Is the UK Facing an Energy Crisis?

Rising energy prices could pile pressure on households and companies at a time when costs are rising across the board. Could the crisis also derail the renewable transition?

Cherry Reynard 27 September, 2021 | 12:03PM
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A perfect storm of rising demand and falling supply have seen gas prices spike across Europe. Countries built up fewer gas reserves over the summer, while disruptions to supply from Russian and Norway have made it hard to replenish. At the same time, other sources of energy, such as wind, have not generated enough to compensate. Could this disruption dampen the nascent recovery?

There are implications for individuals and corporates. Job Curtis, manager of the Silver-rated City of London Investment trust (CTY) says that higher savings rates built up during the pandemic could provide some cushion for households, but this capital is not evenly distributed. He says: “Savings have tended to accrue to middle class people, so may find their way into savings products as much as spending, but people at the lower end of the income scale didn’t benefit and the gas price rises will affect them much more.”

He points out that in the UK, this is coming at the same time as the National Insurance rise, along with a raft of inflationary pressures. This may leave households less room for discretionary spending and could slow economic growth.

Will Governments Step In?

Jamie Maddock, equity research analyst at Quilter Cheviot agrees, but says that governments may step in to limit the impact on the consumer: “It’s politically unpalatable to have these price rises hit the consumer. This is why the government has been limiting the price increases via the cap. That said, the cap will increase in October and it’s likely it’ll increase again in April 2022.”

Geraldine Sundstrom, asset allocation portfolio manager at Pimco, says governments in France, Spain, Italy and Greece are taking measures to soften the blow to households, either involving higher spending or raiding the windfall of utility companies. She adds: “Households will take a hit to disposable income and this is likely to also fuel inflation.”

There are also potential problems in the corporate sector, with higher energy bills raising input costs at a time when many companies are already under pressure from rising wages. This could dent margins. Curtis believes it is vitally important that companies have pricing power, the ability to pass price rises on to their customers.

At the moment, the impact has been limited to a relatively small number of sectors. Smaller energy companies have been the most obvious casualties with the failure of groups such as Avro Energy, Green, Utility Point and MoneyPlus Energy. Higher gas prices are also being felt further down the supply chain.

In a recent note, Fitch Ratings said agriculture and food producers could be a difficult area because of the hit to fertiliser producers: “Fertiliser producers have been severely affected by rising gas prices. Gas is a key input in ammonia production ... [and] several ammonia plants in Europe have cut their output or have temporarily shut down operations … producers may also seek to increase fertiliser prices to pass costs onto consumers.

“Agriculture and food producers are affected by challenges in the fertiliser sector. Agribusinesses may face shortages in fertiliser supplies and increased prices, most likely increasing their costs in the next season’s harvest.”

The ratings group points out that meat processors and carbonated drinks manufacturers, particularly in the UK, are already facing disruptions due to CO2 shortages (a by-product of ammonia manufacturing). Sundstrom says there could be further ripple effects in the sugar and starch industries

Maddock adds: “Other energy intensive industries such as steel could be affected and result in unplanned downtime, but for the time being are not reported as having been impacted.” 

We Need a Back Up 

Creating a more reliable domestic supply may be part of the solution. However, the transition to renewables may not be the answer many believe. Curtis says: “The government is being somewhat disingenuous about the energy transition. Part of the problem is that we can’t store electricity, that’s why prices are high. There hasn’t been much wind this year. It shows we need a back-up system. We believe we will see increasing volatility in energy prices.”

Certainly, it is not clear that it will accelerate the push to renewables and it may even set it back. Spain recently announced emergency measures to limit the potential profits energy companies can make from gas alternatives, such as renewables. Similar policies are being considered elsewhere in Europe. This may prompt energy companies to slow their energy transition measures and would be a serious setback for the decarbonisation push.

For the time being, the impact of rising gas prices is marginal. Governments are likely to step in to limit the impact on the consumer, while it is only a relatively small number of industries impacted. However, it comes as part of a spectrum of wider pressures – tax rises, constrained government finances and higher inflation. Ultimately, it could test the strength of the recovery to its limits.

 

 

 

 

 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Cherry Reynard

Cherry Reynard  is a financial journalist writing for Morningstar.co.uk.