How will the war in Ukraine affect energy prices?

Europe and UK were already facing rapidly increasing energy costs. In the wake of the pandemic, multiple factors including increased demand, storage issues, lack of wind alongside delays in the North Sea oil and gas platform maintenance pushed the price of wholesale gas to record highs. However British and European gas prices hit new records again just last week, one week after Russia began its invasion of Ukraine.?

Russia is the second-largest producer of gas and the third-largest producer of coal in the world. Russia supplies up to 40% of Europe’s gas, although the figure is below 4% for the UK. Nevertheless, UK gas prices have increased in response to global energy market volatility. In response to the war in Ukraine, UK gas prices are now 20 times higher than they were two years ago.

What will happen to energy prices?

The 2021-22 energy crisis has already resulted in the failure of 28 energy suppliers. The UK inflation rate is at 5.5% which is a 30 year high.?

Although the UK does not significantly depend on Russian oil and gas, it will be impacted by international price surges caused by market instability. We have seen this over the last 18 months as Russia has withheld supply. If Russia stopped exporting gas completely, this would result in global demand exceeding supply, driving prices up everywhere.?

It is likely that our imports of Liquified Natural Gas (LNG) will increase in response to moving away from Russian gas. However, it’s also likely that we’ll be in competition with other nations for this, again increasing costs.

The Nord Stream Pipelines

Since 2012 Nord Stream 1 has transported 55 billion m3 of gas to Germany through the Baltic Sea from Russia. If the pipeline is interrupted because of sanctions or warfare, the consequences for Europe and the UK would be significant.?

Sanctions have already halted the approval process of the Nord Stream 2 gas pipeline. This pipeline was due to link Russia to Germany via the Baltic Sea (avoiding Ukraine). This was seen as a major step in pausing Russian influence in Europe as the pipeline would have transported 110 billion m3 of gas every year.

Where does the UK’s gas come from?

Although the UK uses relatively little Russian gas, it still accounts for about 6% of total imports. Around half of the UK’s gas comes from the North Sea, and a third is sourced from Norway. The rest comes from LNG which is transported to the UK from several different countries including Qatar, the USA and also Russia.

Should Russia cut the UK off from its gas supply, we are unlikely to face gas shortages, however, the volatile global market will still impact prices.

If there is any good news here it is that electricity prices in the UK are expected to rise less than gas. Our substantial renewable energy network will help offset any price rise.

What will happen to Europe?

Russian gas is transported across Europe via a series of pipelines that run through Ukraine, Belarus, Poland and Germany. This includes transportation via YamaLand and Nord Stream 1.

Russia supplies 30-40% of Europe’s gas. If energy sanctions were to come into force, or Russia cut the supply to Europe, it would have a catastrophic effect on energy prices across Europe. It would also have a significant impact on supply.

What will happen next?

In response to Russia’s invasion of Ukraine, EU, UK and US leaders have confirmed that they will be placing more sanctions on Russia. On the 8th March, the White House announced a ban on Russian oil, gas and coal imports. And the UK is set to phase out Russian oil by the end of the year. If Russia cuts off its gas supply to Europe, the impacts on energy prices and living costs would be expedited.?

Some MPs have called on the government to expand North Sea oil and gas production, whilst environmental groups are urging for more investment in renewables. It has been reported in The Times that the government is currently on the verge of granting the first oil and gas exploration licences since 2019.

It has also been reported that ministers are considering whether to give fracking the green light so that the UK can become more self-sufficient with its gas. However, production from either of these options will likely take several years.

What should I do?

The energy market is going to be very unpredictable for the foreseeable future. The best thing you can do with your energy rates, for now, is to secure the most favourable rate available and fix it for the next few years.?

It’s unlikely that things will improve anytime soon, so it's best to secure your energy contract now. Take a look at our detailed energy updates for more up to date information on market volatility.