The worst of the energy crisis is yet to come

Even right-wing governments will find themselves having to further regulate the energy industry as the supply crisis worsens

August 05, 2022
Photo: Stephen Frost / Alamy Stock Photo
Photo: Stephen Frost / Alamy Stock Photo

The world’s energy markets remain volatile, and for consumers in countries which depend on imports of gas—Britain and most of Europe—things are likely to get worse before they improve. 

The last two months have seen a series of reductions in gas supplies from Russia into Europe, culminating in the announcement at the end of July that supplies traded through the Nord Stream 1 pipeline from Russia to Germany will flow at no more than 20 per cent of normal capacity for the foreseeable future. The announcement led to a further increase in prices, with the main European benchmark—the price per unit—now up 375 per cent on a year ago.

The immediate response from the European Commission was to ask EU countries to reduce gas consumption across the continent by 15 per cent. But the impact of the policy has been watered down by the unwillingness of a number of countries, including Spain and Italy, to accept the reduction. European solidarity in the face of Russian aggression is strictly limited. Attempts to establish a common purchasing system for gas have been overtaken by national initiatives to sign bilateral deals. Germany is negotiating with Qatar and Norway, while Italy is close to a deal with Algeria. As the impact of the latest supply restrictions begins to be felt, the result will be intensive competition for any spare or uncontracted gas which can be found around the world.

The available volumes are very limited. US shale gas production has increased but other projects, which could bring gas to Europe from Africa, Central Asia or the Eastern Mediterranean, will take years to develop—not least because of the infrastructure required. For the time being, more price increases seem inevitable.

So do constraints on consumption. Germany is already preparing to reduce the temperature in district heating systems, which warm 14 per cent of the country's homes, but is mainly powered by coal and gas. It is also planning on limiting the illumination of public buildings. Mandated cuts in industrial gas use will hit the economy and will contribute to a serious downturn or recession over the winter.

UK energy trade with Russia is minimal, but since we import half our gas needs from the world market we cannot escape the price increase. The Ofgem review of the retail price cap, due at the end of August, is expected to increase average domestic energy bills to over £3,300. The new higher prices will be applied in the autumn—but will not be the last. Another review and another increase seems certain later in the autumn. By the spring, prices could have risen by £2,000 from their 2021 levels. At the same time, Russian frustration at the lack of progress in their war in Ukraine could lead the Kremlin to deploy energy as a weapon to push countries such as Germany into forcing the government in Kyiv to accept territorial concessions in return for a ceasefire.

All this leaves governments trapped by their inability to alter market conditions in the short term. Talk of the long-term development of renewables, nuclear power or hydrogen means little to domestic consumers who facing the immediate challenge of paying inflated bills or to businesses who fear that physical cuts to supply could ruin their operations.  

In past crises, energy security concerns have focused on oil, and the power of producer cartels such as Opec. This time the oil market has stabilised and prices are falling because supply is sufficient to meet demand given the general downturn in economic activity. Russian oil supplies continue to flow to markets in Asia or Africa. In the global economy of the 2020s, energy security is about the supply and pricing of natural gas and electric power.

In theory, the business of energy supply is largely run by private sector companies responsible only to their shareholders. In times of stress, however, the public regards governments as responsible for the continuity of supply at affordable prices. Even right-wing governments, as in the UK, may find themselves in the uncomfortable and undesired position of having to intervene to an ever greater degree, and in the end impose a form of nationalisation on the industry, with retail prices limited by regulation and the balance funded by the taxpayer. Emergency action can easily evolve into new patterns of ownership and control. The renationalisation of EDF, the main supplier of electricity in France, which will take place in autumn, may be the shape of things to come. The shift will be driven by pragmatism rather than ideology but the net result will be the same: energy, in common with defence, will be accepted as a matter from which the state cannot disengage.