The price of natural gas has seen a sharp increase worldwide, with European countries being affected particularly badly. European prices have increased more than 250% since January, placing prices at €74 per megawatt hour. In the UK, wholesale energy prices have seen a 70% increase since August alone.
Why is this happening?
A variety of factors have culminated in a perfect storm for gas prices. The COVID-19 pandemic is one such factor. The International Energy Agency (IEA) points the finger at the sudden economic rebound that has dramatically increased demand for gas.
Additionally, an unusually cold spring and increased demand in Asia meant that usage was high and there was little opportunity for stockpiles to be made.
Furthermore, countries who are attempting to transition to cleaner energy sources tend to be particularly reliant on natural gas. This has been the case with China, who has been outbidding Europe for LNG as it is seen as the cleaner alternative to coal.
Political manoeuvring also seems to be playing a role. According to the Independent Commodity Intelligence Services (ICIS), the Yamal pipeline’s delivery dropped to 20 million cubic meters (mcm) per day in August, which is less than half of its delivery at the end of July and falls well short of its normal rate of 81 mcm.
The IEA has called on Russia to increase their exports stating that while Russia has been “fulfilling its long-term contracts with European counterparts … its exports to Europe are down from their 2019 level”. Many EU politicians have been harsh in their assessment, viewing the lack of exports as the Russian government intentionally withholding supplies to put pressure on the EU to approve the controversial Nord Stream 2 pipeline.
What are the consequences and what is being done?
There is no easy fix to the gas price crisis but governments are taking action to try and mitigate as much of the damage as possible.
Some countries, such as Spain and the UK, have already implemented caps on energy prices for consumers. The French government is currently planning to provide one-off payments of €100 to approximately 6 million lower-income households.
However, the energy cap has the potential to drive the vast majority of energy suppliers out of business. For example, smaller UK energy providers have already collapsed, affecting some 800,000 customers.
The UK started the year with roughly 70 separate suppliers and some now estimate that as few as 10 suppliers will survive through to the end of winter. The government seems set to let smaller energy suppliers collapse, with little interest being shown in government bailouts.
A knock-on effect seems to be hitting other industries as well. The UK government has elected to subsidize a US fertilizer manufacturer so the factories that supply carbon dioxide remain open. The multimillion pound subsidy comes to prop up Britain’s already struggling supply chains.
Why has the UK been hit so hard?
The UK has caught the most attention as they are suffering particularly badly from the increase in gas prices. Much like the cause of the worldwide gas prices increase, there are several factors behind the UK’s troubles.
The UK relies heavily on both wind and natural gas for energy, some 60% of the UK’s energy comes from these two sources. An unusually windless period has put even greater reliance on gas and higher worldwide gas prices have sent prices skyrocketing.
Furthermore, the UK operates on a “just-in-time market” and has roughly 1% of the storage capability as mainland Europe, particularly without the Rough storage facility, which used to provide 70% of the UKs gas storage capability before its closure in 2017.
Gas prices have also been atypically high during the summer months, making it much more costly for suppliers to stock up on supplies for the winter. Brexit has exacerbated the impact as well. The departure from the EU meant that they lost access to the EU’s internal electricity market, and so during a shortage, the UK has to bid for more electricity from mainland Europe.
What comes next?
Despite governments taking steps to intervene, the gas crisis is expected to get worse before it gets better. Indeed, there is now great concern that without access to the EU’s internal electricity market, the price of electricity could quickly skyrocket in the UK. There is no reprieve expected until 2022. Of course, this will be largely dependent on the severity of the winter weather.