- North Sea gas production improving but supply pressures remain
- Business lobby groups call for more support from government
The UK energy crisis ramped up in its second week as the government left smaller power companies to fail while the impact of skyrocketing gas and wholesale electricity prices reverberated down supply chains.
Further out, UK companies look set to be hit by higher power costs all winter, even as the government has swung into action to deal with the ramifications of gas prices hitting decade highs. The British Chambers of Commerce (BCC) said companies faced a rush of higher costs and that higher energy bills would hit hard.
Electricity costs tripled in the 12 months to August 2021, so this is not a new issue, leading to questions over why measures were not in place to protect businesses as there are for consumers, who have the energy price cap. “The energy price crisis risks aggravating the already severe supply chain predicament and could force some firms into a more permanent reduction in their operating capacity,” said BCC head of economics Suren Thiru.
The most pressing issue for consumers, aside from energy retailers going bust, was set to be the CO2 shortage and its impact on food supply. Industry bodies, especially those representing meat producers, were vocal about the immediate risks from fertiliser company CF Industries (US:CF) stopping CO2 production due to natural gas prices, as it provided 60 per cent of the UK’s supply.
The government has now agreed to subsidise CF's power costs. The restart will take several days, the company said. Chief executive Tony Will said CF would work on the “development of alternative suppliers of CO2 for the UK market” with the government.
The British Poultry Council, whose members use CO2 to stun birds, said this was “the start of a long road ahead”. “The whole poultry meat industry is working tirelessly to avoid food shortages or the worst-case scenario of empty supermarket shelves,” said the council’s chief executive, Richard Griffiths.
The causes of the energy price spikes – lower gas supply and wind turbine electricity generation – have seen renewable energy come under fire. The head of the International Energy Agency (IEA), Fatih Birol, who called for a stop to new oil and gas projects earlier this year to help stop climate change, said it would be “misleading to lay the responsibility at the door of the clean energy transition”.
Birol said the supply issues were not down to any one factor, although his statement called on Russia to “do more to increase gas availability to Europe and ensure storage is filled to adequate levels” before winter hits. The IEA said gas-fired plants would remain key to energy markets that have large swings in demand between seasons.
The UK’s power demand ranges from 26 gigawatts (GW) in the middle of summer to over 37GW in February, according to the Balancing Mechanism Reporting Service.
Unhedged
Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, was less willing to hand state money to energy retailers, whose models of undercutting big players were blown apart by the higher wholesale prices. He said the government was determined to “help protect customers from rising global gas prices” through the energy price cap, but would rely on regulator Ofgem’s existing framework to support customers of failed retailers rather than rescue companies such as Bulb and Octopus Energy.
Last week, Centrica (CNA) said subsidiary British Gas had stepped in to take on the customers of failed retailer People’s Energy, as part of Ofgem’s ‘supplier of last resort' process. An industry levy will cover the added energy costs for British Gas, as well as the refund of credit balances.
Centrica chief executive Chris O’Shea said his company was “a responsible energy supplier built on a sustainable model”, which was “well-hedged for the coming winter”.
Lothar Mentel, chief investment officer at Tatton Investment Management, said the smaller companies had been caught out “like any speculator”.
The business model of these companies involved selling energy cheaper than competitors but without certainty over their own costs. The “non-market environment” where a price cap limits flexibility in terms of sales means they were “caught swimming naked” when spot gas prices surged, Mentel said. Bigger players generally hedge production so when prices go up they are insulated.
At the same time, Energy UK chief executive Emma Pinchbeck told parliament's Business Select Committee that even "well-hedged" retailers were worried by the situation as well, and said the sector was "so fragile" that retailers with stronger foundations were unsure about rescuing the customers of failed companies.
Additionally, there won’t be a quick fix even if wind output climbs and gas supply increases, according to climate-focused research firm Ember. “With winter approaching, the escalation in gas prices looks set to continue,” a report from this week said. Ember said carbon offsets had also increased in price in the year to August, from £42 a tonne to £66 a tonne, the gas price rise was far more influential on wholesale prices climbing. Octopus Energy noted these offsets also climbed in September.
Consultancy Wood Mackenzie said North Sea output was already climbing, with a 72 per cent increase between July and August, but the usual levers such as higher imports in times of lower supply were not available. "Continental Europe has been struggling to fill its gas storage ahead of winter and will continue to face tight market conditions throughout winter," WoodMac said.
