European Energy Crisis

What is the European energy crisis?

The European energy crisis refers to the dramatic spike in wholesale natural gas prices, beginning in late 2021 and continuing into 2023, as a result of the post-pandemic supply chain crisis and mounting tensions with Russia, a major gas exporter.

The unprecedented rise in wholesale natural gas prices - peaking at 1,000% of their historic average in August 2022 - led to a surge in household and business energy bills across the continent and major interventions by governments to shield their citizens and economies from the worst effects of the crisis.^[3]

In Great Britain, the energy crisis was amplified by a heavy reliance on natural gas to generate around 40% of our electricity.^[4] While Britain imported little natural gas directly from Russia, we have been impacted by price fluctuations in European markets and have seen huge rises in energy prices and household bills since late 2021.^[5]

Why is there an energy crisis in Europe?

The European energy crisis is multifactorial. While Russia’s invasion of Ukraine in February 2022 is commonly cited as the cause of the crisis, energy prices were already elevated across the continent in late 2021, largely as a result of an unexpected rebound in global energy demand following the coronavirus crisis.^[6]

In 2020, energy consumption around the world slumped as economies were shuttered to prevent the spread of COVID-19.^[7] Energy demand then recovered more quickly than anticipated in 2021, and while supply chains, including for fossil fuels, were still shaking off their cobwebs. This, paired with a bitterly cold winter across the northern hemisphere in 2021, pushed up fossil fuel prices globally.

It was against this background that Putin’s Russia began rattling its sabre: restricting gas shipments to Europe, especially after Germany stalled on approving a second Nord Stream gas pipeline, and amassing troops around the Ukrainian border. Amidst these tensions, wholesale gas prices rose to then-historic highs across Europe in late December.

The crisis reached a boiling point in February 2022, as Russia launched a full-scale invasion of Ukraine. European energy markets reeled over worries that Western sanctions against Russia would be extended to oil and gas, that the war would directly damage pipelines traversing Ukraine, or that Putin would turn off the gas taps. Russia ultimately did stop exporting natural gas to Europe in September 2022, stipulating that it would not resume shipments until sanctions had been lifted.^[8]

The restriction and then withdrawal of Russian natural gas shipments left European countries scrambling to fill their gas stores before the winter of 2022-23, sometimes paying astronomically high prices to do so.

How is the energy crisis affecting energy bills in the UK?

British consumers were initially shielded from the upward creep in energy bills in 2021 and 2022 by the energy price cap, which had been set when wholesale energy prices were lower over the summer.

However, the energy market turbulence led to the collapse of around 30 energy suppliers, with millions of customers transferred to new companies.^[9] Surviving energy suppliers withdrew nearly all their fixed-rate energy tariffs, so savvy consumers couldn't find deals by switching. Instead, the vast majority of households found themselves on default tariffs, with their bills set by the energy price cap.

When the cap was readjusted in April 2022, it rose sharply, by 54%, with some of the rise covering the debts left by failed suppliers. The cap rose a further 80% in October 2022, to £3,549 per year for a household with typical use: more than three times what it had been between 2019 and 2021.^[10]

In response, the government introduced a raft of support measures for households, including the Energy Price Guarantee, which capped household bills at £2,500 per year for typical use from 1 October 2022.^[11] Additional measures protected vulnerable households and businesses from high energy bills. However, high energy bills have fuelled inflation in the UK and contributed to the ongoing cost of living crisis.

The Energy Price Guarantee ended on 30 June 2023, as a lower price cap level came into effect, at £2,074 per year for a household with typical use.^[12] However, the price cap is still set at around double what it was before 2021 and households are feeling the pressure.

When will the energy crisis end?

While wholesale energy prices have fallen from their 2022 peak, they remain elevated across Europe and will likely remain so while the continent is cut off from Russia’s natural gas or until it finds alternative energy sources.

From 1 October 2023, Britain’s energy price cap will drop somewhat to £1,923 per year.^[13] However, from October, Ofgem will also lower the Typical Domestic Consumption Values (TDCV) it uses to represent the price cap, so the decline is even more modest than it seems.^[14]

Cornwall Insight forecasts that during 2024 the energy price cap will move between £1820 and £1930 per year.^[15] However, the International Energy Agency (IEA) warns that bills could spike during the winter of 2023-24 if the weather is harsh or the Chinese economy recovers from its recent downturn.^[16] If bills soar again, the government could face pressure to intervene with another energy guarantee. We’re not out of the woods yet.

We may eventually have to accept that the recent rise in energy bills is no longer an acute crisis but rather our new normal, reflecting geopolitical tensions and a sometimes painful transition away from fossil fuels.

Is there anything I can do to save money on my energy bills?

While energy prices remain historically high, you can take action to lower your bills.

Your first thought may be to switch to a new fixed tariff from a different energy supplier, traditionally the best way to save money on your bills.

However, energy suppliers yanked nearly all of these tariffs as the energy crisis escalated, leaving nearly all households on default tariffs. Suppliers are now relaunching a limited number of fixed tariffs. However, the prices you lock in might be high and you should do your research before committing to one.

Alternatively, you can try to reduce your energy consumption. Because the per-unit cost of energy is so high, the savings from these energy efficiency measures are greater than ever. These include:

• Installing double glazing on your windows

• Installing insulation in your home

• Blocking draughts

• Choosing energy-efficient appliances

• Turning the thermostat down

• Washing clothes in cooler water

• Skipping the dryer and air-dry clothes

• Remembering to turn off the lights