You may have seen energy crunch news headlines over the last week regarding the critical issues in the energy market. Is the UK energy industry in a crisis?
What has happened to the UK energy industry?
It’s all about high gas prices and its continued role in the creation of electricity. Low volumes of gas stored in the UK has created a four-fold increase in wholesale gas prices. Coupled with insufficient electricity generation in the UK to meet its own demand, this has caused an energy crisis. Factors at play:
- Post-Covid-19 commercial ramp-up has created a demand for gas throughout Europe
- The fire at a National Grid site in Kent has shut down a power cable linking electricity between France and the UK
- Many North Sea gas platforms, kept running throughout Covid-19, have now closed for overdue maintenance
- Low wind speeds have affected renewable energy output in the UK
- Gas stocks across Europe are low for this time of year
- Russia, the world’s second-largest producer of natural gas, has limited gas availability to the rest of Europe
How does the UK energy crisis affect suppliers?
The energy market is split into 3 sectors:
- Generation & Wholesale
- Transmission & Distribution
- Energy Suppliers
Energy suppliers pay for the generation and distribution of energy to homes and businesses, plus their own internal costs. They then invoice their customers, usually with enough margin to cover costs and make a small profit.
Ofgem, the energy regulator, caps energy prices for domestic customers. An energy supplier cannot charge households more than a set amount via their standard variable tariff. Energy suppliers are regulated as to how much they can charge customers via these tariffs. However, they are not supported in the current rising costs.
Energy suppliers buy energy in advance (hedging), to match customer demand, as far in advance as is affordable. If they purchase too little, they must buy on the spot market to ‘top up'. This is expensive and volatile. If they buy too much, they must sell off their excess energy which can be a lottery.
Energy suppliers are low, moderate, or high risk, depending on hedging arrangements, engagement in the spot market and financial backing. A factor that will affect suppliers is if they are forced to take on new customers as suppliers fail. Those new customers will almost certainly come at a cost to the energy suppliers if they are chosen as the Supplier of Last Resort (SoLR). Energy suppliers with the deepest pockets or heaviest financial backing will be in the best position to survive.
Will the energy crunch force suppliers to go out of business?
Unfortunately, yes! At the time of publishing this article, People’s Energy, Utility Point, Pfp Energy, MoneyPlus Energy, Avro Energy and Green Supplier Limited have already ceased trading. It is predicted that more will follow.
Bulb, the 6th largest energy company, with 1.7 million customers, is currently seeking financial help.
When an energy supplier is forced to cease trading, customers are protected by Ofgem regulations. This stipulates that those customers' accounts will be inherited by another energy supplier. The energy supplier appointed is known as Supplier of Last Resort (SoLR). The process is entirely free of charge, however, it comes at a cost to the SoLR, especially in the current crisis.
What effect will the critical issues have on household energy bills?
Ofgem, the energy regulator, said in August that default energy tariffs would climb by 12.5% on average. This takes into account the fast-rising energy market prices February to July and equates to an increase of at least £139. Coupled with the end of the £20 universal credit uplift on 6th October, it is likely to drive vulnerable households into fuel poverty this Winter.
Experts have also warned that the energy market is expected to raise energy bills again from April 2022 by a further £280.
With wholesale prices as they are today, it is likely that the standard variable tariff, which households default to when they move into their property, is the cheapest tariff available. This tariff is protected by the price cap.
What happens next to the UK energy industry?
Without a crystal ball, it’s difficult to predict, but in the short term, we can expect:
- In the coming months, more gas will be available, which will eventually drive prices down and see a return to a much more recognisable arena.
- Ofgem and the Government may intervene, in the form of a financial plan for energy suppliers who are taking on new customers under SoLR.
- More households will need help with energy prices and other factors piling the pressure onto vulnerable and low-income families.
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