The RSMR Broadcast - The energy price explosion - is it all a load of hot air?

20/09/21

The RSMR Broadcast - The energy price explosion - is it all a load of hot air?

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We’re seeing some dramatic movements in the wholesale energy market right now and with Ofgem announcing that the energy price cap will go up on 1st October 2021, adding £139 to the bills of 15 million households for starters, we’re in for some seismic shifts when it comes to our energy bills. What forces are combining to drive the sharp rise in energy prices?

The quick answer is a potent mix of policy, geopolitics and economics. Our energy tanks have been running dangerously low in recent weeks, so low in fact that some coal-fired power stations have been cranked back into life. UK government policy is to reduce greenhouse gas emissions with a commitment to phasing out coal power completely by 2024. Around 40% of electricity generated in the UK used to come from coal. This number has gradually reduced to roughly 25% five years ago and last year, coal contributed to 1.6% of the country's electricity mix. From a relatively coal-free year in 2020, the tables have turned, and we’ve had to rely on some coal power every day in the last month. National Grid ESO have confirmed that coal is providing around 3% of national power and the use of coal has returned to 2.2% of the UK's electricity generation. Why are we using so much coal?

Wind power is the largest source of renewable electricity in the UK and contributes to 24.8% of supply in 2020, having surpassed coal in 2016 and nuclear in 2018. However, wind turbines can only be relied upon when mother nature complies; when the wind drops the blades don’t turn. Warm, still weather has meant that wind farms have not generated as much power, so how do we plug the gap?

Usually with gas. Most of our electricity generation is powered by gas but a geopolitical issue is currently wreaking havoc with supply. Gas imports to the UK come via pipelines, primarily from the Norwegian sector of the North Sea, but the rest of Europe doesn’t have access to this resource and relies on imports from Russia. The first pipeline from Russia to Germany, which has a capacity to transmit around 27.5bcm of gas, started transporting natural gas in 2011. The most recent addition, the Nord Stream 2 link, is pretty much ready to roll and could double the capacity of the existing undersea network but US sanctions are preventing completion by restricting the insurance and certification process. Why is the US taking this approach?

The US is concerned that the pipeline will give Russia political power and leverage over Europe. Russia has been limiting gas flows to Europe, providing just enough to keep the lights on, and at the same time, redirecting cargoes of liquefied fuel to Asia to meet insatiable demand from China, Japan and Korea. The pipeline has been a source of friction for some time and with supply in Europe at its lowest level in more than a decade, the decisions being made by Putin really aren’t helping trans-Atlantic relations.

Across Europe, according to Reuters, shortages and increased demand from Asia have meant that the cost of gas has increased to the highest level on record. The cold snap at the start of the year meant that countries dipped into their gas reserves, which would normally be replenished when demand is lower in summer. But as countries are emerging from lockdowns, the demand has been higher than expected. Other factors such as heatwaves have also played a part. In Spain, the recent toxic cocktail of little wind and extreme heat has driven a surge in the use of air conditioners, tipping the already volatile energy scales and causing prices to soar. 

We can’t rely on wind and gas is too expensive, so we’ve gone back to coal. It’s relatively cheap as a material but there’s the cost of releasing carbon dioxide under the European Union’s emissions trading scheme to consider. As power prices have spiked alongside a fear that we would run out of power, coal has become the economical go-to option.

Global gas prices have had a massive impact on our domestic energy; prices are only going in one direction, they’re likely to remain volatile during the months ahead and this is just the start. The supply issue clearly won’t be solved by additional intermittent wind turbines, National Grid are going to have to make some tough choices about where we get our electricity from. Do we look to increase our investment in non-renewable natural gas from the North Sea or to additional nuclear plants? How does this square with our commitment to become carbon neutral by 2050? Using coal as a back stop will inevitably mean we fall short of our net zero ambition. These competing arguments are creating uncertainty, disruption and explosive prices and the need for a robust energy plan is now more pressing than ever.

 

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