Some energy take-aways from the recent Textile Services Association (TSA) Spring Conference in Burton on Trent earlier this month were served up by Paul Dilley of Fox Energy, the TSA’s go-to expert. His presentation, entitled ‘The UK energy crisis: What next?’, initially set out the reasons why the past couple of years have gone from slow simmer to a full roiling boil in the energy cauldron of horror. However, he says, the heat is now being turned down a little – but don’t expect things to return to anything like pre-Covid levels until things finally rebalance in 2026-27.
According to Dilley the clock on the energy crisis followed this timeline:
As a result of the Brexit transition, the UK Emissions Trading Scheme (UK ETS) replaces the UK’s participation in the EU ETS, resulting in price volatility and market uncertainty. A colder-than-average winter in 2021 also led to an increase in energy demand in some areas of Europe.
April - June 2021
Low wind speeds across Europe during this period affect the UK’s proportion of wind generation, which is much higher than that of most of mainland Europe.
With the world emerging from a post-Covid slump after nearly two years of a record-level low in gas prices, the rapid economic rebound saw prices begin to soar. With industries like travel and hospitality requiring more energy at a similar period, demand outstrips supply and causes energy prices to rise rapidly.
The huge increase in gas prices forces some energy suppliers in the UK to go out of business. By the end of December 2021, 28 energy companies close their doors, affecting over two million customers.
All told, gas prices in the UK more than quadrupled during this period to 180 pence per therm. In September alone, the price of gas rocketed by 70%.
A fire at the IFA1 interconnector – a high-voltage cable used to import electricity from France – causes a full outage. Capacity reduces, and the interconnector is expected to function at a reduced capacity until late 2022.
The conflict between Russia and Ukraine causes further difficulties with the UK’s energy supply. Although the UK does not directly import its gas from Russia, many countries reduce or end their gas imports from the latter, causing a scarcity of available gas as a result.
The EU introduces regulations for energy storage, requiring all member states to fill in at least 80% of their storage capacity by November 2022. This is intended as a safeguard to ensure countries have energy reserves to survive winter 2022/23, but it does place significant demand on energy supplies – the impact of which contributes to market volatility for the remainder of 2022.
Russia reduces natural gas flows through Nord Stream, with supply running at 40% capacity in June 2022. Flow is reduced further in July, before being shut down fully in August. Following an explosion and a fire, Freeport LNG is forced to close its 15 million-ton-per-year plant in Quintana, Texas.
October 2022 proves a pivotal year in the ongoing energy crisis, with the launch of the Energy Bill Relief Scheme. The EBRS provides discounted energy rates for business consumers for six months from 1 October 2022 to 31 March 2023.
The UK Government announces a new scheme to replace the EBRS (which came into effect from 1 April2023) the Energy Bills Discount Scheme (EBDS).
Dilley lists other factors to being where we are now to: “The UK’s overreliance on gas for heating and cooking, despite having some of the lowest amounts of gas storage capabilities in Europe, means we’ve been particularly exposed during these challenging times.
One of the UK’s largest natural gas storage facilities, The Rough Storage facility, was closed in 2017, with the government declining to subsidise the cost of ongoing repairs and maintenance. This explains why the UK has so little gas storage capacity compared to equivalent EU countries. Owing to the energy crisis, Rough has since been recommissioned and is expected to reopen this winter.
Over the past decade, five nuclear power stations have closed in the UK, though not directly related to the energy crisis, these closures may be of detriment to the diversity and resilience of the UK’s energy supply.
What has caused the current drop in wholesale energy costs
Russia has already severed gas supplies to the majority of mainland Europe by closing the Nord Steam pipelines, and presently the conflict is little having little to no further effect to the Wholesale markets. A limited number of EU countries continue receiving gas from Russia in the form of LNG.
LNG (Liquified Natural Gas) Levels:
Good levels of LNG are arriving at the UK and the EU LNG terminals from the Middle East (Qatar) and the United States. Whereas these imports do not equal the volumes provided by Nord Stream, they do help keep storage levels near capacity and prevent further panic buying. There is also a huge volume of new LNG terminals under construction across Europe.
Gas Storage Levels:
As a result of the mild winter in Europe, most EU countries are currently sitting at well over 80-90% gas storage capacity, and as such there is less panic in the markets this year to replenish stocks for this winter and drive the wholesale market higher. Indeed, should the weather remain mild as we move through 2023, wholesale market prices should continue to plateau.
Although the UK suffered a mild cold snap in early December, thankfully we had a relatively mild winter across the UK and Europe has had one of the mildest Winters for a decade. This, coupled with the energy-saving efforts of homes and businesses worried by the prospect of unaffordable energy bills, has helped to cut demand, and caused a drop in prices. Weather patterns and forecasts are currently the main driver to the wholesale markets.
Why are we not seeing delivered energy prices reflecting the actual wholesale market?
