14 min

The gas and the electricity price crisis - fundamental causes and big consequences Helm Talks Podcast

    • Business

The gas crisis is very predictable and has caught the government and the regulators asleep at the wheel. Virtually no storage, suppliers without proper contractual cover, and a flawed model of competition have left the UK exposed to the intermittency of wind without proper back-up and with customers picking up the bill. Russia, low wind output, old-fashioned twentieth century wholesale market pricing, and inadequate scrutiny of the suppliers are the immediate causes. But the fundamental problem is the short-termism of the market. Just like Northern Rock, the shift from a longer-term contractual basis to a real-time spot market means volatility, not stability. The price cap is a longer-term contract (or at least six months) and should have forced a consequential response by the companies to go long too.

Just like Northern Rock, limited liability allows the companies to escape, leaving customers to pick up the tab. The Cost of Energy Review in 2017 proposed a reshaping of energy markets to firm capacity, and the Equivalent Firm Power (EFP) auctions. As with the other recommendations in that review, the government ignored this, and it is now reaping the consequences. The ostrich approach will not save the government: the market is flawed, not simply going through a bit of turbulence.

The gas crisis is very predictable and has caught the government and the regulators asleep at the wheel. Virtually no storage, suppliers without proper contractual cover, and a flawed model of competition have left the UK exposed to the intermittency of wind without proper back-up and with customers picking up the bill. Russia, low wind output, old-fashioned twentieth century wholesale market pricing, and inadequate scrutiny of the suppliers are the immediate causes. But the fundamental problem is the short-termism of the market. Just like Northern Rock, the shift from a longer-term contractual basis to a real-time spot market means volatility, not stability. The price cap is a longer-term contract (or at least six months) and should have forced a consequential response by the companies to go long too.

Just like Northern Rock, limited liability allows the companies to escape, leaving customers to pick up the tab. The Cost of Energy Review in 2017 proposed a reshaping of energy markets to firm capacity, and the Equivalent Firm Power (EFP) auctions. As with the other recommendations in that review, the government ignored this, and it is now reaping the consequences. The ostrich approach will not save the government: the market is flawed, not simply going through a bit of turbulence.

14 min

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