Gas crisis could mean cold winter

Date: 22/09/2021
Author: University of Salford Business School
Company: University of Salford Business School

Tony Syme, expert in macroeconomics at the University of Salford Business School, explores the current problems with energy prices and how we got to this situation.

Tony said: “With more energy firms going out of business and a price comparison site advising customers not to switch, deregulation is in the spotlight. Not only will the customers of the bankrupt energy firms face much higher prices when they are moved to another supplier, but OfGem’s £139 rise in the default tariff price cap comes into effect in October. The regulator had already raised the price cap by £96 in April.

“Deregulation was supposed to result in cheap energy prices driven by competition amongst UK energy suppliers and, aided by price comparison websites, this is what happened. From only 4% of consumers changing their gas supplier in 2015, 24% did so in 2019. This had a dramatic effect on the industry. The ‘Big Six’ energy companies accounted for 99% of the market in 2013; this figure had dropped to 70% by the end of 2020 when there were 70 domestic suppliers of gas and electricity.

“But those short-term gains of increased competition have come at a cost. Attractive deals to secure customers via the price comparison websites meant protection for households, but not for the suppliers who absorbed the risk of price fluctuations in the wholesale energy markets. By July, the number of domestic suppliers had dropped to 49 as wholesale prices rose 50% in the first half of the year. With wholesale prices continuing to accelerate, there may be as few as ten by the end of the year.

“There is precedent to all this. The California Electricity Crisis was similarly caused by a deregulated market, long retail energy contracts and rapidly rising wholesale prices. Energy firms went bankrupt and there were severe energy supply shortages between May 2000 and June 2001. When retail prices were unfrozen, firms filed for increases in excess of 50%.

“With inflation already rising, a shortage of lorry drivers causing supply chain problems, and the threat of a commodities supercycle, the squeeze on household budgets and company profits was already increasing. The latest energy crisis could make this a very cold winter.”