Will Liz Have the Energy?

September 6, 2022

If you pay attention to UK news, you might have seen that the Royal family remains under fire from Meghan Markle. There is even bigger news, though. The drawn-out election for the leader of the ruling Tory party ended on September 5th with the ‘coronation’ of another Elizabeth (with apologies to the Queen): Liz Truss. I cannot help but wonder whether Liz the First will come to regret her victory.

Based on news reports and input from my English family, the UK is in a mess. Perhaps the largest single issue is runaway energy prices. Some of the numbers are hard to believe. Let’s look at natural gas, for example.

The UK natural gas market is supplied from a wide range of sources, including the imports piped from Norway and continental Europe and the UK’s own natural gas production. The National Balancing Point (NBP) is a confusingly named reference price for the UK’s liquid natural gas. Before the pandemic, the NBP was around £30-£40 per therm. In August it rose to almost £700 per therm, before falling back more recently to around £500 per therm.

The net effect of these price changes will be a huge (c.80%) increase in natural gas prices for industry and retail customers. To make this increase more affordable and less politically damaging all households are set to receive at least a £400 reduction in their energy bills this winter, provided in installments of £66 per month (winter lasts for six months in the UK!).

While the immediate price increases are extraordinary, it is likely prices will rise even further in the future. The UK’s centrally controlled mechanism for setting prices is always a bit behind the market, and underlying prices have already risen substantially since the price-fixing that took place in mid-August.

Like much of Western Europe, the UK is scrambling to walk back some of its self-imposed restrictions on fossil fuels. Nuclear power is back in fashion, coal power is enjoying a revival, and even fracking has become an acceptable topic for polite conversation at the dinner table. While policy changes on fossil fuels can be made fairly quickly, the results take time to have any impact. High prices and exhortations to limit energy are going to be the stuff of this British winter. At least there are few electric cars in the UK, so Tesla owners are probably not going to be ordered to stop plugging in their vehicles during peak periods, as has recently been the case in California.

President Putin’s continued concern about the adequacy of the maintenance of the Nord Stream gas pipeline is not helping matters. The flow through the Nord Stream pipeline has again been reduced to zero and this time ‘indefinitely.’ The UK does not get any gas that way, but of course, the impact on natural gas prices affects the market for them too. I can only wish Ms. Truss the best of British luck!

Richard Rushton