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The current UK gas crisis

The current UK gas crisis

Max Alexander-Jones

14/01/2022

Reading time: three minutes

Over the past few months, two large energy companies have gone bust: Avro Energy and Green. Most people however, are unaware of this. The reason why it matters is that these insolvencies have led to around 830,000 customers having to switch providers, most of which are far more expensive.

But why is this happening?

The list of reasons seems to be long and complex.

One of the reasons comes from China, which seems to be hold quite a large amount 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 a paucity of gas supplies.

Gas prices in the UK have more than quadrupled over the past 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.

This news is particularly bad for the UK. The UK’s model for generating electricity typically uses gas-fired powerplants, at least 50% of them anyway. To worsen this, wind turbines are going through slow revolutions due to some of the least windy months since 1961. The UK is partly to blame, however. On top of being so reliant on gas for cooking, heating and electricity, the UK has some of the lowest gas storage statistics in Europe. It keeps a solid 1% of Europe’s stored gas. 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, following the laws of supply and demand, gas prices have hit a record high, something that is made worse by covid-induced supply chain disruptions. Prices are therefore increasing for energy providers but due to government caps these increases cannot be transferred onto customers. Ofgem is the regulatory body that checks energy tariffs twice annually and sets the price cap on how much energy providers can charge users for gas.

The price cap rose more than 12% from 1 October and will probably rise again next April. Despite this, with winter coming and energy prices still hitting record highs, these price hikes will likely not be enough to save smaller energy suppliers.

It is quite unfortunate 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. However, Ofgem has already backtracked on the scheme, setting strict stress tests for companies that wish to become energy suppliers. In just over six months, most of the hard work done by the 2014 easement has been unwound. An estimated 10 companies will be left in the energy market by Spring.

At the end of the day, the UK needs to solve this energy issue. The impact of the energy crisis has knock-on effects for almost every other industry, including the all-important farming, and food and drinks industry. While this energy crisis is likely only to be a short-term problem (and a recurring one every winter) there are important steps that should be taken.

For example, the government could start underwriting all of the debt that energy suppliers inevitably accrue during the winter months. This would allow smaller companies to get back on their feet again after the winter and prevent a return to the status quo of the Big Six suppliers.

While the UK may not ever run out of gas even with its poor storage model, it may run out of affordable gas.