Liz Truss, the new leader of the Conservative Party and British Prime Minister, comes to power amidst the worst energy crisis since the Second World War.
In her victory speech, she pledged to “deliver on the energy crisis, dealing with people’s energy bills but also dealing with the long-term issues we have on energy supply.”
To understand the context of the energy crisis that Liz Truss now faces, and what her energy policy proposals could mean for businesses moving forward, we spoke with Ramnikh Kular, Energy Trader at Northern Gas and Power, Europe’s largest energy consultancy, following immediately after the new prime minister announcement.
From what we know at this moment, do you think Truss has a clear, well-informed picture of the energy market?
Ramnikh Kular: I think the magnitude of the energy crisis is bigger than expected by anyone.
For them to have a relevant impact, Truss would have to take extreme measures, both involving demand and supply policies.
Demand destruction could be on the agenda for the upcoming winter. However, in the medium term, the UK needs to increase its LNG imports or source new trading partners.
Truss has proposed to freeze energy bills by paying energy companies to sell gas and electricity below market rates this winter and provide substantial support to businesses. However, to what extent this materializes is yet to be seen.
Truss promises to outline her plan to deal with the energy crisis within one week – without greatly providing any real detail, so I think we will have a clearer picture next week.
With your knowledge of the market and the factors creating this energy price crisis, what three things would you ask Truss?
RK: I would pursue the following:
- Fasten the process of the reopening of the rough storage facility.
- Reduce exports via the BBL and IUK pipeline, so that the storage facility could be filled up.
- Set up payment plans for businesses so that they can pay energy bills, later down the line.
What strategies are you seeing customers employing to get through these times?
RK: The energy crisis is impacting most of the sectors across the UK. All major industries are feeling the pinch of unprecedented commodity costs and rising non-commodity costs.
As it stands, for those businesses who are unable to procure at these levels, we would recommend taking a flex contract.
Flexible purchasing would allow the business to take advantage of any downside in the market. In this instance, the trading team would fix out your volume, when there is a dip in the market, and unfix to rebuy later if market conditions allow. In this way the trading team aim to reduce the businesses unit rate.
Can businesses take some control of the current situation independent of government influence of political persuasion? If so, what can they do…?
RK: Apart from flexible contracts, they can look to energy efficiency.
Our current clients are looking towards the ClearVUE.Zero energy management tool, and it’s helping them find “hidden” energy waste. This has helped them significantly throughout this year so far, and it is expected to be a key tool over the winter and in the coming years.
Are you hearing from businesses that their energy efficiency measures are having an impact now?
RK: Absolutely. The energy efficiency tools are very vital at this time. We have seen clients who have over hedged and have used less, for example, gas, and they know that they have used less of that energy because they have these tools in place. These tools allow businesses to be efficient and take advantage of the market situation as well.
The energy crisis is an unprecedented time, and businesses need an unprecedented tool to combat it.
What has led to today’s energy crisis?
RK: Several events since 2020 have led to extremely high prices for both gas and power.
Initially, a colder-than-seasonal normal April and May 2021 led to UK and European storage sites withdrawing gas, rather than injecting. This created panic in the market since concerns about storage in the upcoming winter began to materialize.
Moreover, the blocking of the Suez Canal, the launch of the UK Emissions Trading Scheme, and the carbon price rally created bullish price impetus during the summer. All these events were magnified amid tight supply. Tight supply was evident across the UK and Europe due to reduced Russian gas flows.
Uncertainty due to Russian flows into Europe during the winter and the IFA interconnector fire led to tighter markets going into the winter period. Reduced Russian supply into Europe was a constant theme in 2021 and contributed to upward price pressure during the winter.
The Russian invasion of Ukraine in February this year intensified the energy crisis and markets have since traded at unprecedented levels. The sanctioning of Nord Stream 2, the refusal to pay in roubles, among other things kept prices at elevated levels.
More recently, French nuclear outages and outages at key US export LNG facilities, amid reduced Russian supply have added further to the supply tightness.