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UK Energy Crisis Leading to Higher Inflation Rate

When the UK gets Gas


Many parts of the world are facing an energy crisis that saw its seeds being planted in the middle of 2021. The current crisis is the latest in a series of repeating energy challenges that have been experienced largely throughout the past half-century. The crisis itself has occurred across the oil, gas, and electricity markets. Still, it is primarily being driven by issues in the natural gas sector, and the UK is particularly hardest hit. This article takes a look at why it is occurring and where things are heading…


Demand for Gas

According to many sources and also discussed by the Energy Savings Trust, demand for gas – the driving force behind the current energy crisis – rebounded as the global coronavirus pandemic subsided and commerce and industry went back to their usual activities. Perhaps somewhat inauspiciously, sustainable sources of power at that time were allegedly inadequate (such as solar and wind) and therefore extra pressure was placed on traditional sources.


Added to this still, was the fact that the main consumers of natural gas – North America and Europe primarily but largely the northern hemisphere in total – were entering the colder months of the year, and demand increased there too. The primary driver behind the crisis (and discussed by The Independent) is the worldwide wholesale price of natural gas.



Figure 1: Uses of Natural Gas (adapted from Wikipedia)


The reason why the natural gas market has become so impactful on the wider energy question is down to the ubiquity of its uses, as shown in figure one. The highest profile use is that which is employed domestically. Manifestly, gas is used by the general population (in northern and developed hemispheres) to heat the home and cook.


Another well-known and consequential utility of gas is in the generation of electricity in power plants. But other more widely engaged and lesser-known uses are highly impactive. For example, it is estimated that at least half of the population of the world is fed foodstuffs that are grown with fertilizers derived from natural gas.


Equally, natural gas is important to production in various industries such as plastics, synthetic oils, fabrics, glass, steel, and paint.


Political Will


Geopolitics has played its hand too. Around 60% of the natural gas used in the UK comes from non-domestic sources. These tend to be from geographically close suppliers such as Norway and Holland, and then ones further afield such as Qatar and the US.


It is estimated that some 5% of the UK’s imports come from Russia. An unavoidable reality is that the bulk of the UK’s gas supplies is subject to the repercussions of geopolitical wrangling taking place in other parts of the world. The obvious potential impact is the havoc unleashed by Russia when it invaded Ukraine.


Some of the largest natural gas fields are located in Russia (the Guardian states how around 40%-50% of the European Union’s gas comes from there) and therefore both that government’s capacity and political will to export gas (as well as other natural resources) can have a profound bearing on the global marketplace and its critical supply chain.


What with both the disenfranchisement that Russia feels toward much of the rest of the world, as well as the large swathes of the world isolating and sanctioning Russia for their actions, something like an energy crisis seems to have been almost inevitable.


The current situation both for the UK and the wider international community has also brought to bear another reality that went from being a long-standing and cumbersome issue to a major challenge and an aggravator requiring immediate resolution: sustainable energy sources.


Had a country such as the UK embraced greener energy solutions sooner – as eventually and inescapably has to happen regardless – the exposure to the global energy crisis would have been much lessened. In turn, the wider impact on the country’s economy would too, have been reduced.


According to the climate think tank EG3 (and reported on by the Huffington Post), homes in the UK are the least energy efficient in Western Europe. So, on top of the necessity to import the bulk of its natural gas from abroad, combined with the reliance on gas to heat the majority of UK homes, the homes themselves are harder to keep warm.


HP goes on to state that when under the same environmental conditions, a UK home will on average drop by three degrees in temperature compared to a German one that will drop only by one. Other issues have also played their part: as discussed by The Guardian, due to the colder 2020/21 winter in the UK, stockpiles of natural gas were depleted.


There are, apparently, a whole host of smaller problems that have come together to conspire and aggravate the situation: greater gas demand in the summer of 2021 due to nuclear power outages, the HDVC Cross-Channel electricity interconnection with France catching fire, and the closure of the Rough gas storage facility affecting the ability to store reserves.


Brokers


By the end of 2021, the wholesale costs of natural gas had ballooned (as pointed out by CNN). 31 of the smaller UK energy providers failed and collapsed. These providers offered more competitive prices to their customers and when they disappeared from the marketplace, those consumers were transferred to the larger and more traditional energy providers.


The result was that their energy bills increased. The smaller providers acted more as middlemen than genuine suppliers and purchased gas wholesale and then sold it on to consumers, in much the same way as a broker might. The government in the UK imposes a cap on the price of energy (for a variety of reasons).


When the wholesale price of gas eclipsed the price at which these brokers could sell the gas to consumers, naturally and ineluctably, businesses began to fail.


Europe has been protected from these market forces to some extent because the energy market there has tighter regulations buffering the consumer against sudden hikes in pricing. The UK market may well have imposed caps to offer some protection but it is reassessed and potentially adjusted adversely every six months which means bills rise more evenly in line with the wholesale cost of energy.


More than this, as of the middle of August 2022, the UK government was planning to alter the interim assessment of the caps to three months, so the protection offered to the end consumer is likely to become more dilute.


The transition now in effect is one where it is growing easier for suppliers to pass on increasing prices of wholesale gas than in the past. The obvious and inevitable consequence over time is that household energy bills are going to rise, perhaps indefinitely…

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