Energy supply issues have been causing shortages and high prices across Europe for weeks, with the UK one of the hardest hit.
Electricity and fuels like gasoline and fuel oil are currently experiencing record prices in the UK. There are many causes of the problem. The supply of natural gas has been tight in recent times, as Asia and Europe compete for limited resources, pushing up prices.
Britain is struggling with energy supply as the global price of LNG (liquid natural gas) rises. This has been a problem in a context of low wind generation. Due to the increasing use of wind power (and to a lesser extent solar power) in Britain, the country has had to rely on natural gas imports from Russia and Venezuela to operate its gas plants when the wind stalls across the country. This cycle is crucial for the stability of the energy network because electricity must be generated according to need. So whenever one source suddenly disconnects, another is needed quickly to replace it. The need for cycle production has put much of the country’s nuclear production out of service sooner than expected, in part because it provides a reliable base load, but cannot be quickly recycled at the margin.
A shortage of truck drivers has caused energy shortages to spill over beyond electricity. Gasoline and food shortages spread across the country, and in early fall, Britain’s Small Business Minister, Paul Sculley, says that “it’s going to be a really tough winter for people.” Sculley also stressed that people should continue shopping for food and fuel as usual and avoid panic shopping, which would only make the crisis worse.
The rapid rise in the cost of gasoline and other energy costs in the country has led to an astronomical increase in the costs of manufacturing and other heavy industries. Business interests are asking for government help. Steel, ceramics, chemicals, glass and paper are among the most affected sectors by the price of gas in particular.
Various government ministers have sent mixed messages about who is in talks with whom as they seek a way out of this crisis. And the country’s leaders are scrambling for piecemeal solutions.
Monday, the British Secretary for Business has submitted a proposal to the Treasury to help companies hardest hit by the energy crisis. The proposal involves loans to affected companies, and Prime Minister Boris Johnson is expected to back it. Fortunately, this program will at least take the form of loans rather than a general bailout, but the pressure for this intervention remains alarming nonetheless.
Prime Minister Johnson will be under heavy pressure to do something more as the crisis worsens. This would likely mean more government intervention in the energy market, which would likely only confuse matters further.
According to the Financial Times, the head of UK Steel, Gareth Stace, declared that “the energy crisis of today will quickly become the steel crisis of tomorrow”. The country’s heavy industry is reeling from the drastic change in energy costs, and this cost will be passed on to consumers through higher prices for essential products. Even with the Treasury loans on offer, many of these companies will struggle to weather the crisis and prices will soon skyrocket.
The current situation in the UK is indicative of the consequences of too much government tampering with electricity markets. As they move their energy infrastructure away from domestic production and shut down reliable nuclear capacity, it’s no surprise that a global supply problem in the LNG market triggers such a crisis.
The situation in the United Kingdom deserves to be observed because it evolves in the months to come. There are lessons to be learned here about what market interventions can do to undermine our ability to respond effectively to sudden supply disruptions and demand shocks. When the energy market is based on political decrees rather than real conditions, serious consequences begin to emerge.
This article was produced by Paige Lambermont, Policy Associate at IER