How Will Russia’s Invasion of Ukraine Affect UK Gas Prices?
UK energy bills set to soar as wholesale gas prices rise following Russian invasion of Ukraine
Ukraine Crisis Will Cause UK Energy Bills to Soar
Russia’s invasion of Ukraine could cause many things to rise in price, especially gas – a development that will impact bill payers across the UK.
The backdrop of rising energy prices in the UK was already worrying. Now, the Russia-Ukraine conflict stands to make the situation much worse.
Fears over gas supplies and large bill increases have already intensified following Russia’s all-out invasion of Ukraine as UK natural gas prices rocketed by over 30%.
The national benchmark prices for natural gas shot up from 213% per therm on Thursday 24th February, to 280p the following morning, as global markets reacted to Russian President Vladimir Putin ordering attacks on Ukraine by land, sea and air.
This marks the second dramatic spike in the past few days. On Monday, prices rose by 10% as tensions approached breaking point – and coincided with the price of oil passing $100 per barrel. These climbing oil prices mean that petrol prices in the UK are poised to break records again.
Energy bills are also set to spiral up as a result of soaring gas prices. Millions of households are already preparing for their energy bills to shoot up after the new energy price cap comes into effect in April.
The new cap – which is the maximum amount energy suppliers can charge customers on standard variable rate tariffs for typical annual usage – will jump from £1,277 to £1,971. This follows an earlier price hike of £139 in October 2021.
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How High Will Gas Prices Rise?
Given that Russia is a key energy supplier to Europe, Britain’s cost of living crisis could intensify as a result of the conflict.
If Russia strikes back at Western sanctions by cutting off gas supplies to the continent, British consumers would almost certainly be hit with higher energy bills.
A surge in wholesale gas prices after Russia launched its invasion of Ukraine could see annual energy bills soar above £3,000 for millions of households, an analyst has warned.
Forecasters had previously predicted bills would rise by more than £300 in October, but Putin’s decision to send troops into Ukraine on Monday in what he previously falsely labelled a “peacekeeping mission” means that figure could “easily double” if maintained long term.
“In a worst-case scenario, with Russian gas and oil fully sanctioned and cut from the global market, crude oil could go up to $130 a barrel, or even higher,” DTN senior market analyst Troy Vincent told CNET.
If crude hit $150 a barrel in 2022, Vincent said, $6.50 or even $7 a gallon wouldn’t be impossible.
“At that point, though, it would trigger a global recession,” he added. “People would start limiting their activities to the bare essentials.”
Does the UK Get Oil and Gas from Russia?
The gas market is crucial to the UK’s energy supply because of its role in heating, industry and power generation.
According to the government, more than 22 million households are connected to the gas grid. In 2020, 38% of the country’s gas demand was used for domestic heating, 29% for electricity generation and 11% for industrial and commercial use.
So, given the importance of gas in the UK, how reliant are we on Russia for our oil?
While the EU depends on Russia for nearly 40% of its gas supplies, the UK is far less reliant, with the country accounting for around 3% of supplies here.
The government has been anxious to stress that the UK is not dependent on Russia for the vast majority of its gas supply, but has not commented on warnings that bills will soar if wholesale prices increase as expected.
The Department for Business, Energy and Industrial Strategy said: “Unlike other countries in Europe, the UK is in no way dependent on Russian gas supply. We meet around half of our annual gas supply through domestic production and the vast majority of imports come from reliable suppliers such as Norway.”
However, Boris Johnson also stated that “we must collectively cease the dependence on Russian oil and gas that for too long has given Putin his grip on western politics”.
The bad news is that Russia typically supplies 30-40% of Europe’s gas, meaning it still wields huge influence over prices, which are already eye-wateringly high. The UK’s energy market is closely connected to markets in Europe, so a price rise in Germany or the Netherlands means British suppliers must pay more to get hold of it.
The UK can’t even turn to stored reserves of gas for relief from market prices. Storage capacity is very low by international standards since British Gas’ owner, Centrica, shut down the Rough facility off the coast of Yorkshire.
What Other Factors are Impacting UK Gas Prices?
While the crisis in Ukraine is having an immediate impact on oil and gas in the UK, it’s hardly the sole factor.