Risk & Exposure:
The uncertainty of the coming winter’s weather and future years means that suppliers are reluctant to pass on the true wholesale market costs. The UK and EU are still nowhere near replacing the volumes of gas formerly received from Russia which means that should a harsh cold snap or ‘Beast from the East’ surface, countries will not be able to replenish stocks at a quick enough level to cater for the potential demand, causing the markets to again increase rapidly.
With the ending of the Governments EBRS, many businesses are expected to fail in the coming months, especially those that committed longer term during the crisis to provide some cost certainty, only for wholesale prices to fall. This could potentially leave suppliers with a huge tranche of gas, purchased at levels 5-6 times the current wholesale costs, which they will need to resell at huge losses.
Pre-purchased energy must be stored, Energy suppliers are continuously buying energy to make sure there's enough to cover demand. If demand exceeds supply, then they need to buy more at current market prices to cover the shortfall. But if supply exceeds demand, then suppliers need to sell the excess energy back to the grid - if the day-ahead price is lower than the price they bought the energy for, then they'll lose money. When the market is so volatile, the risk to suppliers is greater and so prices go up.
Lack of storage capacity:
The UK especially suffers from a shortage of storage space, and although our current storage levels are nearly full, we only have enough storage space for around 50% of our annual winter usage needs. Without further investment in storage, we will remain exposed to sudden supply shortages.
The Chancellor, under pressure from the House of Commons, reluctantly applied a further 35% windfall tax on oil and gas companies’ profits, on top of the existing 65% tax levels suppliers already pay in the UK. Therefore, with profits reduced via the higher tax levels, they are likely reluctant to reduce prices and limit profits.
The way the UK’s energy system works:
Although renewable energy accounted for almost half (45.5%) of the UK's total energy generation in the first three months of this year, we still rely on gas-powered plants to generate some of our electricity.
And that's where the pricing issues come from. Energy prices are currently set using a system called 'marginal cost pricing'. In short, this means that the most expensive type of energy is used to set the price for all types of energy, including renewables. Even if you're on a plan that delivers 100% renewable energy, the price of your electricity is set not upon the cost of wind or solar generation, but on the cost of the last source used to meet demand. As gas-powered stations are used to top up electricity demand in the UK, so the cost of gas-powered electricity is used to set the price of all electricity.
The Energy Bill Discount Scheme (EBDS)
This scheme introduced from the 1st of April this year only delivers a maximum discount of 1.961p kWh for electric and 0.697p kWh for qualifying businesses - which are businesses that entered contracts between the Summer of 2022 to December 2022, when the wholesale market was reaching its peak. All energy contracts currently being agreed will almost certainly not be eligible to receive this discount as the current wholesale cost of electricity and gas is below the threshold set by the Government for eligibility to the scheme.
The scheme does deliver better discounts for Energy and Trade Intensive Industries (ETII). Organisations are considered eligible for ETII support if at least 50% of its revenue is generated from UK-based activity within eligible Standard Industrial Classification (SIC) code sectors.
An additional discount is applied to 70% of that companies’ energy volumes, the other 30% continues to be discounted at the standard EBDS rates. There is quite a complex online application process, which opened to applicants just last week, and on a successful application a discount of 8.9p kWh for electric and 4.0p pkWh for gas can be achieved. Despite extensive lobbying, the laundry sector is not currently considered an ETII, however, there is currently one SIC code sector which we have seen a few laundries achieve success in applying for the larger discount.
15.11 Tanning and dressing of leather; dressing and dyeing of fur.
It may be worth speaking with your accountant to see if it is possible to add this SIC code against your limited company, especially if you do deal with the upkeep/dressing of leather and fur products. ETII companies only have until the 25 July to register for the scheme, after this point the application process will be closed.
Predicting the future
When can business energy users expect a return to normality? Unfortunately, we’re not quite out of the woods yet, with many experts and analysts predicting that the energy crisis won’t lessen until summer 2024/2025.
It is widely predicted that the UK will still be facing similar supply issues this winter, with the market not expected to reach a ‘new normal’ until mid-2024. Prices may remain volatile for a long time, especially if the UK continues to rely on imports – which is likely until we become more self-sufficient with our energy supply.
As such, the view is that we’ll be well into 2024 before energy prices find their new normal.
As more sustainable products make their way onto the market, and new sources of gas are utilised, prices should start to stabilise. And that is what has been going on as of late. Coal and clean renewables have been used to substitute gas in electricity generation.
Elsewhere, it’s been reported that across the EU, a 24% reduction in natural gas consumption has been achieved compared to the five-year average which is also aiding the European markets.
Two new LNG (Liquid Natural Gas) terminals in Germany are under construction. New research released by the International Oil & Gas Producers (IOGP) Europe expected to start operations this winter. There are nearly 30 other LNG import terminals in the planning stage or already under construction across Europe. and the American Petroleum Institute (API) shows Europe can progressively rebalance its gas supply and replace Russian gas imports well before 2030, despite short term challenges and significant impact to society.
The report goes on to say that as additional volumes are made available globally, Europe’s gas supply can be expected to rebalance, and market conditions return to pre-Covid levels by 2026-2027.
Find out more about how Fox Energy is helping laundries save on energy costs at www.foxenergy.co.uk