20 Sep 2021

Systemic problems in UK energy market

Economics Correspondent

The crisis that is cutting down many gas suppliers has raised questions about how vulnerable the energy market in this country has become to global shocks.

There’s a perfect storm of problems which have added up to an acute energy crisis.

One energy source told Channel 4 News that the industry regulator, Ofgem, was culpable for the current mess.

Along with the government, they were so desperate to give the impression of more competition in the market to challenge the big six suppliers, that the bar for new entrants was too low.

It’s like allowing a bank to take deposits without checking if the customer had the right capital requirements in place.

But there are wider problems with the energy market in this country.

Ministers have been very good about vocalising their net zero strategy, but they haven’t invested in the messy bit of how we get there or energy security.

And that’s left this country exposed to global shocks.

Gas is still the single biggest contributor to energy, despite the fact that domestic production has fallen.

And the big issue here is that green energy is still intermittent.

And over the summer, the wind has been unusually still.

That would be fine if we had large strategic gas reserves to fall back on, but we don’t.

In 2017, a storage facility was closed and the government chose not to rebuild, deciding to leave it to the market.

Well, guess what? Private companies, each competing for profits, didn’t bother either.

Now, capacity for storage is less than two percent of annual demand. The UK can hold just nine terawatt hours compared to 113 in France, one 148 in Germany and 166 in Italy.

Half of our gas supply comes from the North Sea with another third coming directly from Norway.

But the remainder provided basically by Qatar and Russia is more problematic.

Over the summer, Russia held back gas supplies to Europe, with critics saying the manoeuvre was intended to force Europe’s hand in finalising the controversial gas pipeline that links Russia to Germany.

But it’s also the pandemic which has caused huge economic upheaval with the Asian recovery in recent months, guzzling up gas demand and pushing prices up higher, which has shot up from under 40p per therm last year to over 184p.

That’s almost a five-fold increase, and it’s that dramatic increase that’s proving fatal for so many business models for UK energy suppliers.