One of the UK’s largest energy suppliers recently suggested that customers who couldn’t afford to heat up their homes eat “hearty bowls of porridge” to stay warm. Ovo Energy, Britain’s third-largest energy provider, later apologised following furor. The episode is testimony of the worry that soaring energy prices have become.
What is the energy crisis all about?
The cost of living in the UK is surging, fuelled by inflating energy bills which have bankrupted many providers and left households grappling with double-digit leaps in heating bills.
As wholesale gas prices rise, energy suppliers are passing on the costs to consumers. Even though energy bills are rocketing across Europe, it is the UK where they are most expensive among all other European nations.
Recently, Conservative MPs turned down the proposal to reduce value-added tax (VAT) on energy bills in Parliament, an intervention that could have provided some relief to families.
Britain relies heavily on Europe for much of its gas supplies which in turn, imports 30% of its natural gas from Russia’s Nord Stream. International Energy Exchange (IEX) chief Fatih Birol last month accused Russia of withholding a third of its gas exports amid intense geopolitical tensions. Gazprom, a state-owned Russian gas supplier, has been sending 25% less gas in recent months, he added.
Remember, energy bills coupled with inflation numbers which are at a decadal high, are increasing the overall cost of living. What’s more? Goldman Sachs suggests inflation may breach 6.8% this year if energy bills are allowed to run rampant.
Once the energy price cap is adjusted in April by Britain’s energy regulator Ofgem, bills are expected to increase at least 50% annually for every household, which translates to £1,900 a year.
In the absence of any intervention, soaring energy bills might force households to face a ‘eat or heat’ dilemma, said Martin Lewis, founder of MoneySavingExpert.com recently.
Why are energy suppliers collapsing?
2021 saw a multitude of energy firms going bust, the most recent being Bulb which was placed under administration in November. In Britain, customers are either on fixed-rate tariff agreements (even when prices go up, consumers pay the same amount regardless) or they can avail the energy price cap. In many scenarios, fixed-rate tariffs mean paying a lower price than what suppliers are using to purchase, in effect hurting them. Many providers have thus collapsed because of incurring losses on buying the energy whenever prices went up.
Can the Government rescue Britons?
Now that a suspension of the 5% VAT is off the table, what else can the Government consider in order to mitigate? As it grapples with bringing energy costs down, the government last week injected £100 million into nuclear power generation at a Sizewell site in Suffolk in a bid to explore alternative energy sources.
European gas prices saw an increase of nearly 600% in 2021 as demand outstripped supply, in part because temperatures dipped across the continent and natural gas flows from Russian pipelines fell to their lowest level in over a month. The ongoing tensions between Russia and Ukraine indicate that the crisis could deepen further.
Kwasi Kwarteng, UK’s Secretary for Business, Energy and Industrial Strategy said that exposure to volatile global gas prices “underscores the importance of our plan” to build a strong renewable energy sector to reduce the reliance on fossil fuels.
Gas, a key element in the production of electricity, is a far cleaner fuel than coal or oil, however, it still emits greenhouse gases and will eventually defeat the net-zero goals of COP26.
How are other nations tackling the energy crisis?
Asia and Europe are witnessing steep energy price rises. In India, where coal consumption has nearly doubled in the last decade and accounts for almost 70% of its energy needs, stocks have fallen by 10%. The country is now looking to import 10% of its requirements at the behest of the government.
A little northward, Chinese companies headquartered in industrial towns are seeking to limit their energy consumption as the country prepares to use coal-fired power plants and pass on high generation costs to end-users. Chinese leaders are now rethinking their energy transition roadmap, bearing in mind their carbon emissions have to peak by 2030.
Meanwhile, the US is witnessing a 47% surge in gas prices since August, coinciding with rising oil prices. The US energy secretary has hinted that they may tap their emergency oil stash to dampen oil and motor fuel prices.
In Europe, as nations grapple to manage the energy crisis, renewables are coming back to the fore. France has started its commitment to boost nuclear renewables. They have also curbed the bill hikes to 4% in 2022. A similar situation is panning out in Spain where the increase in gas prices is capped at 4.4% as an emergency measure for the coming months.
While the rising cost of living is a blow to several British households, the way the energy crunch has manifested shows it’s time countries rethink their pace of energy transition and reduce dependence on the outside world to alleviate the crisis.