Why have energy prices gone through the roof?

Why have energy prices gone through the roof?

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And what should you do about your business energy supply?

Consumer champion Martin Lewis, founder of moneysavingexpert.com, always advises people to shop around for the best prices, whether it is energy, mortgages, loans or broadband. So you know that something is seriously wrong when his current advice is to not bother looking for deals when it comes to home energy prices.

In the UK, energy prices for homes are capped, currently at £1,277/yr for a typical household, after a painful £139 price hike on 1st October.

The global gas prices have risen so high that it is impossible to find a domestic energy package that is lower than the price ceiling. While the cap protects consumers, it also means energy firms are supplying gas at a loss – hence the wave of providers going under.

Businesses have an entirely different problem – they are completely at the mercy of the market. Usually business rates are cheaper than domestic bills, largely because business energy is bought in bulk and you would normally buy enough in to last the duration of a contract. However, if your business isn’t on a fixed rate, then energy companies are passing on the price hikes, and the increases are unprecedented.

 

Why are global prices so high?

People are familiar with the phrase ‘a perfect storm’. So many factors have combined to send prices soaring, that is more like a storm with an added hurricane and typhoon.

At the heart of the problem lies our reliance on gas. Back in 2012, the International Energy Agency in Paris predicted that over the following 10-15 years, there would be a ‘Golden Age for Gas’ – and it has been proven right.

Although, the general movement has been towards renewable energies, the infrastructure wasn’t – and still isn’t – in place. Gas has been seen as a ‘transition’ fuel, a less-bad temporary alternative to green energy. Although it is a fossil fuel, gas produces only half as much carbon dioxide as coal.

Coal is being phased out across the world, but renewables can’t yet match global demand. Which has lead to a growing dependency on gas.

 

The reasons for the price hikes:

  1. The pandemic.

The world locked down, planes were grounded in airports, cars remained parked in driveways and businesses pulled down the shutters. Then suddenly, everything burst to life and everyone needed fuel – all at the same time.

  1. Not windy enough

Wind levels in Northern Europe have been unusually low this year, which means the turbines have slowed down. In the first half of September this year, energy from wind in Germany was 50% below the previous five-year average. Wind turbines generate about 10% of Europe’s power.

  1. Not warm enough

Europe had a relatively cold and long winter, so people have used more energy heating their homes. Storage levels have been low as a result. European countries ran down reserves, leaving their stocks 25% below the historic average.

  1. Reduced supply from Russia

Europe is heavily dependent on gas pipelines from Russia, which is never a good place to be. The Russians are exerting pressure for the new Nord Stream 2 pipeline to be approved, which will be a huge money generator for them. A gas shortage would certainly incentivise European leaders to sign it off. A group of European politicians has called for an investigation into whether the Russian state gas company Gazprom has been deliberately stemming the flow of gas into Europe.
There are other factors. Russian supply has been affected by a fire at a processing plant in Siberia and the terrible winter has reduced Russian output and increased demand.

  1. Chinese competition

Pipelines are not the only routes for fuel. One of the biggest changes to the global energy market has been the increased use of Liquefied Natural Gas (LNG) which takes up about 1/600th the volume of natural gas in the gaseous state – and can therefore be transported by sea-faring carriers. In the past few decades, the global LNG market has quadrupled in size and doubled its share of global natural gas trade.
This opens up global sourcing options, which normally would be beneficial. Until, that is, the gas becomes scarce and a fierce bidding war erupts.
China’s demand for energy has soared recently, exacerbated by flooding in the north of the country which closed 60 coal mines. There have been severe energy shortages in 20 Chinese provinces this autumn, forcing the government to ration electricity during peak hours. Factories have suspended production and the Chinese government is concerned about its industrial output.
The answer has been to buy up as much of the global LNG stock as possible, with stories of carriers ignoring existing contracts and diverting their shipments to China. Money talks!

While the world has been hit by soaring demand and strained supplies for gas, Britain seems to be suffering more than most. Why is this?

 

Why is Britain suffering more?

  1. Our energy mix

There are wide variations in how countries source their energy. France uses a relatively high level of nuclear energy, Norway and Switzerland produce high levels of hydro power.
Countries heavily reliant on natural gas and wind have been hardest hit this year. Britain, which derives about 40% of its energy from natural gas and 20% from wind turbines has suffered more than all other European nations.

  1. Brexit

Leaving the EU did not create the gas price crisis, but has made it harder to mitigate the impact. Continental Europe has large, interconnected, integrated and competitive markets for gas and electricity which help to keep a check on price rises. This partly explains why continental energy prices tend to be between 20 and 40% below UK levels.
With more sources of supply and more storage capacities, EU nations are less vulnerable to market shocks.

  1. Less storage

The UK’s stores hold enough gas to meet the demand of four to five winter days, or just 1% of Europe’s total available storage. The Netherlands has capacity more than nine times the UK’s, while Germany’s is 16 times the size.
The paltry storage capacity wasn’t help when ‘The Rough’ storage facility was shut in 2017. Owned by Centrica (the parent company of British Gas), the facility had provided 70% of the UK gas storage capacity for more than 30 years. The government decided not to subsidise the costly maintenance and upgrades needed to keep the site going.

  1. Fire and breakdowns

With so many economic, political and environmental factors combining to create such chaos, the final nail in the coffin was sheer bad luck.
In September, a major fire forced the shutdown of one of Britain’s most important power cables importing electricity from France. The fire has halted electricity imports via the 2,000 megawatt power cable until March next year.
Meanwhile, several North Sea platforms are currently closed for maintenance works which had to be delayed due to the pandemic.

 

What should you do?

All of the factors which have pushed prices sky high have one thing in common – they are out of the hands of a typical SME. Local businesses are powerless in the face of global and environmental pressures.

So what can businesses do? Just try to make the best out of a bad situation!
There are no cheap deals, but some deals are less expensive than others. You can ensure you are getting the best possible value for your business. And the best way to do this is to talk to an expert; someone who knows the market and can offer you informed advice.

Drop me an email (felix.mushore@rubixvt.com) or call me on 01273 980 619 for an informal conversation about how you can get the best outcome for your business.

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CLICK HERE for the Rubix Jargon-Free Guide to Business Energy

Sources:
Sir Phillip Lowe – https://ukandeu.ac.uk/gas-prices-in-the-uk/
CNN – https://edition.cnn.com/2021/10/11/economy/china-power-crunch-economy-intl-hnk/index.html
The Guardian – https://www.theguardian.com/business/2021/sep/28/uk-wholesale-gas-prices-highs-winter-energy-crisis-suppliers
The Economist – https://www.economist.com/graphic-detail/2021/09/20/what-is-behind-rocketing-natural-gas-prices