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Will the lights go out? An overview of the gas crisis

Gas shortages across the country have driven up the cost of energy to record highs

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The current energy crisis has dominated the headlines of late as gas prices have soared to unprecedented highs. Consequently, millions of households will likely face huge increases to their energy bills, meaning this price spike will ultimately hit hardest for those struggling to make ends meet. Following the removal of universal credit uplift and the latest proposed tax hikes, those currently living in poverty are facing the threat of experiencing conditions not unlike the Victorian times before central heating.  Broader rises in wholesale gas prices will add to already exorbitant energy bills and will likely force marginalised people to go without amenities essential to everyday life, meaning they would need to live without heating and lights.

Whilst UK business secretary Kwasi Karteng has been quick to allay fears that the lights will go out, the situation is far from resolved. Our opportunity to resolve the situation grows slimmer each day, given the government’s reluctance to bail out struggling firms.

This effect has only been exacerbated by the UK’s struggle to import gas from the US and Russia. It seems unlikely that we will be able to capitalize on the US’s growing liquefied natural gas (LNG) market given that we are currently losing a bidding war against Asia. Furthermore, wholesale prices have surged 16 percent to reach record-highs following indications from Russian energy giant Gazprom that they will limit exports to Europe.

What factors are behind these soaring energy costs?

Energy is not cheap in Britain. Average heating bills have surpassed those in Europe for a while now, however, local demand shortages paired with global uptakes in demand mark troublesome times for the UK over the Winter months. It is also not uncommon for people in business to adopt an ‘out with the old, in with the new’ approach to their practice. We have made significant progress in phasing out the use of fossil fuels, with the focus instead being on more sustainable energy. However, this has made us increasingly vulnerable to energy shortages. The drop in output for wind power has depleted stockpiles that were already below expected levels. Furthermore, as the pandemic loosens its grip on the world, energy suppliers are finding it difficult to cope with the sudden uptake in demand as economic activity flourishes. Unanticipated increases in demand for Asian and Latin American resources have also placed further pressures on domestic prices and subsequently the cost of living here in the UK.

How will the government respond?

However you look at it, the government’s decision to not intervene with failing companies is a crucial one.  Many energy suppliers have fallen victim to bankruptcy, with five energy suppliers collapsing in the past week alone. UK business secretary Kwasi Karteng acknowledged that many more energy suppliers will face the same fate in the weeks to come.

Only time will tell whether the government made the right decision in it’s reluctance to interfere. Karteng’s stance on the situation was very clear: the government “will not reward failure”. The decision to abandon struggling firms is in stark contrast to the previous government mantra to drive competition in the energy market. The previous market conditions resulted in an oligopoly consisting of the ‘Big Six’, whereby these energy giants were allowed to prosper at the expense of consumers.

Fears surrounding fair competition in the energy market have resurfaced following the collapse of these struggling energy suppliers. Assuming all goes well and future bankruptcies are limited, the market will still become drastically unsaturated, enabling these firms to have leverage over prices unless regulation is sufficiently implemented. The consensus is unclear on who is to blame for these collapses. Karteng is adamant that unsustainable business models and poor hedging strategies render these firms susceptible to price swings. This would make it the responsibility of the firm, rather than the government, to mitigate these risks. Others argue that the extent of these price swings poses a greater difficulty for the new entrants that the government heavily endorsed not too long ago. Either way, the decision ultimately means that there will be less money leaving the taxpayers’ pocket, which is something we can all be thankful for.

The impetus will be on aiding those consumers that will be most affected by these collapses. It is hoped that larger and more stable firms will take these customers on, even if it is unprofitable to do so. The government will likely underwrite billions in loans to incentivise these firms to take these customers on. This will no doubt be under the condition that they will charge customers no more than the price cap of £1227 per year.

What does this mean for the future of energy?

Given the importance of energy in modern-day economies, broader rises in wholesale prices will have a wide impact across all industries. Costs will rise for nearly all firms, and it is hard to envisage an alternative scenario where it does not result in higher prices for the consumer through inflation.

Kwarteng quickly brushed aside any concerns regarding energy, subsequently labelling fears as ‘alarmist’. He added that lights will not go out, and that food will be available for those who need it. However, it is difficult to see the issue being resolved anytime soon. One could argue that the gas crisis is another reminder of the importance of enforcing tighter regulation in the energy markets. Greater regulation should deter mismanagement and subsequently result in a more efficient and sustainable use of resources.

Whilst the taxpayer will look kindly on the government’s call to leave these struggling firms to collapse, the success of these proposed loans hinges on the profitability of these customers for their larger rivals.

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