Families are facing a huge increase in the cost of powering their homes due to the unprecedented rise in energy costs, while many energy firms are expected to go out of business this year.
Amid warnings of lights this winter, the trade secretary, Quasi Quarteng, has urged people not to worry, saying the UK’s energy supply is safe and that the failure of some energy firms is “no cause for alarm”. .
But how credible is this claim? What is behind the huge increase in prices? Why is UK supply so low and what does this mean for consumers?
How serious are the current gas supply issues?
Global gas prices have risen 250 percent since the start of the year, partly due to the rapid reopening of economies as vaccines helped control the COVID pandemic. In August alone, prices rose 70 per cent.
According to a research note by Goldman Sachs, the amount of gas in storage in North West Europe is at a record low level.
Typically, supplies are made during the summer when demand is low so that enough gas can be stored for the winter when demand is high.
It is feared that prices will rise further as demand continues to rise but supply is not. The bitter winter has only deepened the existing problems.
The government points out that, while the UK is somewhat dependent on global market prices for gas, some 40 per cent of the country’s supply comes from the North Sea and about 30 per cent comes through an agreement with Norway.
Why is there a problem with the gas supply?
Economies have rebounded from Covid-19 as rising demand, combined with a cold winter, has weighed down stocks. This is compounded by far fewer winds in the summer, which means less renewable energy and greater demand for gas. Russia’s Gazprom is also supplying less gas to Europe than usual. The company says this is due to production problems. Skeptics allege that Russia is using its power.
Adding to the supply problems is the fact that the UK has far less gas stored than many other European countries, mainly because storage capacity has run out in recent years. It is also more dependent on gas, which is used to heat most homes and generates about 40 percent of its electricity.
What effect can gas supply problems have?
It is not widely expected that the gas will “run out”, although if prices rise further, their costs to some industries will increase so much that their business becomes impractical.
Increase in cost will inevitably affect the prices of goods for the consumers and will have an impact on the future.
First affected are fertilizer manufacturers who stopped production last week, potentially adding to costs for farmers.
European governments have indicated they will ensure homes are protected from price increases, but this could mean problems for the industry.
Ole Hansen, head of commodity strategy at Saxo Bank, says, “The risk we cannot ignore from an industrial perspective is that the price rises so high that it stifles activity and economic recovery.”
“We may reach a point of rationing energy, and politicians don’t want people to freeze in their homes, so the other option is to shut down the industry.
Energy-intensive industries will be the first to be affected, Hansen said, pointing to nitrogen fertilizer companies, which suspended production last week.
“Chemical production uses a lot of energy, so does cement, and you can’t get cement for the love or money you already have.”
Construction companies are currently grappling with a global shortage of construction materials, which has led to the closure of some projects.
While supply problems are affecting Europe and the US, the UK is “extremely vulnerable” to price fluctuations because, unlike many other countries, most homes are heated with gas, Hansen said.
Henry Patricott, director of oil and gas equity research at UBS, says there is “no prospect” of a significant increase in gas supplies from Russia by the end of the year. “Any stabilization of prices would have to come through destruction of demand,” he said.
High prices also put the Bank of England in a dilemma. Will be reluctant to raise interest rates when the economy is struggling but at the same time worried about rising inflation.
The rate hike would mean higher costs for businesses and mortgage borrowers.
How is the food supply being affected?
Iceland’s managing director Richard Walker has warned that the lack of CO2 could lead to a food supply shortage in “the coming days and weeks”.
Gas is a by-product of making fertilizers – an industry that has partially closed due to rising costs. CO2 is used to stun pigs before slaughter so that they can be humanely killed.
Leaders of the trade body have called on the government to “ensure an adequate supply of gas immediately” to continue production.
If the disruption in fertilizer supply continues, it will further increase costs for farmers, adding pressure to food prices.
What does this mean for energy bills?
Energy bills are likely to rise for most households but not necessarily immediately; It will depend on the tariff people are on. Convertible deals can be extended at short notice, others can only go up after the current deal expires.
All consumers are protected by an energy price limit which sets the maximum level a firm can charge.
The hypothetical average household using a moderate amount of energy will pay no more than £1,277 per year from 1 October – a 12 percent jump from the previous level. Pre-payment meter customers, who are more likely to be vulnerable, will see a jump of £153 per year to £1,309.
Analysts at HSBC expect consumers to face a further 15 per cent hike in prices in April next year, when the cap is reviewed again.
Why are energy suppliers going out of business?
Many energy companies…
Credit: www.independent.co.uk /