Last reviewed 19 October 2021
Escalating food prices, energy bills, and political tension accompany a recent jump in the cost of gas. With no other contender mature or agile enough to take its place, natural gas occupies a unique position in the UK’s energy sector. Jack Barwise explores the current energy crisis, the role of global gas shortages, and what businesses can expect in the coming months.
It was only last year that renewable energy, or “green energy”, surpassed fossil fuels for the first time as the biggest source of electricity generation in the UK. The gap was only 1%, but gas, coal, and oil were pipped to the post by renewables like solar, biofuel, hydro and, especially, wind.
The UK is a leader in wind energy. In 2020, virtually a quarter of the UK’s electricity was generated by wind alone. In May this year, one Friday morning saw previous records blown out the window as turbines generated 17.7GW — about two thirds of the UK’s electricity mix on the national grid.
That’s a head-turning figure when you consider the fact that the UK relied on coal for roughly 40% of its electricity generation as recently as a decade earlier. Back then, wind power was considered a voguish expense, one that barely contributed 3% to the grid even when combined with the figures from solar.
Innovation and the need to invest in more sustainable alternatives won out, however, the UK’s now swelling onshore and offshore wind capacity has enabled wind power to outstrip every other source of electricity generation, with the exception of gas.
Low wind and calmer weather, then, have a cumulative effect on that increased capacity. This year, for the most part, has been characterised by exceptionally calm and dry weather. That means it’s not just wind power that has suffered in 2021, hydro has also struggled to meet expectations.
Wind and hydro shortage
In 2021, the UK faced a wind and hydro shortage; that’s one way to rethink the energy sector as we progress towards a “greener grid”.
For households and businesses relying on the national grid for their energy needs, that’s part of the context that makes up the current energy crisis.
It’s not just in the UK either, that context stretches across Europe. With calmer weather a theme throughout the continent this year, supply hasn’t met the demand for green energy.
These dramatic fluctuations invariably lead nations to look for other sources of energy to fill in the gaps. In the UK especially, that means relying more heavily on burning natural gas to generate the electricity necessary to keep the lights on and the economy growing.
Natural gas is the UK’s predominant source of electricity generation. The country already has the infrastructure in place to rely more or less heavily on burning gas to meet its energy needs, depending on unplanned shortages and the overall availability of other sources.
However, the most immediate problem with this temporary solution is that a global shortage of natural gas has seen wholesale gas prices soar by 250% since January.
But if renewable energy can’t meet the demand in 2021, what about nuclear?
Across the north-west of Europe, nuclear plants are ageing. Many face almost inevitable decommission in the coming decade, and many have already been phased out.
Phillippe Vié, Global Head of Energy And Utilities at Capgemini, said last year:
“The nuclear industry in Europe will face numerous challenges ahead as the volume of reactors entering into decommissioning is booming.”
In the UK, just 15 nuclear reactors contributed roughly 20% to the electricity mix on the national grid last year. As nuclear plants have gradually been shut down, the UK’s nuclear capacity has waned by about 21% since 1999.
The last nuclear power plant to be built in the UK was Sizewell B, on the Suffolk coast, in 1995. There are currently only two new reactors under construction, at a single plant in Somerset.
Why is gas the only alternative right now?
It’s not just nuclear facing reduced capacity. The government has promised that coal, once a giant in the energy sector, will be phased out entirely by 2025. There currently remains only three coal fired power plants generating electricity in the UK, which this year contributed around 2.2% of the country’s electricity mix.
Eliminating coal is part of the UK’s strategy to meet its net zero carbon emissions targets, but this year’s slow-burning energy crisis has caused the country to rely more heavily on its old energy infrastructure. That means more reliance on imported fossil fuels.
As businesses throughout the UK reopen and ramp up their operations following successive lockdowns, natural gas has been the most viable option for meeting increased energy needs, despite higher wholesale prices.
What’s behind the global gas shortage?
Cold winters, increased consumption, and production problems all over the world have left stores of natural gas emptier than usual. While the UK has historically been a large producer of natural gas, that production has been on the decline since 2000 while demand has continued to rise.
The UK doesn’t rely on any single country for its natural gas imports, but, as a whole, Europe predominantly relies on gas from Norway and Russia, and both have suffered problems in production. This has led some to speculate that shortages are owed to Russia “tightening the tap” on its natural gas exports.
Gazprom, Russia’s state-owned energy company, claimed that reduced supply was simply down to just “another ‘winter’ month on the gas market.” But this move has been attributed by EU leaders to Russia’s interest in getting Nord Stream 2, a controversial pipeline connecting Russian gas to the European Union, fully approved and operational.
Either way, with the UK only relying on Russian imports for less than 5% of its natural gas, it’s clear that European politics are, at most, only part of a much broader explanation.
Similarly, blaming Brexit for shortages isn’t sufficient either. Fears that the UK could find itself “at the back of the queue” on the best new deals aren’t unfounded, but current gas trading shows that leaving the EU’s Internal Energy Market has not had a significant impact.
Is this crisis related to the petrol shortages?
While recent problems on UK forecourts are largely exacerbated by media attention, gas shortages are part of a more complex challenge with direct effects on the cost of living and doing business.
With about one third of UK electricity being generated from burning natural gas, those large fluctuations in the wholesale cost of gas threaten price caps and other legislation designed to insulate domestic and commercial consumers.
Energy Secretary, Kwasi Kwarteng, described a lot of the language surrounding these shortages as “alarmist”, explaining:
“There is no question of the lights going out, of people being unable to heat their homes. There will be no three-day working week, or a throwback to the 1970s.”
What does that mean for my business?
For households and businesses, a raised price cap will almost certainly mean higher energy bills. For those on standard tariffs, annual bills increased by £139 as of 1 October based on average household energy usage.
Ofgem, the independent energy regulator, will be meeting to reassess the current cap again in April, meaning that the next several months are going to be a difficult time for energy providers still struggling to turn a profit.
With many energy companies already going bust, UK businesses now have to rely on a market with fewer providers. To ensure households and businesses can reliably expect the utilities they need, switches to the remaining providers have been automatic. Whether you have noticed the switch at home or at your business, you should keep full, detailed records of your bills with previous providers.
But it’s not just electricity generation that natural gas is essential for; due to high gas prices, two fertiliser plants in the UK have had to close down. That’s been a blow to bottled CO2 production, a commodity used in the packaging of meat and fresh produce, as well as in fizzy drinks. Bottled CO2 is also an important part of transporting food and is used to keep goods cold or frozen while in transit.
Less commercial CO2 translates to higher food prices, which have already been going up alongside inflation. Together with higher bills during the winter months, the increased cost of living will put pressure on consumers already facing financial challenges.
The government’s furlough scheme ended in September, in tandem with the £20 uplift to Universal Credit ending on 6 October. With less disposable income, consumers may be less willing to spend in the run up to Christmas.
While UK workers increased their savings during lockdown, the threat of financial insecurity could lead to more cautious spending, despite the abundance of job roles available due to the ongoing labour shortage.
The gas shortage has obvious, direct effects on the cost of living and doing business, but businesses should also be wary of the indirect effects of rising food prices and more anxiety among consumers as meteorologists predict harsher conditions this winter.
For information on how to manage your business’s energy needs, read our Energy Management topic here.