Soaring wholesale gas prices mean that businesses who last renewed energy supply contracts two years ago are facing a fivefold increase in their bills. An industry expert said this could even tip companies previously on a strong footing out of business, and called for a push to cut demand.
UK gas prices trebled throughout 2021 and have doubled again since the start of this year following Russia’s invasion of Ukraine in February. Current futures market curves suggest a further 40 per cent uplift by December.
Although Russian gas made up just 4 per cent of supply to the UK last year, the country was the biggest single supplier to many European nations, including Germany. Attempts across the EU to find alternative sources of supply have contributed to the steep run-up in prices.
Consultancy Cornwall Insights said wholesale prices are unlikely to return to 2020 levels until 2030.
“Logic dictates that there can only be so long that so many businesses can pay so much more for their energy without knock-on consequences for themselves, their suppliers, and the wider economy,” said Cornwall energy expert Robert Buckley.
The UK should be having the same “essential conversations” about energy use that are already underway in the EU, he added.
“This is not only to ensure we don’t see loss of output, but so we don’t see companies with heritage, roots in their communities and otherwise good prospects washed away."
In recent weeks, German municipalities have turned off heating in swimming pools and external lighting for public monuments as it attempts to build supplies for the winter months, fearful of a potential shut-off in supply from Russia, from whom it received around one-third of its gas last year. The European Commission is also temporarily amending state aid rules to allow member nations to help energy-intensive firms keep the lights on.
Arjan Geveke, director of the Energy Intensive Users Group (EIUG), thinks similar measures should be being put into place in the UK to stave off potential gas shortages.
“If I were the government and [saw] what’s going on in Europe, I would start the public information campaign already to save gas,” Geveke said.
His organisation represents some of the UK’s heaviest power users, such as steel, glass, paper and chemicals manufacturers which employ around 210,000 people and contribute £29bn to the economy. Taking action now would allow more gas to be diverted into storage, which would help to lower costs and ensure adequate supply, he said.
Go with the flow
Contingency plans have been drawn up for the government to impose blackouts both on industry and on households under the government’s “reasonable worst-case scenario”, Bloomberg reported this week. The Department for Business, Energy and Industrial Strategy (BEIS) told the IC this scenario was “not something we expect to happen”.
“We are not dependent on Russian energy imports, unlike Europe,” a spokesperson said, adding that the UK has access to its own North Sea gas reserves and the second-largest liquefied natural gas (LNG) port infrastructure in Europe.
National Grid (NG.) recently published an early view of its winter outlook for the electricity market, which said it is taking action to build network resilience, including “extending the life of coal units and exploring market-based demand side response”.
This would involve incentivising users to reduce demand, particularly during expected peaks, as well as encouraging those with the capability to sell energy back to the grid. The government has also asked Drax (DRX) to keep coal-fired capacity ready for use over the winter.
Typically, the UK exports gas to Europe in the summer months and imports gas through the winter. Nick Campbell, a director who advises energy-intensive clients at consultancy Inspired (INSE), said it was possible that supplies from Europe could be cut off if countries on the continent faced severe shortages, but saw it as highly unlikely.
“I just think that prices would rise to a point where there would be a reaction from either supply or demand that would mean that potential shortfall or blackouts wouldn’t occur,” he said.
The most intensive energy users are already struggling. CF Industries, a US-based producer of fertilisers, temporarily shuttered its two UK plants in response to rising gas prices in September last year. In June, the company said it would permanently close one of these – a plant in Ince, near Chester, sparking around 280 redundancies.
Gas prices can make up about 70 per cent of the cost of producing ammonia, a key fertiliser input and CF Industries’ UK managing director Brett Nightingale said that “as a high-cost producer in an intensely competitive global industry, we see considerable challenges to long-term sustainability” from its local operations. It is focusing operations around its Billingham plant instead.
Heat treatment specialist Bodycote (BOY) said last month that it has been moving away from gas-fired processes, with three-quarters of its European operations now powered by electricity.
It operates in 22 countries and said if energy rationing were to take place in one, “it is likely that we would see our customers weight their production and supply chains towards markets that have greater energy security”.
Other energy-intensive industries such as steelmakers, who often buy energy at spot rates, have implemented temporary shutdowns if prices hit levels at which production becomes unviable, the EIUG’s Geveke said.
Temporary shutdowns aren’t feasible for all energy-intensive users, though. Restarting an aluminium smelter can cost anything between €200mn (£169mn)-€400mn and take months to restart, BofA Securities analysts said in a note on Europe’s energy markets this week.
Edgy hedges
Often, energy-intensive users will hedge a significant part of their power requirements so that they have some clarity over production costs – brick makers Ibstock (IBST) and Forterra (FORT) said last month that they had hedged 90 per cent and 85 per cent, respectively, of their energy requirements for the second half of this year.
This still creates a dilemma when hedges roll off, though. Locking in fixed prices at current rates doesn’t hold much appeal, except for the fear that further disruption to supply could cause spot market rates to hike further. Long-term hedges can also tie up lots of capital, Inspired’s Campbell said.
Another concern is that competition among suppliers appears to be dwindling for heavy power users.
Scottish Power quit the industrial and commercial market in March citing “unprecedented challenges” and British Gas parent Centrica (CNA)’s Business Solutions unit will no longer serve customers requiring more than 10 gigawatt hours of electricity or one million therms of gas, Bloomberg reported last week. Centrica declined to comment. This week, it signed a £7bn liquefied natural gas (LNG) supply deal with US supplier Delfin Midstream, although this will only kick off in 2026.
Suppliers are pulling back as profit margins on contracts to larger customers are often very thin, so the more volatile energy markets are, the greater their risk of incurring losses.
Ofgem said it was investigating reports of supplier pullbacks. It has regulatory levers it can use, including changing licence conditions, to ensure fair competition, a spokesperson said.
Alongside its call for a public information campaign, the EIUG wants a temporary easement of emissions standards to allow companies to run diesel-powered generators to reduce gas consumption and for the government to be prepared to trigger emergency rules to allow for subsidies to be used if gas prices spiral out of control.
Geveke, a former BEIS official, doesn’t expect an immediate response from government until the Conservative Party wraps up its leadership election but he said whoever wins needs to quickly focus their attention on energy security.
“It requires a bit more strategic foresight to think ahead what could come in the winter,” he said. “If [a shortage] does hit you, then it’s too late. You can’t do anything about it.”
