Energy crisis to last until 2022, with UK especially exposed, economists warn

UK is more reliant on gas than its EU neighbours, but it also has less capacity to store the fuel

Anna Isaac
Friday 01 October 2021 18:33
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<p>Cooling towers at a coal-fire power station in China. The world’s second largest economy is facing energy shortages</p>

Cooling towers at a coal-fire power station in China. The world’s second largest economy is facing energy shortages

Higher natural gas prices will last well into next year and the UK is acutely vulnerable to the global surge, economists have warned.

Prices for natural gas have risen five-fold amid a “perfect storm” of cost pressures, with higher prices likely to be sustained until at least spring next year, energy analysts and economists believe.

Gas stores across Europe are also below average for the past five years, and there is little sign that Russia or the US will fill the shortfall in a harsh winter, according to economists at Oxford Economics. Reserves stand at 72 per cent, well below the five-year average of 88 per cent. Production problems at North Sea gas producers had made the problem worse, “hampering restocking in time for the winter season”.

Energy regulator Ofgem said that bills would rise by at least £139 for about 15 million households as it shifts the industry’s energy price cap higher. Three energy suppliers collapsed this week, following several others in recent weeks, in the face of record gas prices. The price cap limits the amount suppliers can charge consumers.

Coal is unlikely to plug the gap left by a gas shortage, with coal prices up by 78 per cent, and a lag between China upping mining activity and higher exports.

China is also facing its own energy crunch, with survey data from the closely-watched Caixin purchasing managers’ index showing activity had shrunk amid restrictions on energy use in the world’s second largest economy. There have also been reports of blackouts in recent days in the northeast of the country.

Other major economies such as India, which are very reliant on coal, are also facing low inventories of the fossil fuel.

“There has been a near perfect storm of factors driving this extreme price evolution, and because they are structural in nature and can’t be fixed overnight,” the economists said in a briefing note, “we expect gas prices to remain elevated until spring 2022.”

While the problems facing energy supplies are global, the UK stands out as being more vulnerable than other countries, the economists said.

“In the UK, the problem is even more acute,” they warned. There had been “severe underinvestment in storage capacity over the past few years”.

“To make matters worse, the UK is far more dependent on natural gas for electricity generation compared to its EU neighbours,” the Oxford Economics briefing said. This dependency was for 40 per cent of energy generation, compared with 17 per cent in Germany and 7 per cent in France.

The UK’s largest gas storage facility, the Centrica-owned Rough site, was closed in 2017. Net imports of gas to the UK more than doubled in the three months to June compared with the same period in 2020, and exports fell by more than three-quarters (76 per cent) during the same three-month stretch.

The US lacks capacity at its terminals to ship as much liquid natural gas as demand from Asia and Europe requires, and serious weather events have also disrupted production at US sites. Russia has also faced challenges from 2020 disruptions to its gas production, suggesting it may not have sizeable capacity to boost supplies to Europe.

“One of the consequences of this price spike will likely be to emphasise the real-world costs of decarbonisation with the result of tipping the balance more in favour of expanding natural gas capacity, particularly in the realm of LNG,” the economists said. They added that countries, “particularly” the UK, will need “greater investment in natural gas storage sites”.

A UK government spokesperson said last week in response to criticism of a lack of gas storage: “The UK benefits from having a diverse range of gas supply sources and we have sufficient capacity to more than meet demand. We do not expect supply emergencies this winter.”

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