Concerns have been raised about a recent spike in gas prices ahead of winter this year. Europe and the UK are both faced with a gas shortage that has led to this issue which will have (and has had) knock on effects on multiple industries across the region. As of the 20th September, gas prices (price per therm) are at £1.76, over double what they were this time last year.
Fig 1. UK Natural Gas Price (Pence per therm), Bloomberg
A lengthy cold winter last year is partly to blame for depleting the natural gas storage below usual levels. The UK also partly relies on wind farms to produce electricity, but still weather in the past weeks has meant that wind power has contributed less to the country’s electricity supply, and gas has had to be used up in its place. Much of Europe relies on Russia (the world’s largest gas exporter) to meet their gas demand; however exports have declined recently, from 190 billion cubic meters in 2019 to 170 billion cubic meters in 2020. Another contribution to the hike in gas prices is the increased demand for LNG in Asia, where China and India have increased their demand for LNG by roughly 8% and 10% respectively since last year. All of this has affected the replenishing of gas storage before winter.
Fig 2. Gas demand in selected Asian countries, 2020 and 2021, IEA
The increases in gas prices have had adverse effects on multiple industries across the UK, with the agricultural and food industries being hit particularly hard. Gas is essential in the production of fertilisers and due to the high natural gas prices the largest producer of fertilisers in the UK, CF Industries, which accounts for 40% (1.5 million tonnes per year) of the UKs fertiliser needs, have halted operations in both of its plants. This not only affects the 600 employees across both of the plants, but poses a risk to food security as next year’s crop yields will be affected if fertiliser cannot be purchased by farmers. The by-product of fertiliser production is used in abattoirs to stun animals before slaughter, and without the CO2 the meat industry may not be able to keep up with demand, further increasing the threat of food security. Multiple energy suppliers across the UK have failed since the start of August as they have not been able to cover the increased cost of supplying energy to households across the UK, with other small suppliers at risk of failure in the near future. Ofgem, the government regulator of gas and electricity markets in the UK has recently had to appoint EDF to take on approximately 220,000 new customers who were being supplied by the recently failed Utility Point. Due to the higher gas prices, consumer energy bills will increase and this may contribute to cost-push inflation.
The problem can be exaggerated or eased based on what will happen in the near future; A colder than average winter will further increase demand above expected and make the issue worse. If the Nord Stream 2 pipeline gets approval from countries is passes through, including Germany, then Russia may increase exports to Europe which could ease the issue. Switching from gas to other forms of fuel may also help keep costs of producing energy low and using oil in place of gas due to the high prices of LNG is being seen in Asia and Europe, and this trend may continue if prices stay high, especially in Asia where emissions laws are not as strict. This switch also may not be economically viable for firms in Europe as the cost of permits to emit carbon have drastically increased this year.
The UK relies heavily on gas for its electricity production, and has done for years as the UK is trying to phase out more polluting fossil fuels such as coal and oil. With over a third of electricity supplies across the UK coming from gas power plants and over half of the gas used being imported, the UK is very exposed to the global gas market. This current situation could be used as another reason why we should move to a fully renewable future, however renewable energy sources come with their own risks and drawbacks (relying on the weather, the problem of storing generated power, the initial cost of setting up the required facilities, just to name a few), but could help the UK hedge against market volatility and its reliance on gas imports from Norway and Russia.
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