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Britain’s Energy Price Crisis: Clade’s View

Published Sept 2021.

Turn on the news and you’ll have seen a decidedly dramatic series of headlines over the past few weeks. Massive energy price rises and the collapse of several small and medium sized energy suppliers, queues at petrol pumps, food shortages and more.

The causes of these issues vary from long-term structural issues, short-term demand shock reactions and Brexit-related labour market changes.

The energy price crisis in particular has been caused by several long, medium and short-term factors coming into play at the same time. It’s been coming down the tracks for a while, and touches on a couple of things we at Clade consider extremely important – the decarbonisation and security of Britain’s energy supply.

What has caused the UK’s energy price crisis?

Since the start of the year wholesale energy costs in the UK have risen by 250%. Even since August they’ve risen 70%.

This is largely due to constraints in the natural gas market, upon which the UK is far too reliant. 85% of homes in this country are heated by natural gas, and that’s not the only use for it – domestic heating accounts for just 38% of our gas demand. 29% of the gas we buy goes to electricity production and 11% goes to industrial and commercial use.

Wholesale gas prices have risen since the start of the year for a few reasons:

-Pent-up demand as global COVID lockdowns ease. Economic activity has restarted with a lurch, and global economies are hungry for natural gas.

-This followed on from an especially cold 2020-21 winter, which meant more gas was used to heat buildings and therefore we had fewer reserves.

-There have been some suggestions of deliberate gas price manipulation by Russia, which is being investigated by the European Commission.

-A patch of calm weather in the UK restricting wind turbine output, meaning less wind energy has been available to supplement what we get from burning gas.

-Global trends including an increased demand for liquified natural gas in Asia, which has meant less has reached Europe.

-And finally, fire has damaged cables that we use to import electricity from France which has added some short-term disruption to the electricity supply.

Due to the UK’s energy price cap, plenty of small and medium energy suppliers have been unable to cope with the sudden increase in wholesale prices and have gone under. There have also been significant knock-on effects across other industries – notably in food and drink. The gas price rises caused some major fertiliser plants to close, and those fertiliser plants are used to supply CO2 to the food and drink industry. CO2 is used for the humane slaughter of animals, drink carbonisation and to extend product shelf-life. That’s how a rise in gas prices can result in no meat on supermarket shelves.

What lessons do we need to learn from this?

Most of these issues will resolve themselves in the next few weeks and months, and things will go back to relative normality. But this entire experience has thrown light on some serious structural weaknesses with the UK’s energy supply.

Our reliance on natural gas puts us at the mercy of global conditions that we have no hope of controlling. If China wants more gas, or if Russia decides they don’t want to supply it to Europe, there’s nothing we can do about it. Prices will rise and we’ll have to pay up if we want warm homes, electricity and full supermarket shelves.

These global conditions are only going to get more unstable as global warming accelerates. There are bound to be more system shocks which have the potential to break down the global geo-political order and cause nations to compete more directly and aggressively for scarce natural resources such as oil and gas.

We therefore MUST reduce our reliance on a global energy supply chain and diversify our energy production across wind, solar, hydro and nuclear. We must build better energy storage and have more flexible domestic production capacity to better enable us to mitigate the effects of future energy price rises.

We must also accelerate the electrification of the heat and drastically reduce our use of natural gas, both because of the climate emergency and geopolitical necessity. Any building owners that do this now will be better equipped to cope with future energy market fluctuations. We’ve written more about why we have to act now on decarbonisation here.

The Energy Crisis affects everyone from home owners to businesses. For more information please get in touch.