The Energy Crisis Explained — What Is Causing It, And What Can The Government Do About It?
Energy prices are set to rise this winter due to a shortage of natural gas (Alamy)
The government is set to hold talks with representatives from the energy industry amid growing concerns over the impact of rising gas prices — but what is causing the crisis? And what can ministers do about it?
Why have natural gas prices soared?
There has been frequent concern raised in recent weeks over the skyrocketing cost of natural gas and its impact on energy prices.
Analysis by Imperial College London published by The Guardian earlier this month found that the electricity market price passed the £100-per-megawatt-hour mark last month for the first time since the market was formed in 1990.
This spike has been driven by a 250% price increase in gas since January 2021, with costs to energy providers shooting up by 70% alone since August, according to industry group Oil & Gas UK.
Falling supply and rising demand is the overarching culprit — data from Gas Infrastructure Europe shows that the continent's natural gas stockpile is at 75% of what it was this time last year, the lowest level for the time of year since 2013.The origins of this crisis can be traced back last winter, which was particularly harsh and saw cold weather extend well into April, depleting many natural gas stockpiles.
Europe’s own natural gas supply has also been falling over the last decade — Norway, one of the continent’s biggest producers, has seen its own production fall four years in a row, according to the BP Statistical Review of World Energy.
Production of energy via wind generation has also fallen across the board due to lower wind speeds and calmer weather. This particularly impacts the UK, where wind generation is the second-largest domestic source of electricity.
Some also see Russia’s hand in the crisis. The European Parliament has asked the European Commission to explore the role of state-backed exporter Gazprom in compounding the situation, suspecting them of withholding additional supplies for political reasons.
How is it impacting businesses and consumers?
Natural gas, a fossil fuel which is relatively cleaner to burn than alternatives such as coal and oil, is mainly used for electricity generation, as well as cooking and heating in domestic settings.
Wholesale energy costs make up about 40% of household bills, meaning energy companies are under pressure to increase consumer prices when their own costs soar.
However, companies cannot charge above the price cap set by energy regulator Ofgem.
This is set to rise by an extra £139 to £1,277 in response to the global rise in gas prices, but the increase still may not be enough for some companies to cover their costs.Five small suppliers — Utility Point, People’s Energy, PFP Energy and MoneyPlus Energy — have gone bust since August amid the squeeze.
Suppliers are already restricting the number of tariffs available to new customers, forcing price comparison sites to temporarily cease or reduce their energy switching services.
There are fears that many more companies could shut up shop, with major suppliers Bulb and Green Energy warning they may not survive the winter without additional government support.
Are there other impacts of the crisis?
The impacts of the gas crisis are being felt beyond the energy sector. PoliticsHome reported on Friday that the government was braced for shortages of fizzy drinks, beer and meat products due to shortages of CO2.
High gas prices have caused two key fertiliser plants in the UK to temporarily shut down, leading to a squeeze on the supply of CO2 gas which is a byproduct of the production process.
As well as being pumped into fizzy drinks, the gas is also used for the humane slaughter of animals and as a component in the refrigeration process for meat products.
These shortages risk “cancelling Christmas” according to some industry leaders.
Ranjit Singh Boparan, the owner of Bernard Matthews and 2 Sisters Food Group warned over the weekend that his sector was at “breaking point” amid the CO2 shortages, echoing similar warnings from the heads of Iceland and Ocado.
Some NHS operations are also at risk. Lord Adebowale, the chair of the NHS Confederation urged ministers on Monday to ensure the NHS was prioritised if shortages worsened.
“CO2 is used in a number of interventions in the NHS: invasive surgery and endoscopy for instance, stabilising body cavities so that surgeons can see what’s going on inside,” he told Times Radio.
“So we have to prioritise the NHS in all this because otherwise people will suffer.
What can the government do about it?
The government has stated that any impact on gas supplies is temporary and that it is monitoring the effects this may have on small energy companies.
Kwasi Kwarteng is set to meet with industry leaders on Monday to discuss the ongoing crisis, having hosted similar meetings over the weekend.
The business secretary insisted that “well-rehearsed plans” were in plans to ensure business continuity for customers whose suppliers went bust.
But it's understood that major energy suppliers are calling for the creation of a so-called “bad bank” backed by the government to absorb the cost of customers transferred to their services that they cannot afford.
Currently, customers whose suppliers in the UK go bust are automatically transferred to another supplier and tariff by Ofgem.
But, as many smaller firms go bust, larger companies face millions of new consumers coming onto their books, putting pressure on their services.The government has dismissed calls, however, to drop the energy price cap and green energy levies to help alleviate the pressure on companies.
"The price cap remains in place to protect consumers from sudden increases in global gas prices and it will save them money this winter,” the Prime Minister’s official spokesperson said on Monday.
They said they were not aware of plans dor the cap to be reviewed before April 2022 and dismissed calls to scrap green levies.
"The Prime Minister has spoken at length about the importance of renewable energy sources and his commitment to reducing carbon dioxide emissions here in the UK," they explained.
PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe