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Energy price cap rises: Economics and business experts comment

Ofgem have today announced a rise in the energy price cap, with millions of households potentially paying £693 more a year for their heating and electricity. Experts from Warwick Business School and the Department of Economics have commented on what has led to this situation, and what this says about the future of our energy supplies.

Professor Mike Waterson of the Department of Economics said: "OFGEM has a problem, in that wholesale gas prices have risen substantially since the last review and have remained high. A substantial amount of our electricity is generated by gas. As a result, as we know, many suppliers have gone into administration. To make the remainder viable, prices need to rise or some other means of dealing with the shortfall is required. However, this is politically very difficult, whatever the solution is."

Professor Mike Bradshaw of Warwick Business School, writing before the announcement earlier today, said:

“As we await an announcement from Ofgem on the new price cap for household gas and electricity prices, two questions come to mind: how long are high prices likely to last and is the current price crisis a result of the low carbon energy transition?

“On the first question, predicting future oil and gas prices is a dangerous game, but the markets and industry commentators seem to think that high prices are here for a while yet. In the case of both oil and gas the root of the problem is matching the surge in energy demand triggered by the easing of lockdown measures in response to the Covid-19 pandemic with sufficient supply. Both oil and gas production, for different reasons, have struggled to match demand and intense global competition is resulting in high oil prices—the highest for 7 seven years—and record high gas prices. The global markets for oil and gas are operating according to the laws of supply and demand. The problem is that there are limited prospects for significant increases in supply in the short-term. Medium term, there is also the prospect that cuts to investment during the pandemic may result in supply problems as new production fails to materialise when needed. This suggests a more prolonged period of high prices into the mid-2020s.

“On the second question, it should be clear that the current energy price crisis is the result of imbalances in fossil fuel markets. This is nothing new, the oil and gas industry is notoriously cyclical and volatile. The solution to exposure to fossil fuel price volatility is simple, reduce your reliance on such sources of energy services, first by improving your energy efficiency and second, in the longer-term by switching to alternative ways of satisfying your need for energy services. For example, increasing the role of renewable power generation to reduce your reliance on coal and natural gas, a switch that is made even more affordable by high fossil fuel costs; plan to replace your gas boiler with a low-carbon alternative in the future or replace your current petrol or diesel with an electrical vehicle. Of course, such changes take time and cost money, but the fossil fuel price crisis should serve to accelerate the process of decarbonising our energy system, not encourage a new round of fossil fuel investments.

“In 2030, we may look back of the energy price crisis of 2021-22 as the inflection point at which clean energy made a breakthrough and the resulting acceleration of the energy transition meant that the price spikes earlier in the decade were the last hurrah for the fossil fuel industries as the world emerged from the pandemic and struggled to match energy supply and demand.”

Professor David Elmes of Warwick Business School writes:

Today’s price cap rise sends a clear signal that we’re not doing enough regarding the energy we use as heat.

While the government, after many delays, released its Heat & Buildings Strategy in October 2021, this was criticised yesterday by MPs in the House of Commons Energy and Climate Change Committee. The committee concluded that “The Government is not yet on track to deliver on its own targets and more urgent changes are required” regarding how we heat our homes.

Source: Seventh Report: Decarbonising Heat in Homes Published 3/2/2022

Reported at (for example):

Researchers across the UK have recently reviewed how heating can be achieved with fewer emissions while keeping bills down.

Source: Smart Local Energy Systems and the Heat Decarbonisation Challenge Published 31/1/2022

EnergyREV is a consortium of academic researchers across UK universities working as part of the UK Industrial Strategy to identify how Smart Local Energy Systems can help the UK achieve its climate change ambitions while providing affordable energy for us all.

“Heat is local and makes up about half your energy bill” comments Professor David Elmes of Warwick Business School, part of the EnergyREV team. “Keeping that cost down, even as gas prices go up, means taking a smart and local approach to heat. It means moving away from how we’ve relied on gas and electricity down a wire or pipe from somewhere distant. It means local changes like switching from boilers to heat pumps, using heat networks, better insulation and higher building standards.”

3 February 2022

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