Why UK energy prices are rising much faster than in Europe

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But energy prices in the UK are now higher than in comparable economies such as France and Italy, analysts told CNN Business. And the British have suffered price increases far greater than in most European countries, including Germany, where decades of energy policy have been upended by the war in Ukraine.

The Office for National Statistics said this week that UK natural gas prices had risen nearly 96% in the year to July, while electricity prices are up 54%.

Annual consumer price inflation for gas and electricity in the UK is expected to soar to an average of around 80% this year, compared to an average of 40% in the 19 countries that use the euro, according to an analysis by Deutsche Bank.

The worst is yet to come. Average annual energy bills could exceed £4,000 ($4,820) from January, and £5,000 ($6,000) later in the spring up from around £2,000 ($2,400) currently. Millions of people could be forced into poverty as a result. Leaders of the UK’s National Health Service warned on Friday of a “humanitarian crisis”. Many people could fall ill this winter as they “face the terrible choice between skipping meals to heat their homes and having to live in cold, damp and very unpleasant conditions”, they said.
Headline inflation in the UK exceeded 10% in July, compared to 8.9% in the eurozone. unlike others the problems of the British economy, Brexit does not appear to be a major factor. So why are UK energy bills rising so much faster than in most European countries?

A broken market

As wholesale cost inflated last year, 31 small UK energy companies – which traditionally offered competitive prices – went bankrupt, forcing millions of customers to switch to larger suppliers and pay higher bills.

The way the British government designed the energy market has made that more likely, Henning Gloystein, director of energy, climate and resources at Eurasia Group, told CNN Business. Small businesses acted as brokers rather than providers of an essential public service.

“Many retail energy suppliers in the UK were not true energy producers. Instead, they bought electricity and gas on the wholesale market and then resold it to retail customers like households,” Gloystein said.

This meant that as soon as wholesale prices rose far beyond what suppliers could legally charge, they went bankrupt.

Europe works differently. Most countries have stricter regulations on SuppliersGloystein said, including rules designed to protect them from sudden price spikes.

The prices paid by UK households are subject to a cap, but it is adjusted every six months – a period about to be reduced to three – which means that bills rise faster in line with wholesale costs.

“There is a transition agreement between now and when we move to this full quarterly model which pushes prices up a little bit more,” Sanjay Raja, chief economist at Deutsche Bank in the United Kingdom, told CNN Business. . “Suppliers are able to pass on wholesale gas price increases much faster than they have been in the past,” he added.

Lack of storage

The UK faced a “perfect storm” of events that drove up energy bills, according to Raja.

Most houses are powered by natural gashe said, as electricity, nuclear energy and renewable energy sources account for a larger share of the European Union’s energy mix.

The country also depends on gas to generate 40% of its electricity, compared to less than a fifth for the entire bloc, according to Deutsche Bank.

“It’s a double whammy and the UK’s overreliance on gas is a big reason why gas prices, I think, in the UK are a bit higher than elsewhere. “, did he declare.

While the UK produces about half of its gas production in the North Sea last year fell to its lowest level on record due to maintenance work, according to the government business department.

Lack of storage made the situation worse. Centric (CPYYF)a British energy company, closed the country’s largest gas storage facility in 2017, although it is in talks with the government to reopen the site this winter. Europe has more storage capacity and quickly filled it before winter — and a dreaded total cut of Russian gas.

UK natural gas contracts for the first quarter of next year are almost 7% more expensive than European benchmark contract prices, according to analysis by Auxilione. This is because Europe has now built a buffer for the winter months.

Lack of storage forces the UK to rely on “real-time flows” of gas from the North Sea, Norway, Belgium, as well as liquefied natural gas imports, Tony Jordan, director of Auxilione, told CNN Business.

“We are much more dependent on the here and now when it comes to winter,” he said.

European gas is still very expensive. It was trade at €242 ($244) per megawatt hour on Friday, an all-time high, according to Auxilione. That’s much higher than the UK gas spot price, which trades at the equivalent of €160 ($161) per megawatt-hour, but the differential is mainly due to increased demand in Europe as it fills its reservoirs for the winter.

Germany declared a gas crisis in June, after Russia cut throughputs from the vital Nord Stream 1 pipeline by two-thirds, bringing the country one step closer to gas rationing for industry.

Minimal government support

Faced with skyrocketing bills, governments across Europe have stepped in to help relieve the financial pressure on households.

But the “elephant in the room”, Raja said, is that none of the support offered by the UK government so far has directly subsidized consumer energy prices. Earlier this year the government announced a £150 local tax rebate for millions of households to help ease the pain.

More aid is coming soon, but it won’t be enough, say anti-poverty campaigners.

An electricity transmission tower near residential homes in Upminster, UK, Monday July 4, 2022.

In May, the government announced a £15 billion ($18 billion) support package, including a £400 ($482) loan to 29 million households from October, which will run over six months.

By way of comparison, France has capped electricity price increases at 4% until the end of the year.

Other countries “have had a more direct intervention with energy prices, so comparatively gas and electricity prices in the UK are a bit higher,” Raja added.

On Thursday, Germany announced plans to cut gasoline sales tax from 19% to 7% until March 2024, which is designed to more than offset new taxes introduced to pay for gas storage. The government has asked companies to pass the reduction on to their customers, according to a report by German broadcaster ZDF.
Liz Truss, the front-runner to succeed Boris Johnson as the UK’s next prime minister next month, has not said how she will provide additional help to households beyond reduce taxes.

The opposition Labor Party is calling for a windfall tax on the profits of oil and gas companies to be extended to help fund a freeze in energy bills this winter.

Mark Thompson contributed reporting.

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