Hot on the heels of crises driven by shortages of carbon dioxide and HGV drivers, it is perhaps the ultimate irony that – in the month before COP 26 in Glasgow – the UK and to a lesser extent much of the rest of the world has been rocked by a series of crises in the fossil fuel driven energy market. Whilst much of Asia is being impacted by a shortage of coal, Europe is feeling the full effects of a shortage of natural gas. This is perhaps particularly acute in the UK for a number of reasons including reduced storage capacity, issues with one of the key grid interconnectors to France, and a spike in global demand as the world economy seeks to pick up from where it left off pre-pandemic. The result? Eye watering wholesale gas prices that have risen more than double since January 2021, with a 70% increase since August. Prices rocketed a further 37% in one day on 6 October.
Whatever the reasons for the shortages and increased prices in the UK, there can be little doubt that this has had a devastating impact on smaller energy companies, who are less able to put sufficient hedging in place to insulate them from such vast increases in wholesale gas prices. Casualties include Avro, Green, Igloo, Utility Point, People’s Energy, PfP Energy and MoneyPlus Energy, all of which have entered administration.
Upon the failure of these energy companies, their domestic customers are automatically switched to alternative suppliers under the “supplier of last resort” scheme. Energy suppliers which step in to supply in this way are not bound to honour existing customer contracts, which means the energy costs for those consumers are likely to rise almost immediately. If people are having to spend more on their energy bills, that will impact other sectors such as retail and leisure in the run up to Christmas, a period which should be one of their busiest times of the year for trading.
In contrast, business customers of failed energy companies are required to find alternative suppliers and some are likely to be nearing the end of their current hedging arrangements. Given the massive price hikes, the costs of securing a new supply, particularly for heavy use business customers, could prove prohibitive, leading to reduced productivity and the need for restructuring of operations and finances. The impact of this on the wider economy is cause for concern and, whilst the government is reviewing the position and are under significant pressure to provide emergency loans, as yet, no comfort has been given to businesses, notwithstanding the call for price caps by the steel, glass, and paper manufacturing sectors.
Whilst much of the talk at COP 26 will rightly be around emerging technologies such as battery storage, green hydrogen and floating off-shore wind, this is of little comfort to those industries at crisis point now.
Should you have any queries arising from the issues outlined, please contact one of our team.