How the government is assisting the energy industry at this challenging time
High wholesale prices are causing problems for energy suppliers and consumers alike, but the UK government is working on measures to solve them. Let’s find out more.
It’s an unprecedented time for the energy industry. A combination of events has created a perfect storm, which is bad news for energy suppliers and consumers. Suppliers are going out of business, consumers are facing substantially higher energy bills, while the knock-on effects could be disastrous. The UK government is looking at drastic measures to address the situation.
In this article, we’ll look at what is happening and why. We’ll also look at the possible solutions at the government’s disposal.
Soaring prices, dying suppliers
For a variety of reasons we’ll look at in the next section, wholesale gas prices are soaring. Since the start of the year, they have risen by 250%. However, this rise just became steeper. The month of August saw prices increase by 70%.
This price rise caught some suppliers in a trap. Many are going out of business as a result, while others are on the brink. More energy companies have ceased trading since mid-August with more to follow no doubt. One of the UK’s sixth-biggest suppliers, has asked the government for a bailout. Alternatively, it may be swallowed up by another firm.
A firm going bust does not mean its customers will lose their energy supply. They are automatically transferred to a supplier of ‘last resort’ designated by Ofgem. However, they may end up on a more expensive, variable rate tariff.
Why are gas prices rising?
There are several reasons why we’re seeing a rise in gas prices at this time.
The first is the COVID pandemic. As the world reopens after lockdown, there is more demand for gas that the suppliers cannot currently meet. In the UK, the industry is still working to catch up after a particularly cold winter in 2020 and 2021.
Next is the good old British weather. Over the last few weeks, the weather has been relatively calm, so the 11,000 wind turbines are not producing as much output as is typical. This means the industry relies more on natural gas to produce electricity. Unfortunately, the UK has a low gas storage capacity compared to its European neighbours.
There is also a potential problem with Russia, which has been accused of manipulating the market to push up prices, as well as:
- High demand for gas in Asia
- Several gas platforms in the North Sea being closed for repairs
- A fire at a National Grid facility in Kent
All in all, it’s a perfect storm for the UK energy industry.
Why are suppliers trapped?
The problem for suppliers is that they are highly leveraged to historical gas prices. Many customers switch to new suppliers to take advantage of lower rates, which they are contracted to for one or two years. If the wholesale price rises higher than the price those suppliers charge their customers, the suppliers are losing money. Larger suppliers can sustain these losses, but many smaller suppliers cannot.
There is also a price cap set by the government that dictates how much suppliers can charge for their energy. This price cap is reviewed every six months. Suppliers cannot adjust their variable rates higher than the price cap, so they again lose money if the capped rate is lower than the wholesale price.
The government has several solutions that it could try. Nothing is decided yet, but it’s understood that the options they’re looking at include:
- Bailout loans for struggling energy suppliers
- Ending the price cap so suppliers can raise their prices
- Doing nothing and letting the market sort it out
There are downsides to all these plans. There are more than 50 energy suppliers in the UK – and the government will not want to bail them all out. On the other hand, removing the price cap means customers will face much higher bills at an already difficult time. This Conservative government may be philosophically in favour of leaving it to the market, but if it leads to job losses and higher bills for customers, they will face criticism.
Consequences of the energy crisis
The issue for the government is that letting this crisis get out of control could be disastrous on several different levels.
Winter is on its way, and if consumers cannot afford to heat their homes, it could lead to serious health issues and general discontent. Suppliers going out of business also has considerable consequences for the energy industry – fewer suppliers means less choice for consumers and bigger giants at the top that can throw their weight around.
However, perhaps the biggest problems looming are the knock-on effects across the wider economy. For example, two factories that produce carbon dioxide for the food industry have shut, citing the rise in gas prices as the reason behind it. This lack of CO2 could even lead to shortages of meat and carbonated drinks.
CO2 is used in the humane slaughter of animals for meat. In a worst-case scenario, it could mean that meat production has to stop and animals need to stay on farms. No turkey for Christmas is a significant possibility.
What will happen?
The government has not decided what (if anything) it will do to address the rising gas prices and the supply issues they cause. The bad news for suppliers is that if it does act, the priority will always be the welfare of the consumer, not their balance sheets.
We will keep an interested eye on what happens.