In numbers: The UK’s natural gas predicament
MPs are warning that the energy price crisis is “racing ahead of the UK Government” and reports abound that Ofgem will need to make a steeper increase to the price cap this autumn than originally intended. So, why is gas still such a contributor to British energy prices?
Tuesday (26 July) saw MPs on the Business, Energy and Industrial Strategy (BEIS) Committee publishing a new report assessing the Government’s approach to energy market design and energy pricing.
The conclusion of that report was that the Government’s current approach – to increase fossil, nuclear and offshore wind in the longer term while providing homes with a one-off Energy Bills Support Scheme payment this year – was not sufficient. MPs noted that the Government had past opportunities to go further and faster on improving energy efficiency and reducing the share of imported gas in the energy mix by scaling low-carbon generation.
Shortly after that report was published, the National Grid published its winter electric outlook, which was actually fairly low on specific forecasts for likely electricity demand. It did confirm that National Grid has been supporting delays to coal plant closures and advocating for more demand-side measures to help the UK avoid either blackouts or emergency imports at high prices, this winter. Demand-side measures mentioned include improving flexibility and communicating the importance of energy efficiency to consumers. National Grid is yet to publish its winter gas outlook, with publication slated for October.
BEIS also published a string of datasets regarding energy production, exports, imports and consumption this week.
Here, we pull out nine key facts and figures from the new reports from BEIS and from other key sources, to paint a picture of the role of gas in the UK’s energy mix.
1) Gas prices are 600% higher than last year
Wholesale gas prices in the UK hit £3.52 per therm on Tuesday (26 July), making them six times higher than on the same day the year before. This is less than the highest price we’ve seen this year, a record £4.95 recorded in early March.
Most organisations to have carried out analysis into the future of wholesale gas pricing believe that it will remain around the levels we’ve seen so far in 2022 for at least the first half of 2023 – most likely into winter 2023-24.
Wholesale prices have been increasing since last summer. At that point, the increase was attributed to a global mismatch between supply and demand as nations lifted Covid-19 lockdown restrictions at different times. Supply and demand was also impacted by weather patterns – nations like India and China saw gas demand increase amid higher weather, as demand for cooling increased. Prices have climbed far more steeply since the start of 2022, as major gas exporter Russia mulled then executed its invasion of Ukraine.
Gas is an internationally traded commodity, meaning that nations who extract more gas do not automatically get to keep it, or choose who they trade it with. Instead, it’s sold on the global market to areas with the highest demand and the highest bids.
Domestic and business consumers in the UK will have already seen some of this increase passed on to them. Ofgem’s price cap for annual dual-fuel bills for homes rose The price cap rose by 54% to £1,971 in February. A further rise is in the calendar for October and, while the regulator originally predicted a rise to £2,800, gas prices have climbed higher than it expected. The new prediction is that the price cap will rise by 65% in October, to £3,240.
The Government has also moved to give Ofgem powers to review and change the price cap more frequently (every three months). So, concerns are mounting already about yet another increase in early 2023.
2) 80-85% of the UK’s homes are connected to gas for heating and/or cooking
This is part of why dual-fuel bills are increasing. However, electricity generation is likely playing a far bigger role in driving bill increases, as this article will go on to discuss.
3) UK gas production fell 17% between 2020 and 2021, but is on the rise now
BEIS’s figures reveal that the UK produced 363,970 GWh of gas in 2021, down from 439,394 GWh in 2020. Production has grown significantly since 2007, pandemic aside, but it not yet back up to 2019 levels.
However, production may well increase in 2022. BEIS only has figures for the first quarter at the moment, which reveal that production was 5.3% higher in Q1 2022 than in Q1 2021. BEIS puts this down to the completion of maintenance works across the sector and increased demand. Time will tell if this trend continues, as homes, businesses and industry broadly look to reduce their consumption.
