The UK is currently experiencing one of its worst energy crises since the infamous ‘Winter of Discontent’ under Jim Callaghan’s Labour government in the late 1970s. With countries reopening from COVID lockdowns, a huge increase in the demand for gas, wind turbines being short of wind, and various supply lines being damaged or interrupted, the UK’s energy sector is in the middle of a perfect storm.
Gas fuels 22 million households in the UK, making it crucial to keeping the country’s industry and workforce functioning. But, in spite of its importance, less than 1% of Europe’s stored gas is held by the UK. Having one of the lowest storage capacities for gas in Europe has left the country vulnerable to the current supply shortages. To make up for the energy shortfall, the government has had to temporarily resort to firing up formerly-dormant coal power stations.
Gas shortages across Europe have caused wholesale gas prices to surge by 250% since the beginning of 2021, with a 70% rise in the last month alone. Energy suppliers in the UK are suffering from the price hikes as their prices are restricted by the government’s energy price cap. The cap is reviewed twice a year by the government and sets the maximum price for energy tariffs, based on the wholesale cost of gas that is paid by suppliers. The cap prevents energy companies from raising their prices in line with their expenditure, resulting in them having to shoulder the financial burden. Smaller energy companies can only tolerate this for so long until they fold or require a bailout by the government. At the beginning of 2021 there were 70 energy suppliers in the UK and it has been predicted that only 10 will remain by the end of the year. The caps were intended to insulate customers from escalating domestic and international prices but, as more suppliers go under or drop out of the market, customers have been left stranded and now have to switch to a new, more expensive supplier. From October 1st, the cap will be raised by more than 12% and is likely to increase further in April 2022, but this will be too late for many struggling energy suppliers.
Of the many hurdles for the EU to jump in order to solve the energy crisis, one of the largest involves dealing with their largest energy supplier, Russia. In 2019, 41% of Europe’s natural gas supply came from Russia alone, courtesy of Gazprom and the Nord Stream I pipeline. In recent months, Gazprom, the Russian state-backed gas company, has limited how much extra gas they deliver to Europe beyond their contracted amount. This has caused gas prices across Europe to surge by a further 10% in the past week. The International Energy Agency confirmed that Russia is fulfilling its long-term contracts to European customers but that it has supplied less gas on average to north-west Europe in 2021 than in 2017-2019, before the coronavirus pandemic began. Gazprom’s chief executive Alexei Miller claims they are ready to increase production if needed but prices could rise further in the winter due to gas shortages in their underground facilities. Energy traders are suspicious of this shortage as Russia controls these facilities and notably declined to exhaust their purchasing capacity of gas via pipelines from both Ukraine and Poland. This observation has roused suspicions across Europe about the company’s intentions, due to Gazprom and Russia’s ongoing disagreements with the EU about the controversial Nord Stream 2 pipeline and the delay in having its operation authorised.
The Nord Stream 2 is an underwater pipeline stretching over 745 miles from Russia’s Baltic coast to northeastern Germany. Running alongside its twin, the Nord Stream 1, it will pipe an equal 55 billion cubic metres of cheap natural gas per year to Europe, doubling the amount of gas being sent from Russia to Germany. Despite various legal and political challenges since its inception in 2012, the Nord Stream 2 reached completion earlier this month. Russia has to wait for German regulators to approve and certificate the pipeline’s operation before any commercial deliveries can be made through it. Gazprom had planned to launch the first flows of gas at the start of October but the final decision on whether the pipeline can operate could take up to four months. These delays are rumoured to be the reason for Gazprom’s restriction of surplus gas supplies into Europe, effectively holding the gas hostage until the EU accelerates its decision on the pipeline. These rumours have been made more credible by comments from Gazprom and Russian officials that Russia could increase gas sales once Germany and the EU approve the start-up of the pipeline.
Many Eastern European countries opposed the building of the pipeline as it gives Russia a stronger grip over Europe’s energy security. Among those countries, Ukraine has been one of the project’s most vocal critics. Their opposition is largely due to the pipeline’s route, as it takes the same route as the Nord Stream 1, bypassing Ukraine’s pipeline infrastructure and removing an important check on Russia’s growing aggression. This also deprives Ukraine of approximately a billion euros annually in transit fees. Across the pond, the United States are attempted to restrict Russia’s dominance by labelling the pipeline a security risk and placing sanctions on it earlier this year. The sanctions had their desired effect and delayed the building of the pipeline, angering Germany who have a commercial interest in the project.
In July, President Biden and German Chancellor Angela Merkel agreed to allow the completion of the pipeline without any further sanctions and the Nord Stream 2 was completed earlier this month. However, the two countries recognised the threat to Ukraine and Poland’s energy security and the potential for Russia to cut off their energy supply and have consequently threatened to trigger sanctions on Russia if the pipeline is ever used as a political weapon.
In the meantime, EU lawmakers have called for an investigation into Gazprom to reveal whether their refusal to supply more gas is intended to escalate market prices. This market manipulation is likely intended to to pressure regulators to accelerate their approval of the Nord Stream 2 pipeline. Gazprom have a majority stake in the $12 billion project, so the accusation is not unfounded, but the investigation is unlikely to be immediate so their underhand tactics may endure unabated.
If Gazprom are proven to be manipulating gas prices by hoarding supplies, Russia will have already fallen foul of America’s threat by using the pipeline as a political weapon and severe sanctions will likely be imminent. But, regardless of the investigation’s outcome, Russia has seemingly placed the EU and Germany in checkmate as they risk losing face by acquiescing to Russia’s aggressive tactics, but they also risk many lives being lost if the energy crisis is not resolved in time for the harsh winter. Unless larger volumes of energy can be sourced from other countries Germany and the EU have a tough decision to make which could tilt the balance of power in future negotiations.