Energy Prices Continue to Skyrocket – Does This Affect You?

Let us answer the title question right away – it does affect you. Energy prices keep rising, which has an impact on all of us. If you are not a business owner who is barely managing to match market prices, then you are a consumer for sure. Either way, you have to pay your energy bills. In this article, we will aim to summarize all the events that preceded the energy crisis and that are behind surging energy prices. 

Energy Crisis

The Energy Crisis of 2021 hit hard on the world. In the Fall of 2021, this topic concerned many. Yet, the consequences are to come. As soon as we manage not to freeze or bankrupt during the winter season, inflation will hit hard on society. The ongoing energy crisis is a shortage of energy across the globe which is due to the mixing of many environmental, political, and economic factors.

Since the early 1970s, energy crises have been frequent and sudden changes in energy prices have caused major problems for some countries. Crises were largely caused by wars and great powers’ economic and market manipulation. Over the past century, there have been mass nationalizations of energy companies and frequent tax increases that have also led to shifts in energy supply and demand.

How did it all start? Let’s remember 2020 when the COVID-19 pandemic hit the world and caused a huge economic recession. Now, realize how 2021 brought us an unexpectedly rapid global economic recovery. The World Bank announced in its June 2021 Global Economic Prospects that 2021 should have the fastest post-recessionary growth in the last 80 years. Gas, oil, coal, and electricity prices fell to their lowest levels at the beginning of the pandemic, but bounced back quickly and reached unprecedented prices. 

At the end of 2021, it was clear that the energy demand exceeded the world’s supply. Read below what other factors boosted the crisis.

Green Transition

What is most speculated about as the trigger of the energy crisis is the global attempt to reorient the majority of countries to the use of renewable energy sources, the so-called green energy.

Throughout history, we realized that prices, demand, and supply generally changed abruptly and rapidly during the crisis. Why is this crisis different? Precisely because of the global transition to green energy. The urgency to combat climate change can cause the prices of gas, oil, electricity, and coal not only to stay high but also to continue to rise until we meet the goals of the Paris Agreement.

In short, Paris Agreement is a legally binding international treaty on climate change that was adopted by 196 countries. This treaty entered into force in 2016, and it works on a 5-year cycle. In 2021 all the countries began the realization of their climate action plans. Economic and social transformations have taken off all over the world. The ultimate goal of the Paris Agreement is to limit global warming.

It was not the Paris Agreement, established seven years ago, that caused energy shortages, but each country that began to implement its national plans to fight global warming. Many countries insist on shutting down nuclear power and coal plants to “go green”. Renewable energy supply rises gradually but not fast enough to meet the global demand. It is estimated that the global supply of renewable energy sources will increase by 35 gigawatts in a year, while the electricity demand will increase by 100 gigawatts at the same time.

The major downside of renewable sources of energy is that weather is unpredictable and can not be put under control, therefore even if we have enough wind farms and solar panels on a global scale, we can never be so sure that we will have enough wind and solar to exploit the full potential of renewables and meet global demand. 

In the past year, there has been a sharp decline in renewable energy production that couldn’t be controlled or fixed by a human. Brazil faced the worst drought in almost a century, which affected its electricity supply since mostly the entire country relies on hydropower. The colder than expected winter in the northern hemisphere caused enormous natural gas demand, as well as doldrums that shoot down wind farms across Europe and Asia, while everything was followed by the windless summer. In Australia and Indonesia flooding affected the volume of coal mining.

EU insists on replacing carbon-related energy sources and aims to reach carbon neutrality by 2050. ETS is the first and the largest international Emissions Trading System established. This system sets the limit on the carbon emissions amount emitted per year by all the installations globally. Installations buy or receive carbon credits from each other, where one carbon credit corresponds to one tonne of carbon emitted. Meanwhile, ETS prices skyrocket. The EU’s ultimate idea is that the rise in carbon prices should disincentivize fossil fuel energy emissions.

Many believe that renewable energy sources are unreliable and that there must be a backup plan. But what happens when there is a shortage of all other energies, more or less clean?

How Are Households Affected?

Across the global most prestigious portals, in the past couple of months, we all came across headlines such as “Record high power prices in Europe”, “The US gas prices spike”, “Rolling blackouts in China”, “Empty petrol stations in the UK” and so on. Those are the end-consumer issues.

Every government is trying to find its way to battle the crisis and to help households. This winter, everyone noticed that energy bills went up. Many energy suppliers bumped prices for the end-users due to the extremely low energy supply. 2022 could overtake the expenses records of household heat and power during the energy crisis of the ’70s and ’80s. Households across the world suffer. While Europeans struggle with gas shortages, people from China and India are under pressure due to coal shortages. 

The United Kingdom is one of the largest European users of natural gas, where 85 percent of households use central heating systems and where gas generates a third of the country’s electricity. The government has set the energy price cap, which means it has set a maximum price that can be charged for energy use. On February 3rd, due to the current stage of the crisis in the world, the government was forced to revise and increase the energy price cap. This large increase will have a significant impact on households in the UK, especially those with low incomes.

The UK government is taking actions to help those who are at the highest risk in a form of rebates, credits, and discounts. Also, local authorities are withdrawing money from their funds to help low-income households to pay energy bills. Despite the efforts of the government and the authorities, food prices have started to rise sharply. Many households, not only in the UK, are facing a “cost of living catastrophe”, and they are at serious risk of energy poverty.

How Are Businesses Affected?

The energy supplying companies are most endangered by this crisis. Hundreds have already exited the market. The crisis affects at largest electricity-intensive industries. Many have limited their production capacities, such as ammonia and fertilizer industries. As already mentioned, food prices are rising, and 50% of the world’s food relies on fertilizers.

In China, coal power producers lack supply therefore many Chinese provinces faced blackouts. Other industries that are big electricity consumers, such as aluminum, steel, and cement had to limit operations. India’s domestic coal mining companies could not respond to the high demand for coal. The prices of imported coal were too high, which caused power plants to cut and even halt production.

Yet, an increase in energy prices increases the cost of production of all commodities that use even a small amount of energy. The exact correlation between the growth of energy prices and the determination of underlying products prices depends on the required amount of energy in production as well as on the similarity of demand drivers. 

At this time, prices of underlying products and services are fluctuating more than before and it is extremely difficult to monitor and align your prices with the competition. Regardless of the competition, it is difficult enough to survive in the market due to the high prices of inputs and the necessary adjustments to the current conditions. To help yourself, business owners should consider reliable pricing optimization tools to stay profitable, decrease losses, and be on the top of the market.

Small businesses’ viability is at a huge risk since some just recovered while some are still facing the consequences of the Covid-19 shutdowns and restrictions. Unsurprisingly, small businesses are having a hard time paying energy expenses. At the moment, many businesses are facing double difficulty, struggling with energy prices skyrocketing and the decline in consumers’ spending budget.

Conclusion

At this point, countries must take all possible measures to help businesses and households cope with high energy expenses. Strategic reserves and programs for low-income households will slow the growth of the world’s energy poverty rate. When implementing measures, it is significant not to jeopardize investment funds for renewable energy sources, which are vital for the transition to a cleaner and more resilient energy system.