Other factors affecting UK gas prices include high demand in Asia for liquified natural gas which has meant less than expected has reached Europe.
In the UK, several gas platforms in the North Sea have also closed for maintenance that was paused during the pandemic.
Meanwhile, cables that import electricity from France have recently been damaged following a fire. The National Grid said its site at Sellindge in Kent has to be evacuated following the blaze.
The fire and planned maintenance means it will be offline until 25 September and only half of its two gigawatt capacity available until March 2022.
What Can the UK Do to Stop Rising Gas Prices?
It’s likely that the political crisis between Russia and Ukraine will intensify, and the government will need to go further than current measures.
Boris Johnson acknowledged the impact of the market turbulence on UK consumers – already facing a rise in already-record prices – when he addressed the House of Commons.
The Prime minister said, “the government will do everything possible to save our people from the repercussions for the cost of living”.
Soaring energy prices are the key factor behind Britain’s current cost of living squeeze – which has seen inflation hit a three-decade high of 5.5% and prompted the Bank of England to forecast that it will top 7%.
So, does the government have a contingency plan to deal with ever-increasing gas prices in the UK?
So far, the government has stuck to the line that “thanks to our diverse mix of nuclear, natural gas and renewable technologies, the UK has one of the most reliable systems in the world”.
But, while the security of gas supplies doesn’t appear to be at risk, price pressure could have massive ramifications. The efforts of the chancellor, Rishi Sunak, to help households cope with rising costs involves giving them £200 off their energy bills, with this “loan” paid back at a rate of £40 per year over five years from 2023. The idea behind this plan is that part of the cost is postponed until markets return to normal.
However, if the Ukraine conflict is prolonged, prices could remain higher for much longer, meaning bills will still be high when households have to start repaying the government.
What other options do we have?
Alternative Gas Supplies
When it comes to securing alternative gas supplies, LNG from the US and Qatar is one option. Officials were reportedly in talks late last year with Qatar over a deal that could result in the gas-rich nation supplying extra cargoes of gas in the event of an energy emergency, according to the Financial Times. But the government denied requesting that Qatar act as a “supplier of last resort”.
VAT Cut
Energy UK, the trade body for suppliers, previously called for VAT to be cut on household bills from 5% to 0%.
Businesses currently pay 20% VAT on their energy bills and the government offers a 5% rate for firms that use a limited amount of electricity. Businesses are not protected by the energy price cap.But, in October’s budget, Mr Sunak resisted calls to cut tax on energy.
Green Levies
Suppliers also asked for levies that fund renewables investment and energy efficiency improvements to be removed from bills. The investment would instead be paid for from general taxation.
They argued that this would be more progressive because those on higher incomes would contribute proportionally more. The levy is a tax on an essential good, which takes up a significant part of the amount paid by low-income households.
E.On’s chief executive Michael Lewis meanwhile called for a “polluter pays” approach, which would have included an increased tax on carbon to make up for the money lost from levies on bills.
Suppliers estimate that scrapping green levies and cutting VAT to zero could reduce bills by £250 to £300 on average.
Spreading Costs
Energy UK also suggested an industry-wide financing scheme to allow suppliers to spread the cost of gas-price spikes and supplier failures over several years.
Currently, the price cap mechanism means that these costs will all hit people’s bills next year.
Under the plan, lenders would provide funds to cover the immediate up-front costs of buying energy, with the money recouped over a longer period. The government would not guarantee the loans but would oversee the scheme to ensure it is not abused.
Government Funding
E.On also called for a “more radical” approach and proposed that the government should step in to use public funds to lower bills in the short-term.
For example, that could entail the government taking some or all of the cost rises onto its balance sheet, allowing these sudden price spikes to be paid back later.
A version of this approach has now been unveiled by Mr Sunak, although, as discussed, not to the extent that suppliers were hoping for.
Beat the Rising Gas Prices
So, it looks like rising energy prices are something we’re set to live with for some time yet.
Following Russia’s attack on Ukraine, the cost of living crisis in the UK is only going to worsen.
If you’re concerned about increasing energy prices and want to take matters into your own hands, find out how to cut down your energy costs at home.
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