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The UK’s energy crisis set to continue

The UK’s energy market has been plunged into chaos following soaring energy prices which has caused several energy companies to collapse, with fears that there are more to come.

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In the last year, more than 20 energy companies have fallen victim to the unprecedented increases to the price of wholesale gas. This has created enormous financial pressure on suppliers who have been unable to pass on the costs to consumers because of the price cap. 

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At the beginning of February 2022, Ofgem announced that there would be a record increase of 54% in the energy price cap, which came into force on 1 April 2022 with the potential for a further increase in October 2022.

Is this increase to the price cap sufficient?

The price cap was initially introduced in January 2019 to protect consumers from energy companies charging too much but has been a contentious issue for suppliers since its introduction. It has been suggested that the price cap has instead caused more damage to consumers, as many companies increase their tariffs in line with the price cap, but it may not reflect any price decreases in wholesale supply.

Whilst the price cap increase in February 2022 was dramatically high, compared to the increases in the wholesale market, many suppliers are still forced to under charge their customers. Therefore, even some of the UK’s biggest players who have well-hedged portfolios and are somewhat protected against volatility in the market may struggle in the months ahead.

How are customers protected if their energy supplier collapses?

If an energy supplier goes into administration, then a Supplier of Last Resort (“SoLR”) process is triggered.  This process ensures continuity of supply to domestic customer.  During the SoLR customer accounts are transferred to another energy supplier automatically by the energy regulator Ofgem. Any credit balance is protected by the new supplier. 

What is causing the increase in prices?

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There are several causes of the failing energy market in the UK. Firstly, falling supply and increased demand. There was a global increase in energy demand throughout 2021, mainly due to the ramp up of production in factories following the coronavirus pandemic. This, together with harsher winters, has depleted Europe’s gas stockpile which is at its lowest level for some time. In addition, the UK has some of the lowest natural gas storage capacity in Europe, placing a reliance on imported supplies.

The most worrying factor is the impact of hostile geopolitical relations, particularly between Russia and the West, and Russia’s reluctance to supply gas beyond the contracted levels.

How does Russia affect the UK energy sector?

Gazprom, which is majority owned by the Russian Government, is one of Europe’s biggest gas providers. The gas is sent through several pipelines, being the Nord Stream, the Brotherhood and the Yamal-Europe to various regional storage hubs and then distributed to different countries across the continent.

In September 2021, the construction of a new 1,200-kilometre undersea gas pipeline was completed. The new pipeline, Nord Stream 2, starts at the Ust-Luga area in Russia, stretches across the Baltic Sea to the Greifswald area of Germany and cost a staggering £9bn to complete, half of which was paid for by Gazprom. Even though the use of Nord Stream 2 could potentially solve the gas shortage issues currently being faced, the new pipeline has been strongly opposed by the United States and Ukraine, as it allows Russia to avoid running gas through countries such as Poland and Ukraine who charge high transit fees.

Germany, who initially backed the development of Nord Stream 2, announced in November 2021 that it was temporarily suspending certification of the pipeline. This announcement left many fearing that Europe will suffer further gas shortages which added to the European gas price hikes and leaves Europe in a very vulnerable position.

For further information on the topics raised above or the SoLR process, please contact Business Recovery Manager Alexandra Davies.

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