Quick Guide to the Energy Crisis

What are the main factors that have caused the energy crisis, and what does the future hold for the energy market in 2022 and beyond?

 

It will come as no surprise that we are living in the midst of a global energy crisis, which has led to huge implications for UK consumers and businesses. Many businesses are experiencing rises in energy costs twofold or event threefold which, combined with uncertainty for the future, means we are living in an unprecedented and volatile time. But how did this crisis come about, and what does the future hold?

While the crisis is complex and multifaceted, we believe the main causes of the soaring cost of energy can be broken down into four areas: the Covid-19 pandemic, the geo-political landscape, inflation, and weather.

 

Covid-19 Pandemic

The impact of Covid-19 on our daily lives has been far reaching, and energy costs are no exception. The volatile nature of the pandemic, from lockdowns to the lifting of restrictions, led to an unpredictable environment for supply and demand that could not be easily predicted. While energy supply could not immediately increase in response to a sudden jump in demand, prices then inevitably rose. So why may we see this kind of supply issue?

 

Geo-political landscape

Limits with energy supply largely come down to geographical and political issues, specifically the relationship between Russia, Europe and energy supply. This is an is interesting, albeit complex topic but, in short, Russia has a vast geographical reach and, due to its geology, is an energy superpower.

In March 2022, Russia invaded Ukraine which has had a huge impact on the cost of energy due to the limitations on supply of natural gas and oil to the West. While the UK only imported 4% of its natural gas supply from Russia in 2020, Europe as a whole imported 39% from Russia in 2021[1], and have been hugely reliant on Russian supply historically. Sanctions have therefore caused a great deal of difficulty for European countries that were dependant on Russian supply, and have had to move to alternative sources for their energy needs. This has put higher demand on those alternative sources of natural gas, such as from Norway, which has driven the cost up for all countries, including the UK.
[1] “Imports of energy from Russia” Research Briefing, House of Commons Library, 14 June 2022.

 

Inflation

Inflation increases are linked to the rising cost of production of commodities. As natural gas and oil has a high capital cost relating to extraction and supply, this then passes on to the consumer. Interestingly, inflation rates and the cost of energy are closely aligned, and when inflation increases, natural gas is one of the first commodities to increase in price. As inflation continues to rise, energy prices inevitably follow this trajectory.

 

Weather

The effects of climate change have meant weather patterns and conditions are becoming increasingly unpredictable and extreme. This in turn has had a significant role in the energy crisis – supplies are depleted, demand increases and prices rise. For instance, an exceptionally cold winter in 2021 added pressure onto a strained energy market following the volatility of the Covid 19 pandemic, and reduced wind power generated earlier in the year to build up supply. Add into the mix exceptionally hot summers across Europe, with a higher energy demand through increased usage of air-conditioning for instance, and gas prices are likely to increase.

 

What’s the prognosis?

As an Energy broker in the corporate market, we are often asked what the future looks like for energy prices going into the latter part of 2022 and beyond. To answer this, we would need a crystal ball, as no-one truly knows what the future holds. However, at EES– as energy market experts – we unfortunately do not believe that the future is smooth sailing. Looking at a number of the factors above that have had a part to play in the energy crisis, the unpredictability of the market is likely to continue, be it due to geo-political reasons, inflation, weather and climate change, What we can hope for, however, is greater investment into alternative energy sources to move away from reliance upon fossil fuels and the insecurity of such a volatile market.

 

How can we help at Experienced Energy Solutions?

At EES, there are numerous ways we can support your business through the energy crisis, whether it be through our free Energy Health Check-up, securing the best pricing for your energy, or supporting you on your Net Zero journey to reduce your energy consumption. Please get in touch with our team to discuss how we may be able to support your business through this challenging time.

 

Published June 2022