There has been considerable coverage of the dramatic increase in the wholesale price of natural gas (the price energy companies pay for gas to supply to consumers) across the world, and the significant impact this is having on both consumers in the UK and energy companies. This blog will look at the causes of the price increase and how this will feed through to consumers in Scotland, as well as the powers the Scottish Parliament has in relation to fuel poverty.
What is going on with the price of gas?
There are several factors which have contributed to the rapid rise in the wholesale price of gas this year. The Oxford Institute for Energy Studies published commentary in September which explains that there are three sources of gas in Europe – domestic production largely from the North Sea, pipeline imports largely from Russia and Norway, but also from Africa, and finally imports of liquified natural gas (LNG). European demand has largely been met through domestic production and pipeline imports, while Europe has generally been the ‘balancing’ market for global LNG – this means that the supply available to Europe is determined by other markets demand, not necessarily by what Europe needs. Asian markets tend to pay a higher premium and so are the preferred buyers for LNG exporters.
- European domestic production from January to August 2021 was down nearly 24% compared to the same period in 2019. Completion of maintenance work in the UK and Danish fields has been delayed due to the COVID-19 pandemic, while production from the Dutch fields has continued to decline, a longer-term trend as some fields near the end of their productive life.
- European pipeline imports are also down compared to 2019, by 4%. Imports from North Africa and Azerbaijan rose, but were more than offset by a reduction in imports from Norway and from Russia.
- Imports of LNG into Europe were also down in the first eight months of 2021 compared to the same period in 2019, by 11%. While overall supply in the global market rose, it did not rise as quickly as demand. Chinese imports rose by 30%, while Japan, Korea and Taiwan imported 7% more.
This overall reduction in supply has been compounded by a slight increase in demand, partly due to an increased use of gas in electricity generation. Scottish Government energy statistics show that over the first half of 2021, lower wind speeds and rainfall reduced generation from wind and hydro sources, and these lower wind speeds have impacted electricity generation across Europe. This has meant that withdrawals from reserves have been significantly higher in Europe than normal which has only been met by reducing reserves. The Oxford Institute noted that:
Not only were storage stocks substantially depleted in Q1 2021, but stock replenishment in Q2 and Q3 was slower than in recent years, leaving Europe with lower-than-average stocks as we move toward the start of winter.Why Are Gas Prices So High? Oxford Institute of Energy Studies, September 2021
How does this impact retail electricity prices and consumers?
The increased cost of natural gas has a direct impact on the price that energy companies pay to distribute gas to consumers, but it also has an impact on the price of electricity due to the role natural gas plays in generation. In 2020, 35.7% of UK electricity was generated from gas.
Ofgem are responsible for the regulation of the UK energy market and the protection of consumers, and since 2019 have set an energy price cap which limits the price consumers on default tariffs or prepayment meters will pay for their energy. In August 2021 Ofgem announced that the price cap would increase by £139 per year for default tariffs, and £153 per year for prepayment customers, which will affect around 11 million households across the UK.
Customers on fixed tariffs might be impacted by the increase in energy costs. Fixed price deals have risen significantly throughout the year, so customers who are due to renew over the coming months are likely to see a rise in the monthly price they pay. Even customers whose deals are not due to renew may not be insulated from the increased prices – so far this year 16 suppliers have failed, 13 of which have failed since September, as the price cap increase prevents energy firms from passing on the full increase in wholesale costs. While Ofgem ensures that customers’ supply is taken up by a new provider without interruption (and any account credit is protected), customers are not guaranteed the same terms or price as their existing deal. The Guardian quote analysis which suggests there could be as few as 10 suppliers still in business by the end of the year.
I thought Scotland produced oil and gas?
Scotland does produce gas, but production levels have generally been falling since 2004. The Scottish Government publishes full year statistics, with the latest data covering 2019. These show that 269,426 gigawatt hours (GWh) were produced, which was 61% of the UK total. This is a reduction of 415,100 GWh (60.6%) from the peak of 684,526 GWh in 2002 . The latest data on Scotland’s gas consumption shows that in the financial year 2019/20, total consumption was 47,502 GWh, so, despite the decrease in production, there is still a surplus of gas produced in Scotland.
However, Great Britain is a single energy market and at GB level there has not been a surplus of gas produced since the mid 2000s. For 2021 so far, net imports of gas into the UK totalled 337,911 GWh. The UK Department for Business, Energy and Industrial Strategy publish more recent data up to Q2 2021, in the Energy Trends publication, which shows that UK production of gas has declined over the last three years, and production in Q2 2021 was down 41% compared to the same period in 2020. This is due to the ongoing maintenance work on the Forties Pipeline System mentioned above. The reduction in production has meant an increase in gas imports, which were higher in Q1 and Q2 2021 than the previous three years.
Government policy in Scotland
This reliance on imports, and the significant demand globally for natural gas, means that while it remains an essential part of the UKs energy mix there will be pressure on energy companies’ costs, keeping bills high for consumers. Although most aspects of energy policy are reserved, there are some actions that can be taken in Scotland to try and address the impacts of the increase in energy costs in the retail market. Most policy in this area has focused on promoting energy efficiency, which will lower consumer bills. In September 2020 the Scottish Government announced a £16 million investment to help fuel-poor households improve the energy efficiency of their homes.
The Fuel Poverty (Targets, Definition and Strategy) (Scotland) Act 2019 sets the objective of reducing the proportion of Scottish Households in fuel poverty to no more than 5% by 2040. The latest data shows that in 2019 24.6% of households were in fuel poverty. The Scottish Government had intended to publish a fuel poverty strategy in September 2020, but has delayed this due to the response to the COVID-19 pandemic. The pressure on consumer bills will only add to the urgency to address this.
Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit