Soaring gas prices have captured the headlines over the last week, sending some energy companies into administration and leaving businesses and homeowners alike facing the prospect of much higher heating and energy bills this winter. However, wholesale gas prices are just one aspect of a wider crisis for the UK’s energy supply. Huge increases in gas prices have come at the worst possible time for the UK’s energy sector, and we now face a winter generation picture where it seems as if everything that could go wrong, is going wrong.
What is Happening to Gas Prices?
Since January 2021, wholesale gas prices have risen 250%. 70% of that increase has come since the end of August. Across Europe, the gas price benchmark set at the Netherland’s TTF virtual exchange facility remains close to record highs seen last week.
There are a number of factors in play that are impacting on gas prices. Primarily, Asia’s continued recovery from the impact of lockdowns has seen demand for gas rocket, ramping up competition with European markets. In the US, power outages caused by Hurricane Nicholas impacted on oil and gas production, further trimming supply. This comes just two weeks after Hurricane Ida took 80% of oil and gas production in the Gulf of Mexico offline.
Most of Europe’s gas supplies originate in Russia, where state-backed gas giant Gazprom appear to have sensed an opportunity to push through their controversial Nord Stream 2 pipeline. Comments from the Kremlin that the proposed pipeline between Russia and the European Union would solve the current gas crisis carry the implication that they are willing to use their gas stores as leverage to force the project through. Russia claims the pipeline is complete, but the project has been dogged for years by opposition from some EU countries as well as the US, environmental groups and some German politicians.
A Perfect Storm for the Power Sector
While the rest of Europe is braced for significant price rises, the UK’s generation capacity currently looks particularly vulnerable. We are now heavily reliant on wind generation, with five of the world’s 10 largest offshore wind farms located in British waters. An unseasonably mild September has seen that generation collapse. Across 2020, wind averaged 25% of our total generation. Currently, it offers less than 7%.
In the absence of wind power, our generation mix still relies on gas turbine generation to pick up the slack. Gas is now required to make up more than half of our total energy demand, and even mothballed coal power stations are being brought back online to contribute. Not only does this badly hamper the collective progress made by the UK power sector towards better sustainability, but given current market conditions it is also a disaster for energy prices.
Further factors seem to continue to conspire against the UK and our ability to provide a safe buffer between supply and demand. Several of the UK’s own gas production rigs in the North Sea are currently offline, carrying out vital maintenance that was paused during the pandemic. Our aging nuclear fleet has also been disrupted, with reactors at Hinkley Point B, Heysham and Hartlepool offline.
Last week, a fire knocked out a key power cable linking the UK and France. The UK is a net importer of power from France and their extensive nuclear power station fleet, and the fire saw around 2,000MW of capacity severed. Half of that is expected to remain offline until March, with the rest hoped to come back online towards the end of this week.
Questions over Winter Capacity
National Grid had already warned that the UK’s winter capacity margin looked set to be at its narrowest for five years, even before recent events. Following the disruption caused by the fire, it leaves the UK facing a very real blackout risk in the event of any further unexpected outages. In terms of energy costs, we are left largely in the hands of the weather, but will almost certainly see significant increases.
What is already being described as the UK’s winter energy crisis is an important reminder that the days of reliable, predictably priced power directly from the grid may be coming to an end. The underwhelming performance of wind generation at a time when we need it most highlights that for all the benefits it offers, renewable energy can’t solve all of our energy problems alone.
For businesses who are likely to face significant increases in their overhead costs this winter, addressing your power management strategy should be a priority. As energy prices increase, better efficiency becomes increasingly vital; ensuring the power you do purchase is used as efficiently as possible. Technologies such as voltage regulation, that are able to deliver a significant reduction in your overall consumption, offer a steadily increasing return on investment as prices continue to climb. Put simply, the cheapest unit of energy is the ones that you don’t use. With record rises forecast for energy bills well into 2022, reducing overall consumption has to be a priority for any business concerned about costs.
With major disruptions or blackouts now a real possibility, addressing your power resilience to minimise or avoid disruption will also be top of mind for many businesses. Depending on your operations and level of exposure to power disruption, this could be through using voltage regulation to avoid sudden spikes or dips in voltage, battery energy storage to provide emergency power in the case of disruption, or a combination of the two.
To find out more about how Powerstar can improve your energy efficiency, reduce energy costs, and provide site-wide power resilience, speak to our team here.
23 September 2021