The City has spent decades fretting over energy security, but perhaps the answer has been sitting beneath our shoes all along. A surge in geothermal energy projects across Britain is providing a rare bright spot for investors weary of the whipsawing gas markets. While Liz Truss’s short-lived premiership sent gilt yields into a tailspin, a quieter revolution is taking place underground, one that might just offer the fiscal discipline the Treasury so desperately needs.
Let’s be clear: geothermal is not a silver bullet. The levelised cost of energy from deep geothermal wells remains higher than onshore wind, but the virtue lies in its baseload stability. For every megawatt-hour of geothermal power generated, we import one less unit of volatile LNG from Qatar or the US. With wholesale gas prices still 40% above pre-Ukraine norms, that hedge is worth its weight in gold.
The numbers are starting to look respectable. The British Geological Survey estimates the UK’s accessible geothermal heat could supply 20% of national heating demand by 2050. That’s not trivial for a nation where heating accounts for a third of total energy use. More importantly, it is capital-intensive upfront but with operating costs akin to a nuclear plant: low variable costs once the drill bit hits hot rock. For pension funds seeking long-duration assets to match liabilities, this is manna from heaven.
Yet I remain sceptical of the government’s role. The Treasury has a habit of over-promising and under-delivering on energy projects. Remember the fiasco of the Green Deal? Or the carbon capture subsidy that never materialised? The current government’s pledge of £1.2 billion for geothermal exploration sounds grand, but in the context of a £2 trillion economy, it is barely a rounding error. We must ensure this money is spent efficiently, not frittered away on consultancy warm fuzzies.
The market itself is showing the way. Private capital is flooding into the sector. Firms like Geothermal Engineering Ltd are raising funds on AIM, and the projects are real: the United Downs deep geothermal plant in Cornwall is already feeding 3 MW into the grid. That is tiny, but the technology is scalable. The real prize is district heating networks, where geothermal heat can displace gas boilers in housing estates from Southampton to Edinburgh. That is where the mega-bucks lie.
Of course, there are risks. Drilling is expensive and failure rates are high. The geology is not as cooperative as Iceland’s. But with natural gas still the marginal price-setter for electricity, any renewable that operates with near-zero fuel cost is a winner in the ancillary services market. The capacity market payments and renewable obligation certificates might be passé, but the Contracts for Difference regime for geothermal is surprisingly generous.
Central bankers, take note. If geothermal can shave just 1% off the inflation rate by insulating the UK from gas price spikes, that is a gift to the Monetary Policy Committee. Higher energy costs have been the single biggest driver of the cost-of-living crisis. A new domestic energy source is exactly the sort of supply-side reform that fiscal hawks like me have been crying out for.
The bottom line: geothermal is no panacea, but it is a sensible diversification play. For investors, it offers a hedge against the binary outcome of European gas supplies being cut off by a cold winter. For the nation, it is a rare example of industrial policy that might actually deliver a profit. As the Chancellor prepares his Autumn Statement, he would be wise to look down. The answer to our energy woes may be closer than we think.
