Britain’s Energy Sector: Too Many Suppliers, Not Enough Supplies, and a Need to Rationalise Energy Use

A number of smaller energy suppliers have been forced out of business in the UK since January 2021, at which time the nation’s privatised energy sector consisted of over eighty companies, leaving nearly 1.8 million domestic and business customers without a provider as of September. Mr Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, naturally had to step in and reassure the British people that there wasn’t any crisis after all and that winter blackouts would not happen. Addressing the House of Commons on 20 September 2021, he said “we have sufficient capacity, and more than sufficient capacity, to meet demand” and that the UK has a “diverse range of gas supply sources”. In keeping with his free market values, he had no sympathy for failed or failing smaller companies with “poor business models”, both refusing them government bailouts as well as not countenancing subsidies for larger providers to take on their customers, and also ruled out a return to oligopoly, as exemplified by the erstwhile nationalised power utilities. It appears that the government may be content in future with a smaller number, maybe around ten, energy suppliers in a streamlined and thereby more “efficient” energy market.

These market failures are primarily the result of a mismatch between supplies of gas and the energy demands of households and businesses, leading to a 250 per cent rise in wholesale gas prices between January and September this year, with a 70 per cent rise in August alone. Gas price rises, combined with a mandatory energy price cap, imposed by energy regulator Ofgem and last reviewed this August, placed many smaller providers in an unsustainable position and forced them to withdraw from the market. These smaller providers fell victim to a business model in which suppliers are not necessarily responsible for energy generation but merely purchase gas at wholesale prices before reselling this on to their customers.

The shortage of gas is the result of a number of different factors. Reduced supplies of natural gas via undersea pipeline from continental Europe (Belgium and Netherlands interconnectors), declining North Sea production, compounded by delays in maintenance of gas platforms, and a higher demand for liquefied natural gas (LNG) in Asia alongside reduced tanker shipments to LNG terminals (one at the Isle of Grain, Kent, and two at Milford Haven, Pembrokeshire), have all combined to reduce British gas stocks. Gas storage levels have also fallen, with the major long-term Rough gas storage facility operated by Centrica (owner of British Gas), under the sea bed 19 miles off the East Yorkshire coast, being forced to close in 2017 after the government refused the company subsidies to keep it in operation.

 The UK relies heavily on natural gas (a non-renewable source) and on wind power (renewable source) for electricity generation. The effects of reduced gas supplies were amplified by a fall in the energy output of wind turbines, with the calmer than usual British Isles proving not to be windy enough in recent months. Coal plant capacity and coal-fired power generation have been falling over the years and nuclear power plant closures and outages further reduced energy supplies from other sources.

Rising gas prices equate to rising domestic fuel bills, which will further increase inflation, which has already crossed the desired target of an annual 2 per cent increase at most. The smaller energy providers have been caught out by the energy price cap, which has only helped the so-called ‘Big Six’ providers (British Gas, EDF Energy, E. ON, npower, Scottish Power, and SSE) to consolidate their market dominance. There is a large choice of confusing tariffs to select from, and the cap applies in varying degrees to the different tariffs on offer. Default tariffs, in particular, already work to the detriment of customers unwilling or unable to shop around for cheaper options, possibly through comparison price sites.

An undesirable side-effect of rising gas prices is the crisis in domestic carbon dioxide (CO₂) production, as a by-product of fertiliser manufacture, which relies on adequate supplies of affordable gas. Around 60 per cent of UK supplies have come from two fertiliser factories, in Cheshire and on Teesside, both of which have been since closed by their owners- CF Industries. The shortage of CO₂ has affected both the humane slaughter of livestock as well as reduced supplies of CO₂ for vacuum packaging of fresh foods, baked foods, meats and salads, Covid-19 vaccine transportation, and the manufacture of carbonated water, soft drinks and alcoholic beverages.

The energy sector has experienced a series of company failures and thereby drawn attention to some of the problems of privatisation of shared resources that happen to be basic necessities for day-to-day living. The energy sector is fragmented, with generation, transmission, distribution, and supply the responsibility of different companies. The choices provided by multiple providers, acting at different points along the supply chain, have not helped customers already struggling to meet their finances and liable to fuel poverty and insecurity. Whatever happens, a self-correcting market is unlikely to provide all the solutions to gas insecurity by itself. In the longer term, a reduced reliance on natural gas is a priority, given the urgency to respond to the challenges posed by climate change.

Ashis Banerjee