Page 4 - EurOil Week 40 2021

EurOil COMMENTARY EurOil

Crisis exposes vulnerabilities

in UK energy system

The spike in gas and power prices has exposed serious vulnerabilities in the UK power system

WHAT: THREE more UK energy suppliers have ceased Wholesale gas and power prices only account
A number of energy trading, Ofgem announced on September 30, as for 35% of the average customer bill, while the
suppliers have gone the crisis on the country’s gas and power markets rest consists of transmission and distribution
bankrupt recently in deepens. charges, operating costs, environmental and
the UK. The companies, Enstroga, Igloo Energy and social obligations and taxes.
Symbio Energy, have 6,000, 179,000 and 48,000 “Retail prices do not, therefore, need to climb
WHY: customers respectively, Ofgem said. The reg- anywhere near as much as wholesale prices, but
Suppliers have been ulator will now pick a supplier of last resort to the tripling or quadrupling of wholesale prices
caught between very high ensure their energy needs continue to be met. while bills increase hardly at all has put unsus-
wholesale gas and power “In recent weeks there has been an unprece- tainable pressure on retailers’ margins,” Kemp
prices and low regulated dented increase in global gas prices, which is put- said.
customer tariffs. ting financial pressure on suppliers,” Ofgem said Energy retailers were already struggling with
in a statement. “Ofgem is working closely with weak margins before the onset of this crisis.
WHAT NEXT: government and industry to make sure custom- Many large incumbent suppliers have been able
The government will have ers continue to be protected this winter.” to offset losses with earnings from gas produc-
to provide more support Other recent bankruptcies include Avro tion, power generation and energy trading oper-
to consumers once tariffs Energy and Green Supplier, whose customers ations they own. But this has not been the case
rise in October. have been absorbed by Octopus Energy and for smaller, non-integrated players. The govern-
Royal Dutch Shell respectively. ment has taken steps in recent years to encourage
more small players to enter the market in order
Policy problems to encourage competition, but many of those
The situation in the UK energy market is a reflec- same companies are now facing bankruptcy.
tion of the broader conditions across Europe, “In their focus on encouraging competition,
where wholesale gas prices recently surged above policymakers failed to ensure smaller non-inte-
$1,000 per 1,000 cubic metres for the first time grated gas and electricity suppliers were man-
ever. But energy analyst John Kemp also points aging their price risks properly and pursuing
to policy issues in the UK that have exacerbated sustainable business models,” Kemp explained.
the situation. Meanwhile, the UK relies more on gas for
“Britain’s choices over energy market design, its power than most other OECD countries,
price controls, gas-led power generation, charges having almost completely phased out coal use
and billing have reflected the balance of political over recent years. Gas is also used to heat almost
forces and interest group lobbying, whether they 80% of homes. At the same time, domestic gas
have been deliberate or unconscious,” he wrote production has not seen the same growth, and
in a recent column for Reuters. “Policymakers therefore the country relies on imports for 60%
have wanted domestic gas and electricity sup- of its gas needs.
plies to be reliable and affordable while lowering “The result is that almost all of the country’s
emissions, but a surge in global gas prices has residential energy system depends on imported
revealed the tensions between these objectives.” gas, which in turn depends on international
Despite the surge in gas and power prices, prices for pipeline gas and especially LNG,”
regulated customer prices for electricity have not Kemp said.
changed much, and this is what is causing energy
suppliers to go under. While spot market gas Difficulties in transition
prices increased by 400% last year and electric- The UK’s energy crisis is also a source of embar-
ity prices are up 250%, according to Kemp, cus- rassment little more than a month before the
tomer bills have risen by under 10%, although country hosts the COP26 global climate sum-
a bigger increase is envisaged from October to mit. Analysts at ING note that while countries
March. across Europe are facing similar difficulties, the

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