Soaring gas prices are a cost of this war – and Britain cannot avoid them | Energy bills
Russia’s invasion of Ukraine has led to crippling gas price increases.
On Friday, the price per therm soared 25% to a record high in energy markets before falling back. A fresh spike above 500p per therm – nine times the price seen just over a year ago – is expected over the next few days as traders panic over the tide of war.
Fears that Moscow is planning to curtail natural gas supplies in response to new rounds of sanctions, further driving up the price, cannot be easily dismissed, say some analysts, who admit Vladimir Putin’s administration is deliberately undermining any rational view of his tactics. in this increasingly bitter and destructive war.
Unsurprisingly, major recipients of Russian gas across Europe have spent the past week scrambling to find alternative sources.
Italy, which uses gas to produce 40% of its electricity and imports more than 90% of its gas, mainly from Russia, has turned to Algeria and Azerbaijan for alternative supplies.
German politicians have talked about canceling plans to close nuclear power plants and increase electricity production from coal-fired generators.
In the short term, however, Russian gas is an essential part of the energy mix, and without it rationing would be widespread.
Heavy industries across Europe have already adopted short-time work or, in several cases, weekly closures to cope with rising prices. Automaker bosses are among those who believe they could never pass the cost of higher energy on to consumers and have therefore opted to restrict production until prices come down.
Boris Johnson rightly claims Britain has managed to cut gas supplies from Russian gas fields to less than 5%, but privatization of UK North Sea supplies ties consumers to prevailing market rates international energy markets, leaving the UK as exposed as any other country to rising prices.
According to industry body Energy UK, recent increases could push the average energy bill from more than £2,000 a year after a price cap was lifted in April to closer to £3,000 in October, when the cap will be revised. Consumers are already being offered flat rates of £3,500 a year.
That leaves Britain and Germany among the hardest hit by rising prices, in part because they have so little control over domestic supply via public ownership.
According to energy analyst Ano Kuhanathan, any restrictions on Russian gas supplies would hit industrial and residential users hard.
He works for Euler Hermes, a subsidiary of German insurance giant Allianz, and concluded in a report with two colleagues last week that much of Europe will be dependent on Russian gas for several years, despite measures to reduce demand and to develop alternative energy sources.
He dismissed an International Energy Agency (IEA) report that European leaders could cut their dependence on Russian gas by a third in just one year as “extremely aggressive” and almost certainly impossible.
The IEA highlighted a 10-point plan that included strong pressure to insulate homes, a faster wind farm construction program and publicity pressure to persuade people to lower their thermostats by 1C.
Stressing the need to act quickly, IEA Executive Director Fatih Birol said: “No one has any illusions anymore. Russia’s use of its natural gas resources as an economic and political weapon shows that Europe must act quickly to be prepared for considerable uncertainty regarding Russian gas supplies next winter.
Jim Watson, professor of energy policy at UCL, said Britain was in a similar position and that “reducing gas demand should be central to the UK’s response to the invasion of Ukraine and high prices”.
But Kuhanathan said a change in strategic planning would leave energy market dynamics largely unchanged in the short term and that, without rationing, there was little choice but to continue using Russian gas.
“Most of the gas in Europe is transported by pipelines. There could be a switch to liquefied natural gas (LNG), but there is no storage capacity.
“And anyway, Japan and China are among the many countries that want huge amounts of LNG, which means the extra supply isn’t there right now,” he said.
Britain also lacks the storage capacity that could shield the UK from the full impact of gas price volatility.
The Germans had the illusion that a lack of storage was not something they needed to worry about. But reports last week in the German press revealed that the country’s largest gas storage facility is partly owned by Russian gas supplier Gazprom and was nearly depleted in the weeks leading up to the invasion.
Given that Russia accounts for 17% of global gas supplies and 12% of oil production, it will be a painful transition to alternative sources, especially if the switch is to take place in months rather than years.