Amid rising global demand for gas and energy and a resultant dwindling supply, the UK has been experiencing rising gas prices across recent months. The energy price cap, which sets the maximum price suppliers in the UK can charge customers on a standard tariff, was risen in October 2021, resulting in around 15 million households seeing their energy bills rise by 12%.
Shortages have only worsened across the Winter months, with a cold Winter across Europe last year also being cited as a reason for reduced stored gas reserves. The energy price cap is set to be increased again in April, with projections forecasting another 50% rise in prices at this time.
Given the tumultuous prices, homeowners have been encouraged to stay on a fixed deal tariff is possible, and to invest in improving energy efficiency in their homes, by way of double-glazed windows and insulation. However, there is only so much these measures can do to soften the blow of rising gas and energy prices, with there being particular concern surrounding the inequality of the impacts with lower-income households being disproportionately disadvantaged by the current market situation.
Commonly cited as a longer-term solution to the current crisis is improving the storage solutions currently available. In 2017 the rough storage facility in the North Sea shut down following a decision by the UK Government to not subsidise the maintenance fees. Before this, the facility provided around 70% of the UK’s gas storage capacity for more than 30 years. Now being touted as a critical mistake and a key reason as to why the UK is facing such unprecedented price rises. The International Energy Agency expects global energy storage capacity to expand by 56% by 2026, to allow for renewable sources of energy to be more relied upon. This is in line with the UK’s gradual transition away from natural gas and towards more renewable energy sources, yet with an untypically windless Summer across Europe, much of the deficit that renewable sources were expected to make up has been left unfilled.
While improving storage may provide a long-term solution for the issue, construction of said infrastructure can take years to complete and therefore more immediate remedies have also been considered. It has been calculated that if taxpayers were set to mitigate the rising costs alone, it would equate to around £20 billion a year to reduce bills by the average £723 they are expected to rise in April 2022. This goes beyond the £12 billion plan set to help the NHS recover from the COVID-19 pandemic and therefore is seen by many to be entirely unfeasible. Ideas to simply face the present rises as they come, hoping that there will be an eventual ‘levelling-out’ of prices has faced equally heavy criticism, notably surrounding how inequal the impacts faced will be and the moral issue of ‘chancing’ such an issue as large and pressing.
The energy regulator for Great Britain, Ofgem, is under some heavy fire itself for failing to act earlier to prevent such huge price spikes as are currently being experienced. Of specific note is a 2017 market review commissioned by ministers written by Sir Dieter Helm, which specifically called for increases in energy efficiency, greater technological innovation to support the rollout of renewable energy and a focus on improving energy storage. All of the said key proposals have demonstrably largely failed to be implemented on a large scale and thus we are presented with the situation at present whereby said failures have only exacerbated the pressures felt across the country.
Finally, an overreliance on imports of energy has equally been cited as a crucial area that needs addressing if energy prices are to be stabilised. As covered earlier, Europe experienced record low wind speed in the summer, which has followed dwindling rates of nuclear power in the UK, following numerous plant closures primarily due to ageing infrastructure. Furthermore, gas supplies from Russia, which typically supplies over 1/3 of European Demand, dropped to a 6-year low in November, with it being cited as a political move in response to Ukraine’s desire to be closer with NATO. Russia has denied limiting gas deliveries to the continent, yet the lower import rates have nonetheless only helped to exacerbate the situation in the UK.
Resultantly, there is no one easy solution to the current energy crisis facing the UK, rather there is little to no viable solutions at all, with it being expected that UK Households will be left out of pocket for years to come. Measures such as those outlined in this report may be taken to lessen the blow, but there is a lack of clarity as to how effective this will be in truly solving the problem rather than just kicking the can down the road.
Analyst: Matthew Ball
Sector Head: Archit Lal