Energy supply problems have been causing shortages and high prices across Europe for weeks, with the United Kingdom one of the hardest hit.
Electricity and fuels like gasoline and heating oil are currently experiencing record prices in the UK. The causes of the problem are multiple. The supply of natural gas has constricted lately, as Asia and Europe compete for limited resources, driving prices up.
Britain is having energy supply problems as the global price of LNG (liquid natural gas) rises. This has been a problem amid low wind production. Because of the increasing use of wind power (and to a lesser extent solar power) in Britain, the country has had to rely on imports of natural gas from Russia and Venezuela to cycle up its gas plants when the wind stalls across the country. This cycling is crucial for the stability of the energy grid because power must be generated as it is needed, so whenever one source suddenly goes offline, another is needed quickly to replace it. The need for cycling generation has taken much of the country’s nuclear generation out of service earlier than planned, in part because it provides reliable baseload, but can’t be quickly cycled at the margins.
A shortage of truck drivers has caused the energy shortages to spread beyond electricity. Gasoline and food shortages have become widespread in the country, and as fall begins, UK Minister for Small Business, Paul Sculley, says that “this is going to be a really difficult winter for people.” Sculley also stressed that people should continue to purchase food and fuel as usual and avoid panic buying, which would only serve to deepen the crisis.
The country’s rapidly rising gasoline and other energy costs have caused the costs of manufacturing and other heavy industry to rise astronomically. Business interests are pushing for help from the government. Steel, ceramics, chemicals, glass, and paper are among the industries hardest hit by the gas price in particular.
Various government ministers have sent mixed messages about who is in talks with whom as they seek a way through this crisis. And the country’s leaders are scrambling for piecemeal solutions.
On Monday, the UK Business Secretary submitted a proposal for the Treasury to help the firms hardest hit by the energy crisis. The proposal involves loans to affected firms, and Prime Minister Boris Johnson is expected to support it. Luckily, this program will at least come in the form of loans rather than as an all-out bailout, but the pressure eliciting this intervention is nonetheless alarming.
PM Johnson will be under great pressure to do something more as the crisis deepens. This would likely mean more government intervention in the energy market, which would likely only muddle things further.
According to the Financial Times, the head of UK Steel, Gareth Stace, said that, “the energy crisis of today will fast become the steel industry crisis of tomorrow”. The country’s heavy industry is reeling from the dramatic energy cost shift, and this cost will be passed on to consumers through higher prices for essential goods. Even with the proposed treasury loans, many of these firms will struggle to weather the crisis, and prices are soon to skyrocket.
The situation in the UK right now is indicative of the consequences that come from too much government tampering in electricity markets. As they transition their energy infrastructure away from domestic production and close reliable nuclear capacity, it comes as no great shock that a global supply problem in the LNG market would touch off such a crisis.
The situation in the United Kingdom is worth watching as it evolves in the coming months. There are lessons to be learned here about what market interventions can do to harm our ability to respond effectively to sudden supply disruptions and demand shocks. When the energy market is based on political edicts, rather than real-world conditions, stark consequences begin to emerge.
Catalyst articles by Paige Lambermont | Full Biography and Publications