The UK energy crisis – A perfect or not-so perfect storm?
From the start of this year, seven electricity suppliers have gone into liquidation as result of a meteoric rise in wholesale electricity prices.
It is expected that, if current market conditions persist, only 10 out of the 70+ electricity suppliers in the UK will survive until the end of the year without government bailouts. When trying to understand how this energy crisis has arisen, it is essential to first appreciate how the UK generates its electricity.
Over the past year, 40% of the UK’s energy was generated from gas combined cycle power plants; 17.7% from onshore and offshore wind farms; 17% from nuclear power plants; 1.8% from coal, and the remaining from other sources. Almost all of these generation sources have faced serious problems which have collectively contributed to the development of this crisis.
At the heart of the energy crisis has been a global shortage in natural gas, and the premiums that have been subsequently priced into the market as concerns surrounding its supply have grown. This shortage has been attributed to a multitude of causes. The first being the especially cold winter last year, which increased consumption of natural gas for heating and reduced gas storage levels across Europe and around the world. Normally, gas reserves would have been replenished over the summer, however many gas producers had to undertake a backlog of overdue maintenance following the lockdowns, resulting in a reduction of gas production during this period. Following the decommissioning of the Rough Gas Storage facility in the North Sea in 2017, the UK now has very limited gas storage to protect it from short market fluctuations.
In addition, Russia, who normally supplies over 40% of the EU’s gas, has more than halved its exports to Europe in the past year which has put even more strain on the region’s gas supply chain. This has had a knock-on effect on the UK, as almost half of its gas supply comes from Europe.
Ultimately, these market conditions have caused wholesale gas prices to quadruple over the past year. The UK was particularly exposed to this price shock due to 40% of its electricity generation being reliant on natural gas which has, in turn, significantly contributed to the rise in wholesale electricity prices.
To compound this crisis, unusually calm weather conditions in recent months have reduced the amount of electricity being generated from offshore and onshore wind, and maintenance at nuclear power plants has reduced their capacity to generate electricity too. A coal-fired plant was actually brought out of standby to help support the UK grid network during the sustained period of low wind generation.
Normally, in situations where the UK’s grid network is strained, interconnectors which link the electricity networks of the UK and Europe can be relied on to support each other when needed. However, a major fire at the IFA interconnector with France took out one of these crucial links in September, causing a massive spike in short term UK power prices. The full capacity of the site is now unlikely to be online until March 2022, which means that this support mechanism is going to be limited over the colder seasons.
All of these market situations have combined to drive up the wholesale price of electricity to over £350/MWh at its peak, which is 700% higher than the 10-year average of £45/MWh. This has been devastating to high users of gas and power, along with energy suppliers, who buy electricity at wholesale price, and sell to consumers who are protected by a government-imposed cap on electricity prices. This prevents electricity suppliers from transferring the burden of wholesale electricity price shocks onto consumers, leaving many suppliers vulnerable to being squeezed out of the market. Whilst the government has announced an increase on the electricity price cap to help relieve pressure on suppliers, there is no certainty that this will prevent many suppliers from folding.
With winter fast-approaching, natural gas demand is expected to increase putting more strain on the UK’s wholesale gas and electricity market. To discuss how this is impacting your business as a user or generator of gas and/or electricity, please get in touch with Helen Melling, Senior Energy Specialist at Carter Jonas on 07467 335587 or helen.melling@carterjonas.co.uk.
View this month’s energy news >>
View the latest energy market update >>