The Energy Crisis

What is the energy crisis? 

Since early 2021, the world has been experiencing a global energy crisis as wholesale prices have surged. Europe, and the UK in particular, has seen some of the most extreme price rises, but the issue has been experienced worldwide. The energy crisis has had a profound impact on UK businesses and public sector organisations, transforming their relationship with the energy they use and their approach to energy management. 

What caused the energy crisis? 

The start of the global energy crisis stems from the world’s recovery from the COVID-19 pandemic. Following a prolonged period of reduced activity due to lockdowns, the post-pandemic recovery saw a global spike in demand for energy that rapidly exceeded supply. The result was a steady increase in prices, which increased its upwards trend throughout 2021. 

After peaking in November 2021, prices subsided slightly until the Russian invasion of Ukraine in February 2022, which drove global markets to record highs. Russia is the world’s second largest producer of natural gas and third largest producer of oil, with around 60% of that supply exported to Europe. International sanctions that followed the invasion and the Russian response to reduce exports to Western Europe saw energy prices surge again, with Europe particularly acutely affected. 

The UK has seen a more significant increase than the rest of Europe. There are a number of factors behind this, but the primary one is that despite a rapid shift towards renewable energy, we still rely on natural gas to provide baseload when demand is high. The UK produces very little of its own natural gas and has only a fraction of the storage capacity of most of our European neighbours. As a result, we are forced to import natural gas from Norway, Belgium and the Netherlands at a premium, and a lack of storage also means we are unable to stock up during periods where prices are suppressed. 

What will be the long-term impact of the energy crisis? 

There is a growing belief that rather than just a period of elevated prices, the energy crisis instead represents the acute starting period of a ‘new normal’ for wholesale energy markets, particularly for Europe. An unseasonably warm January saw demand for gas plummet across Europe. However, despite this decline, prices remain around double the average price seen pre-pandemic. While most analysts hope that the historic high prices seen during periods of the current price crisis will be outliers, markets are likely to remain both elevated and volatile heading forwards. 

In the short-term, a reliance on gas generation and even some coal generation being called upon will have increased the carbon intensity of the UK’s grid energy. However, the energy crisis has also catalysed both government and business focus on the benefits of the energy transition when it comes to more stable prices and better energy security. The risks associated with an over-reliance on imported gas supplies has been clearly demonstrated, and the UK is committing to an overhauled energy generation mix that reduces that reliance and bolsters our own generation capacity, with a focus on renewable generation and balancing. 

It has also seen much-needed focus placed on the importance of energy efficiency, both from Government and individual organisations. The Government launched the Energy Efficiency Taskforce in Autumn 2022, with a stated aim of reducing the UK’s collective energy demand 15% by 2030 from a 2021 baseline.  

Eventually, if properly managed, the energy transition should deliver an energy mix that is able to reduce energy costs, carbon emissions and exposure to volatile wholesale fossil fuel prices. To achieve that, the UK will need to carefully balance plentiful, low-cost renewable generation with sufficient balancing capacity to meet with demand at all times. This will almost certainly need to combine another generation method such as nuclear with energy storage technologies and grid balancing mechanisms such as demand side response.