Price spikes in the global energy market are meant to happen during the cold months of a northern hemisphere winter, which is why their arrival now is alarming. It suggests the current mini-crisis – which, embarrassingly, is seeing the UK shovel millions in the direction of coal plant producers just ahead of the Cop26 climate conference in Glasgow – has the potential to become much worse come January or February.
As ever in the energy market, it takes a combination of factors to produce a price surge of the degree seen on Monday in the UK – record levels for short-term electricity prices. Wind speeds have been low across northern Europe for most of the year. The UK’s gas stocks are low. And a few plants have gone offline for repairs at a bad moment.
In international markets, economic recovery in China and parts of Asia has accelerated demand for LNG (liquified natural gas). US shale gas producers, now under political pressure to curb fracking, are not producing the same volumes as of old. Russia, some argue, is underproducing gas ahead of the opening of the Nord Stream 2 pipeline to Germany. The UK is certainly not alone in experiencing the storm in the fossil gas market.
A few factors – wind speeds, for example – could reverse to relieve the immediate pressure. But one can also diagnose a basic overreliance in the UK on gas as the “transition” source of fossil fuel energy on the way to net zero. There’s not much resilience in the system, with so many nuclear plants due to come offline this decade. The Bank of England may even been obliged to take notice: we’re now at the point where the year-on-year hikes in consumers’ energy bills have a meaningful impact on overall inflation numbers.
In the end, high prices encourage more supply and dampen demand. The definition of a proper crisis, perhaps, is a situation where there is not enough gas to satisfy demand, which could mean rationing for businesses for short periods. That prospect is still unlikely this winter, thinks independent energy analyst Peter Atherton, but is “a greater possibility than it has been at any time since the 1990s”.