4) The UK imports seven times more gas than it exports
Regarding what happened to the gas produced in 2021, around 21% (75,682 GWh) was exported, per BEIS’s figures. The UK has been a net importer of gas for decades, as its demand outstrips domestic supply – and, as noted above, gas is internationally traded. In 2021, the UK imported 560,831 GWh of gas, more than seven times the amount it exported.
The UK gets 58% of its imported gas from pipelines, primarily Norway (55% of all imports). If demand is high in Europe, competition for Norwegian gas will increase, pushing up the price. The other 42% of gas imports come as LNG, mainly via ships from Qatar and the USA, however, 12% of LNG imports were from Russia in 2020 (making Russia the UK’s third largest supplier). The UK government has committed to phasing out Russian LNG as soon as possible in 2023. The UK is also competing with Asia for LNG.
5) Gas accounts for almost 40% of the UK’s electricity generation
Gas accounted for 39.9% of the UK’s electricity generation mix in 2021, up from 35.7% in 2020, BEIS states. Challenges for low-carbon generation in 2021 included nuclear capacity undergoing maintenance and/or coming offline permanently, and poor conditions for wind generation, especially in August and September. In the gas generation sector, meanwhile, the completion of maintenance works enabled a boost.
Most of the UK’s gas demand and use in 2021 was for electricity generation, not for heating. 253,665GWh was used for electricity generation, compared to just under 28,000 GWh for heat generation.
6) UK homes use more gas than the private sector
When electricity and gas demand are combined, domestic buildings are a far larger source of demand than commercial buildings and industrial operations. Homes demanded 318,392 GWh of gas-based heating and electricity in 2021, up from 296,566 GWh in 2020. The demand for industrial users totalled just over 107,000 GWh in 2021, up from around 99,000 GWh in 2020.
The Climate Change Committee (CCC) emphasised in its latest progress report to Parliament that progress to reduce homes’ gas consumption, by improving energy efficiency and electrifying heating, has been extremely slow.
7) New UK gas capacity could account for less than 8% of national demand
Oil and/or gas from six new North Sea fields that could get approval in a licensing round in Autumn 2022 would not start to be produced until 2026, and Stonehaven research commissioned by Highview Power estimates that their maximum output would be just 2.4% of UK demand – or just over half the level of imports from Russia. Their output would peak in 2028 and then decline.
New oil and gas fields in the North Sea would take years to be approved and infrastructure to be installed before drilling begins. They are not an immediate solution, with fields coming online now being given the go-ahead several years ago.
The UK Government is also considering lifting a ban on fracking inland, provided that the British Geological Survey (BGS) has new evidence on how tremor risks can be prevented. This goes against the advice of its own climate advisory committee and the will of many local communities in Lincolnshire, the UK’s prime fracking location. Stonehaven estimates that fracked gas would produce less than 5% of the UK’s gas demand over five years, even if production was significantly ramped up with little to no issues such as planning and protests.
8) Fortunately, renewable generation in early 2022 was up 9% year-on-year
BEIS states that the UK is importing less electricity and generating more of its own. Net imports were down 22% in Q1 of 2022 compared with Q1 of 2021.
Renewables could yet make strong headway in 2022. UK renewable electricity generation totalled 38.2TWh in Q1 of 2022, up 9.3% year-on-year, due to capacity additions and favourable wind generation conditions and higher average sun hours. Renewables, nuclear and biomass collectively represented 60.4% of the generation share in Q1 of 2022.
9) The UK has wasted 1,300GWh of wind energy since September
A word of caution on that last point. Analysis conducted by the consultancy Stonehaven found that, since September 2021, the UK has wasted over 1,300 GWh of wind power – enough free renewable energy to power 500,000 homes a day. Most of this wastage came through curtailment. As a result, the UK spends more money turning off wind farms and using gas as a backup, at a cost of over £390m since September.
Renewable energy industry bodies have urged the Government to come up with a more joined-up approach to scaling energy storage to help avoid this waste. Those that are critical of renewables, though, have been using this trend to argue the case for more nuclear – or even more gas-fired electricity generation.