biofuels can no longer be used in plant and machinery for construction work after 1 April 2022. The change includes all non-road mobile machinery, including excavators, dumpers and cranes. It will also apply to commercial heating and power generation, such as running mobile generators on construction sites.
In the 2020 Budget, the government announced the end of the entitlement to use red diesel and rebated biodiesel for most sectors from April 2022 to meet climate change and air quality targets. Red diesel accounts for approximately 15 percent of all diesels used in the UK and produces nearly 14 million tonnes of carbon dioxide a year.
It is hoped that the end of the rebate for construction plant and machinery will incentivise the improvement of energy efficiency for vehicles and machinery, investment in cleaner alternatives, or the use of less fuel. Some major contractors have already made the switch to cleaner fuels. BAM has committed to running its UK construction machinery using recycled cooking oil. Hydrotreated vegetable oil (HVO) is an advanced renewable fuel derived from waste products.
Laing O’Rourke is also replacing red diesel with HVO in its site plant. HVO will be used until it has a fleet entirely made up of electric and hydrogen-powered equipment. With red diesel being the largest single source of emissions for both companies, the change is positive in the transition to net zero operations.
Red diesel and rebated biofuels attract significantly less fuel duty; red diesel is 46.81 pence per litre less than white diesel. Red diesel is also subject to a reduced five percent VAT rate for supplies up to 2,300 litres.
There is concern from some in the construction industry about the cost impact the end of the rebate will have, particularly given the volatile nature of the current market. Some industry bodies have asked the government to delay the end of the rebate.
The cost uplift is anticipated to impact energy and infrastructure projects more than building projects due to the large amounts of plant and equipment required to undertake such works.
Gleeds has calculated indicative uplift ranges below for different types of activity; the uplifts assume an increase of 46.81 pence per litre for fuel costs: