UK braced for energy crunch and high prices

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·Business Reporter, Yahoo Finance UK
·3-min read
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Lighting a domestic gas hob in Santiago, Chile, October 192, 2012. Chile needs to increase the production of energy by 8,000 MW to ensure its growth, specially in the mining sector, but finding a way compatible with the environment. AFP PHOTO/Martin BERNETTI        (Photo credit should read MARTIN BERNETTI/AFP via Getty Images)
Reasons behind the increase in prices include low gas reserves, heightened global demand, and low wind output. Photo: MARTIN BERNETTI/AFP via Getty Images

The UK is braced for an energy crunch, with wholesale prices of gas and electricity soaring to record levels over recent days.

Benchmark natural gas prices in the UK and in Europe have tripled this year, and the rise in prices will mean higher energy costs for companies and more expensive bills for consumers.

The surge is set to eat into the profits of several energy firms over the coming months, and pressure net profit margins which are already at their highest since 2008.

Reasons behind the dramatic increase in power prices include low gas reserves, strong commodity and carbon prices, heightened global demand and low wind output.

Read more: UK energy bills may rise due to global gas supply crunch

Europe is already running out of time to refill storage facilities before the start of the winter, as flows from Russia and Norway, top suppliers to the continent, remain limited.

According to Goldman Sachs (GS), soaring prices are also exposing the risk of power outages over the winter period.

While potentially partly a result of lower demand at the start of the year amid the COVID lockdown, the UK's reliance on imports has also increased this year. For example, gas imports from Norway surpassed the UK's own domestic production over the first half of the year.

Stefan Konstantinov, senior analyst at commodity intelligence service ICIS Energy, told CNBC on Thursday that Europe’s gas deficit was “making the market nervous as we approach winter”.

“That is coupled with the very significant competition for LNG supplies from Asia and South America, which is driving gas prices up,” he said.

Factories have already been forced to suspend operations, with a leading fertiliser company closing two UK factories due to the price hikes.

On Wednesday night, CF Industries Holdings revealed that it was halting operations at its manufacturing complexes at Billingham in County Durham, and Ince in Cheshire.

It said that it does not have an estimate for when production would resume and blamed high natural gas prices (natural gas is a crucial component in the production of fertilisers).

Read more: Europe’s energy crunch is forcing UK factories to shut down

The closures will likely increase pressure on UK government ministers, as well as British energy regulator Ofgem, to take action to protect industry and households.

Gareth Stace, the director general of trade group UK Steel, said the “extortionate prices” were forcing some steelmakers to suspend work during periods when electricity prices were at their highest.

He called on the government and the industry regulator to “take action as this situation continues”.

Adding to the energy crunch, a fire on Wednesday knocked out a key subsea power cable that brought power from Britain to France, the UK’s top electricity supplier.

The blaze has halted electricity imports via the 2,000 megawatt power cable until at least 13 October, possibly into March 2022 for full capacity. This has now increased demand for electricity production within the UK.

Jim Reid, Deutsche Bank strategist, said: “Tight supplies that haven’t been replenished as much as expected after a cold winter are partly responsible, but there’s also a lack of coal options as increasing numbers of plants are phased out, and Russia has sent less supplies to Europe than expected.”

Watch: Europe faces skyrocketing power prices

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