The UK energy market crisis explained
As the UK has plunged into an unprecedented energy crisis with gas prices and energy bills rocketing, millions of people are worried about the difficult winter ahead.
Here, we explore what’s driving the issue and what can be done to solve it.
What has triggered the energy market crisis?
Energy suppliers buy their gas and electricity wholesale, and it is then sold on to their customers. This means price fluctuations can happen, as is generally the case in any market.
However, the UK’s wholesale energy prices have reached new all-time highs lately, increasing by a staggering 250% since January and 70% since August alone. The increase is due to a combination of factors, principally the ramp-up of the world’s economies post Covid-19, causing a global surge in demand for gas.
Other contributing factors have been a cold winter that left gas storage facilities depleted and the fact that Europe’s own natural gas supply has also been falling over the last decade. According to the BP Statistical Review of World Energy, Norway, one of the continent’s biggest producers, has seen its own production fall four years in a row.
Renewable energy production via wind generation has also fallen across the board due to this summer being one of the least windy since 1961. This particularly impacts the UK, where wind generation is the second-largest domestic source of electricity. This slowdown in wind energy has caused the UK to fall back on electricity generated by power plants, some of which burn gas.
What does it mean for our energy bills?
Wholesale energy costs make up about 40% of household bills, meaning energy companies are pressured to increase consumer prices when their costs soar. Despite the spike in costs for the companies, consumers are protected by the energy price cap set by the energy regulator Ofgem.
In response to the global rise in gas prices, the cap is set to rise by £139 per year – for households on a standard tariff with typical energy usage – while customers who use prepayment meters will see a £153 rise. This will affect around 15 million homes in England, Wales and Scotland, representing a 12% rise in energy prices.
However, the increase still may not be enough for some energy companies to cover their costs. Sixteen energy suppliers have already gone bust this year, and there are fears that many more companies may not survive the winter. Data from Ofgem shows that the number of energy providers in the UK has declined by a third since mid-2018.
Currently, customers whose suppliers in the UK go bust are automatically transferred to another supplier and tariff by Ofgem. However, the current energy crisis means that the best tariffs have been withdrawn from sale, leaving default uncompetitive tariffs as the lowest-priced available in most cases.
Homeowners with solar panels and energy storage devices are definitely better positioned to cope with the energy crisis. By utilising self-generated energy, they import much less than they otherwise would from the grid. Therefore, they are protected from the full impact of rising retail energy prices or being transferred to an uncompetitive tariff if their supplier goes bust.
Accelerating the adoption of clean technology to face the energy crisis
It’s impossible to look at the current situation without focusing on our reliance on fossil fuels.
With surging gas prices severely affecting energy companies, our founder Simon Daniel believes that it is more important than ever that we accelerate the adoption of clean technology within the home to help households access cheaper and greener energy. According to Simon, virtual power plants, or VPPs, may be a vital tool in the fight against growing energy needs:
“Many of the old energy systems that are in place are no longer fit for purpose. The energy market needs to adapt so that more virtual power plants, cloud-based, decentralised networks of power generation systems, can help provide a more sustainable option to take pressure off the grid. By enabling smart batteries to discharge solar energy stored in them to power households, or to charge up from the grid when the grid has too much power, these ‘home power stations’ create a bi-directional energy flow that can support the move away from fossil fuels.”
“The UK as an island needs to manage increasing energy demand and intermittency of renewables. The recent interconnect failure and rising prices of fossil fuels show the critical importance of investing in local renewables and energy storage to balance the grid, deliver net-zero and deliver low-cost supply for consumers.”
At Moixa, we strongly believe that collective action is needed to decarbonise our energy supply and end our reliance on fossil fuels. Only by utilising new innovations, upping the IQ of batteries, and providing alternative energy solutions can we build a future powered by renewables and achieve our net zero targets.