Energy companies have approached the government for assistance today in coping with huge rises in the wholesale cost of natural gas, which makes up 40 per cent of the UK’s energy mix. The situation could have knock-on effects for many other industries – but why are gas prices so high?
What’s behind the steep rise in gas prices?
Broadly speaking, the rise is the result of the same shortage-of-everything crisis that is disrupting supply chains around the world; complex systems that were suddenly paused during the pandemic are not easily switched back on. The global pandemic caused the largest drop in energy demand since the Second World War, which affected prices and production, with global gas production falling by 3.3 per cent in 2020. But the slump was followed by a very cold winter in Europe and Asia, which meant there was a rapid increase in demand even before the rise in demand that came with the easing of pandemic restrictions around the world in 2021.
Energy prices in the UK spiked last week as a fire at an interconnector – a large power facility through which energy is imported from overseas – in Kent took 2GW of imported French electricity offline. Other factors have contributed to the shortage and spike, including low wind speeds, the decommissioning of nuclear power plants and the planned closure for maintenance of a number of gas platforms in the North Sea.
The UK is already a net importer of gas, so it’s vulnerable to price shocks elsewhere. It also produces most of its electricity from gas, which makes price rises still more significant.
Is Brexit to blame?
Boris Johnson and Michael Gove promised lower fuel bills for households once Britain left the EU. Gas prices in Europe are also at record highs, but countries in the EU’s internal energy market trade efficiently with each other using linked auctions that balance prices across the bloc. The UK, having decoupled its auctions from Europe, could in theory get cheaper energy than anywhere else – if energy was really cheap. But it isn’t, so the UK is more exposed to high prices.
Is Vladimir Putin to blame?
The UK imports less than 1 per cent of its gas from Russia, so it’s not the case that a big valve marked “UK” has been heaved shut in a basement under the Kremlin. That said, the Russian state-owned supplier Gazprom did not auction extra gas in Europe despite the high demand last winter, and has supplied less gas to north-western Europe this year than in previous years. A group of 42 MEPs have asked the European Commission to investigate Gazprom, suggesting that the squeeze on supply is intended to pressure Europe into speeding up the launch of the controversial Nord Stream 2 pipeline.
Why is there a CO2 shortage?
Britain is, if nothing else, a world leader in bitter irony: the country's over-dependence on fossil fuels means it is now facing a shortage of carbon dioxide. Not the atmospheric kind, which is sadly at its highest level in 14 million years, but the bottled kind, which is mostly produced by two fertiliser plants in the UK, both of which have closed as a result of high gas prices.
The lack of CO2 could lead to shortages of meat and frozen foods, since the gas is widely used by the food industry in refrigeration and delivery.
How severe is the gas crisis?
The government released a statement on 18 September saying it does not consider the UK’s energy security to be at risk. Energy bills for existing customers won’t rise immediately, although bills for around 15 million people were set to rise from October anyway due to the raising of the price cap. The consumers who will see immediate price rises are those who get their energy from smaller, more precarious suppliers. If these companies go under, their customers will be switched to the higher default tariffs charged by other suppliers.
The Octopus Energy CEO Greg Jackson has argued that the “crisis” narrative is being used by the biggest energy suppliers (the Big Six) to make the case for restoring the sympathetic regulation they’ve enjoyed in the past.
But Britain’s over-dependence on gas is a crisis in itself. What the UK needs, as Jackson told me recently, is pricing policy that allows energy companies to invest in ever-cheaper renewable generation, and to leave gas behind.