What Has Caused The Energy Crisis?
For those of you who don’t pay for household bills separately from rent, or you’ve simply been living under a rock, you probably won’t know that a big story recently is energy. Over the past week or so, big energy companies like Avro Energy and Green have ended up going bust. This has caused a massive outrage amongst around 830,000 customers who have had to automatically switch provider to a far more expensive option. But why is this happening? Well, to be honest the list is quite exhaustive and long.
One of the reasons seems to be from China hogging quite a bit of gas importation. As economies progressively recover from the impact of the pandemic, countries across the Northern Hemisphere, which tend to experience long and cold winters, have been left with very little gas supplies. Gas prices in the UK have more than quadrupled over the last year, and market experts believe this was due to China’s demand for gas being raised to nearly 10% of its 2020 demand. Consequently, China’s imports of gas have surged by almost 20%, meaning that there have been fewer shipments to Western European countries from Eastern countries like Qatar.
Thisnews is really bad for the UK in particular. The UK’s model for generating electricity typically utilises gas-fired powerplants, at least 50% of them anyway. Just to add to this mess, though, it seems nature doesn’t like us that much either: wind turbines are going through really slow revolutions during some of the least windy months since 1961. The UK is partly to blame, however. Although we are so reliant on gas for cooking, heating, and electricity, the UK has some of the lowest gas storage statistics in Europe. We, in all of our intellect and wisdom, keep a solid 1% of Europe’s stored gas. Yes, I thought the same don’t worry. In turn, Britain has been forced to fire up its coal power stations again, paying millions of pounds to companies to keep making ends meet in the power department.
So, simply following the laws of supply and demand, gas prices have hit a record high. And yes, the supply chain disruptions are certainly not helping. So, of course this costs energy providers more to buy the energy, but due to government caps on energy price increases, providers cannot transfer full price make-ups onto customers. Ofgem is the company that checks energy tariffs twice per year and also set a price cap on how much energy providers can charge users for gas. Now, the price cap is supposed to rise more than 12% from 1 October onwards and will probably rise again next April. But, with winter coming and energy prices still hitting record highs, these price hikes will not come fast enough for smaller energy suppliers to survive through the winter.
It is quite unfortunate really given that smaller suppliers only joined the market after Ofgem dropped the barriers to enter the energy supply market to increase competition for the Big Six suppliers. This isn’t necessarily a bad idea; more competition makes the free market fairer, or at least the public’s perception of it fairer anyway. But, Ofgem has already backtracked on the scheme, setting strict stress tests for companies who wish to become energy suppliers. But this crisis is meant to unwind all of the hard work done by the 2014 easement in just over six months, leaving an estimated 10 companies left in the energy by Spring.
At the end of the day, the UK needs to solve this issue. The impact of the energy crisis has knock-on effects for most other industries, including farming and the food and drinks industry, although I would like to make it clear that the energy crisis is likely only to be a short-term problem. Nevertheless, the Government could start underwriting all of the debt that energy suppliers are inevitably going to fall in during the upcoming months; this would certainly allow smaller companies to get back on their feet again after the winter.
The UK may not ever run out of gas even with its counter-intuitive storage model, but running out of affordable gas would have the same catastrophic effect either way.
by Declan Larkin