Drivers of the current energy crisis

The energy crisis is an unprecedented and everchanging phenomenon driven by various macro factors worldwide. Subsequently, this has impacted the cost of living, which is at an all-time high at 11.1% inflation as of October 2022.

This is a crisis that has drastically affected both the commercial and domestic sectors alike. National Energy Action estimates that the number of households in fuel poverty across the UK is 6.7 million, as of the start of April 2022 and this was 4.5 million last October, an increase of nearly 50% in 6 months.

With all the noise, it can be difficult to decipher exactly what information is true and understand the determining factors that have led to our current crisis. Rukhsana Faiz, Sector Director for Energy & Utilities is keen to help people understand the multiple drivers behind the current situation, which are:

1. Post-Covid recovery – China’s post Covid economic recovery also coincided with increased energy demands from Asia and Europe too. As China’s demand for energy is a key driver of global energy prices, an increase in their efforts to recover from the Covid pandemic resulted in increased gas demands from China and fewer gas shipments arriving in Europe from the Middle East.
2. Weather conditions – Cold weather conditions in early 2021 in parts of Europe, caused European gas storage levels to drop and this caused a knock-on supply issue and led to gas prices being increased.
3. The Russian factor – Following Russia’s invasion of Ukraine, the wholesale price of gas reached record highs in Britain. As gas shipments have been diverted to China, flows of pipeline gas from Russia to Europe have not made up the shortfall and decreases in overall Russian supply to Europe have caused a rising global demand and hence, this is driving the increase in gas price.
4. Electricity generation – In the UK, gas-fired power plants generate approximately half of the UK’s electricity. This reliance added to some other issues caused challenges in the UK electricity system. UK’s nuclear power plants supply around 20% of electricity and some of these ageing nuclear power plants have been forced to undergo maintenance. A main power cable which is used to import electricity from France was shut down due to a fire. Less wind led to the UK’s wind turbines slowing down, thereby generating less electricity in some months versus previous years. To support this pressure on the electricity system, coal fired power plants have been used as a temporary measure.
5. Reliance on imported energy – UK imports a significant volume of gas but unfortunately, has some of the lowest volumes of gas storage in Europe, with the UK holding under 1% of Europe’s gas. These two factors have created market volatility and increased vulnerability to price fluctuations particularly within the domestic market. The domestic heating and electricity prices have increased because of these factors, along with the UK currency weakness against the $US.

However, more recently, some measures to address these issues were announced in the Autumn budget such as:

• The Energy Price Guarantee (EPG), which will be maintained through the winter, limiting typical energy bills to £2,500 per year. From April 2023 the EPG will rise to £3,000 for 12 months.
• Energy security stabilisation through the delivery of new nuclear power, including Sizewell C (subject to final agreement), and the roll-out of further clean renewables, including wind and solar. The UK government’s £679 million investment in Sizewell C will support the project’s continued development and is set to generate electricity for 6 million UK homes by 2031
• A new national ambition to reduce energy consumption by 15% by 2030 (against 2021 levels) with £6bn funding being made available from 2025 to 2028 to drive improvements in energy efficiency and a new Energy Efficient Taskforce (EETF) who will be responsible for delivery.

Whilst there were a number of welcome, immediate measures announced we need to ensure the focus stays on energy market reform now to create a future where we have greater resiliency to the macro factors that can affect the energy market and ultimately, less volatility for consumers.