The UK Energy Crisis and the Cost-of-Living 'Catastrophe'

Since the Covid-19 pandemic struck, the UK economy has had to deal with a lot of major challenges that have tested its fundamentals, however it might just be facing its greatest one yet. Rising energy prices have led to what many believe to be a cost-of-living crisis that is affecting everyone in the country. Gas and electricity bills are skyrocketing nationwide with no real end in sight, but what has caused this hike in prices and why has it been so disastrous?

 

Countries from across the globe have been emerging from the economic wreckage left by the pandemic at different rates, meaning supply and demand in many markets have been thrown into disarray. In 2021 demand for gas from China and other Asian and European markets increased dramatically, following a period of depleting gas storage levels due to the pandemic. What ensued was a scarcity of supply for natural gas, made worse in the UK by the fact that around half of its electricity is generated by burning fossil fuels in gas-fired power plants. This predicament continued for months as other nations around the world also began to recover from the pandemic and demand grew in their economies, only for the situation to be exacerbated by Russia’s invasion of Ukraine in February and China’s Zero-Covid policy, resulting in a greater disruption to supply chains globally.


In April the UK government published their Energy Security Strategy, aiming to help tackle the stark rise in energy bills and also simultaneously reduce the UK’s reliance on imported Russian oil and gas. However, PM Johnson himself admitted that the strategy would not on its own provide the winning hand in tackling this crisis, which has seen the average family’s energy bills rise by approximately 54%. The Prime Minister said that there was a “limit to the amount of taxpayer’s money that can be used to help with energy bills” and that economic stimulus from the government can’t act as the saving grace that millions of people are looking for. Opposition parties have called for the imposition of a windfall tax – a one-off tax that targets a sector of the economy that has made large profits that they weren’t responsible for - on rich energy companies like BP, who recently announced a $6.2 billion profit in the first 3 months of this year. The belief is that the windfall tax would raise a significant enough amount of money to help contribute to reversing the damage caused by the soar in prices.


There is precedent for this, albeit 25 years ago, when then-Chancellor of the Ex-Chequer Gordon Brown imposed a windfall tax on energy companies in his first budget in 1997, raising over £5.2 billion as a result. Despite this, the consensus in the government is that a windfall tax would discourage future investment in the UK in this sector – something that is needed desperately. BP subsequently have committed to reinvest all profits from its North Sea oil and gas production into the UK over the next decade, however this is being seen by many as a way of offsetting the political pressure that the energy giant is under.


The consequences of this crisis could be disastrous, with the think tank Resolution Foundation warning that UK households are facing a “cost of living catastrophe”. In April, the energy price cap – the maximum rate an energy supplier can charge for their bills – was raised, meaning an average annual increase in bills of £693 for around 18 million households on standard tariffs. This has led also to the number of people across the UK in fuel poverty climbing to 6.5 million nationwide. The ramifications of the crisis are being felt by the entire country, however anti-food poverty campaigner Jack Monroe has called on the ONS to change the way that the cost-of-living crisis is being reported, arguing that the crisis has disproportionately affected the poorest in society, without proper recognition in the statistics.


One consequence that the UK will face collectively, however, is the looming threat of inflation. Inflation is both a consequence and a causality of the energy crisis; it has contributed to the problem and helped it deteriorate exponentially. Prices in the UK are rising by 7% a year and inflation is set to hit a 30 year high of 10% in October. The UK economy also faces a serious threat of stagnation, with Bank of England Governor Andrew Bailey warning that generating a recession may be the only way to reduce inflation to around 2% – the bank’s inflation target. The bank has raised interest rates to their highest levels for 13 years in order to combat rising inflation. Macroeconomically speaking, increasing interest rates helps to reduce inflation by reducing the money supply and incentivising people to save more of their money. This comes at the expense of contracting economic activity however, meaning not only does the central bank have to act quickly and severely, but there is also a balancing act taking place between rescuing the economy and permanently scarring it.



It is impossible to say exactly how long the crisis will last and economists around the world are scrambling for the latest data and statistics to monitor the trends. What is clear though is the fact that this crisis is set for the long haul. Keith Anderson, the CEO of Scottish Power has warned that millions may face an “horrific winter” without more government intervention and Jonathan Brearley, CEO of energy regulator Ofgem, has claimed that bills are likely to increase again in October. Both the government and the Bank of England have a lot of difficult decisions ahead and many will expect them to have to seriously work for their money – money which is decreasing in value day after day.

 

References/ Wider Reading

What is the energy cap and why are bills so high? | BBC NEWS

Stagflation looms as in UK as economic growth grinds to a halt | Financial Times

BP’s investment pledge fails to quell calls for UK windfall tax | Financial Times

Cost of living crisis: 'Limit to amount of taxpayer's money' that can be used to help with energy bills, Boris Johnson says | Sky News

Cost of Living Crisis | Institute for Government


60 views0 comments

Recent Posts

See All