The UK is heavily dependent on gas. Half of UK electricity is generated from gas-fired power stations and we rely on it for heating and cooking. Many industries have a similar dependency, and if they cannot get enough of it, they may close down or reduce production of whatever their product is. The price of gas in the UK is capped for six months at a time so smaller suppliers may become susceptible to failure if their costs rise significantly but their revenues cannot increase.
The standard risk mitigation for dependency on gas, is storage. Whilst it is difficult to store electricity, it is simple to store gas. Despite reliance on gas for energy, the UK has very little storage capacity and currently holds less than 1% of Europe’s gas stocks. This makes it difficult for us to manage any adverse changes to the supply or price of gas. Scenario planning would usually highlight this and trigger remedial action.
The current unfolding scenario goes like this: demand for gas has been increasing in China and the other resurgent post-pandemic economies in Asia; this has caused the price of gas to rocket and for supplies from places like Qatar to be diverted from Europe to Asia. Wholesale gas prices in the UK have quadrupled leading to some small suppliers to consumers failing and high energy usage industries such as steel and chemicals talking of cutting production. Fertiliser companies have closed down production. A by-product of fertiliser production is food-grade carbon dioxide used to preserve food, to carbonate and dispense drinks, and to stun animals for slaughter. There is now a shortage which will impact meat supply, date codes on food and production of fizzy drinks. Yesterday, the government said it will subsidise the re-opening of one American-owned fertiliser plant in Teesside for three weeks.
The other major source of gas is Russia which is fulfilling its contracts but not supplying any more to meet the gap. It has a new pipeline waiting to be authorised that bypasses Ukraine so that they will be able to avoid paying transit fees to that country. The reason Russia is not supplying additional gas is either because they want to keep the price high, or it may be a negotiating ploy to get the new pipeline authorised quickly.
For UK electricity, we also have wind farms, but recent months have been the least windy since 1961. We have ageing nuclear plants that are suffering unplanned outages, and we have a cable for electricity imports from France that is currently shut.
It is not clear what sort of risk management will have been performed for scenarios like this, but winter is coming.
Data Sources: The Guardian newspaper; ft.com