EFFing Crisis

Rising energy prices
Rapidly rising energy, food and fuel prices have been dubbed an EFFing Crisis by UK Ministers, as they struggle to get rampant inflation under control. Gas and electricity prices started rising in mid-2021, which was unusual as energy prices typically decrease in the warmer spring and summer months due to a decrease in demand. Although wholesale gas prices had been predicted to begin rising in 2021 as the gas surplus was due to be exhausted (meaning prices had previously been particularly good value), the sustained increase and subsequent acceleration of prices was unexpected. Energy consumers need to understand that anywhere between a third to a half of UK electricity production is generated through the burning of natural gas and, as such, any increase in wholesale gas prices also increases electricity prices.

UK relies on energy imports
The UK is a net importer of energy, meaning the current UK energy production capability is insufficient to meet the country’s energy demand without importing energy from other countries e.g. France (nuclear power), Norway and Russia (gas). The recent (September) fire at the Sellindge National Grid Power Station in Kent, which is connected to France and accounts for 2% of the UK’s annual energy consumption, highlighted the fragility of the current UK energy grid and the country’s reliance upon our international neighbours to keep the lights on and prices down.

Russia and Geopolitics
Further complicating the issue is the supply of gas from Russia to Europe, which is currently piped through the Ukraine. However, the geopolitical relationship between Russia and Ukraine is fraught, as the latter wants to establish closer ties with the EU (much to the chagrin of Moscow). This has caused speculation that Russia has been reducing the amount of gas flowing through Ukraine to send a message to both them and the EU. Putin denies any such allegations and counters the accusations by stating that Russia is willing and ready to send as much gas to Europe as it needs.

Given the global community’s desire and need to shift from fossil fuels to renewables sooner rather than later, it is in Russia’s interests to sell as much of its natural gas to Europe whilst it still can. To complicate the matter further, Russia is waiting for German regulators to approve the new Baltic Sea gas pipeline, Nord Stream 2, and, again, there is speculation that Russia is aggravating Europe’s current gas supply crisis to speed up the decision. Therefore, it’s in Europe’s interests to get NS2 operational and supplying gas asap. The supply of gas from Russia is more of an issue for continental Europe, rather than the UK, as the UK only imports about 5% of its gas needs from Russia but it is still an influencing factor on UK prices.

In Russia’s defence, it is in their interests to sell as much of their natural gas as possible to Europe because China, in particular, is drastically reducing the cost of solar PV, which is accelerating the transition from dirty fossil fuels to greener renewables. As such, the accusations levelled at Moscow may have an element of truth but it is better for Russia to increase the supply of gas to Europe sooner rather than later. Of course, it can be (and is) argued the world should be moving more quickly to a renewable energy grid but, ideology and desirability aside, winter is coming and Europe needs to increase its supply of Russian gas to decrease the EFFing prices.

COVID, QE and Inflation
Additionally, we have to factor in the pandemic. COVID is a convenient (and sometimes lazy) excuse for almost any supply chain issue as the world tries to ramp up logisitically after 18 months of international lockdowns. The easing of lockdowns and increased economic activity are increasing demand, which increases prices. However, it could be argued rising prices are also a symptom of currency devaluation (quantitative easing aka QE), whereby Western economies, the US in particular, have devalued their currencies by printing addtional obscene amounts of money (on top of the QE following the 2008’s Global Financial Crisis) in the fight against the pandemic.

When there is more of a commodity, it is less scarce and, therefore, less valuable. The supply and demand argument which can be applied to rising energy prices can be applied just as equally to the value of our currencies used to purchase that energy. The devaluation of a currency generally leads to an increase in the cost of goods and services (inflation), as there is more money in the system competing for resources. Previously, runaway inflation had been limited to real estate and stock markets but it’s now affecting commodity and energy prices, which has led to an EFFing crisis.

Inflation hedge or energy threat?
As prices soar for energy, food and fuel, inflation in these key commodities increases the cost of living. That makes life more difficult for businesses and individuals/families who are already struggling. In China, energy rationing has already been implemented by the Chinese Communist Party (CCP), which leads to the question: could that happen here in the UK and elsewhere, such as in Europe and the US?

As inflation runs rampant, a greater focus will be placed on industries consuming energy without an apparent tangible benefit to society. As such, the cryptocurrency Bitcoin will come under greater scrutiny as it consumes more energy than some nation-states. The counter-argument is Bitcoin offers a decentralised and deflationary form of currency, which is akin to digital gold, and Bitcoin miners (consumers of nation-state quantities of energy) are incentivised to use renewable energy. A big reason why so many Bitcoin miners were in China was that there was so much cheap energy produced from solar PV in western China’s Tibetan Plateau (aka Tibet, if you don’t agree with China’s annexation of another country). However, in a period of rampant inflation and potential energy rationing to help combat the EFFing crisis, Bitcoin faces a mounting challenge against its energy-intensive Proof of Work (PoW) consensus.

Bitcoin and its energy consumption will likely be targeted by other governments who see Bitcoin as a threat to its monopoly of centralised money creation and control. Crypto is an easy target as the distributed ledger technology is still greatly misunderstood by the masses. However, blockchain technology will revolutionise every industry on the planet, including the energy industry; speeding up its adoption of renewables through projects such as the Energy Web Foundation.

Alternative cryptocurrencies, such as Cardano (Proof-of-Stake) and Energy Web Token (Proof-of-Validator, consume considerably less energy than Bitcoin. For example, compared to Bitcoin’s annual energy consumption (91,000 GWh), Cardano uses less than 0.01% (6GWh/yr) – a considerably greener blockchain technology, which may help lead the innovative decentralised green revolution the planet desperately needs.

What should businesses do?
As a business owner, you need to know how much longer this trend of rapidly increasing energy prices will continue and if (and when) it will reverse. If your contracts are due for renewal in the coming months, what should you do? If you need to renew your contract soon, I would advise signing up for a 1-year contract at the least-worst prices you can secure. You might even want to consider Out of Contract (OOC) rates for a while, in the hope that prices begin to come back down over the coming months. Some of my clients have been faced with almost triple their current contract costs, which is simply horrendous. Unless you have to sign a contract now, it is likely better to wait, as the expectation is for the current price spike to come back down once things like the Nord Stream 2 pipeline are brought online and warmer weather reduces demand.

Should you have sufficient time left on your current contracts, I advise waiting until 4-6 weeks before the end of your current contract end date (CED) to sign any new deal/s. The best time to look at renewing energy contracts is in the warmer spring and summer months, when national (and northern hemisphere) demand decreases. Having time on your side will afford you the luxury of patience, which is likely to pay off.

Finally, according to Online Direct, there has been an incident of a supplier reneging on a contract that has yet to start. This is related to a supply chain issue but has not affected any of my clients’ contracts. At present, if you have agreed to a contract that is yet to start, all we can do is wait. If a contract that is yet to start is rejected, affected clients will be notified as soon as I become aware. In the meantime, it’s best to be patient and hope the situation improves.

As always, I’m only an email or phone call away to answer any questions for my clients (and any businesses interested in my services).