The deepening tensions between Russia, Europe’s biggest gas supplier, and Ukraine have reignited fears that the Kremlin may weaponise its gas reserves by restricting exports to Europe in the face of potential sanctions.
Russia is western Europe’s largest single supplier of gas, a commodity that is in tight supply globally and has reached record market price highs in recent weeks, threatening to tip the UK into a national energy crisis.
Meanwhile, Europe may need to use even more gas to keep the lights on this winter after the French nuclear firm EDF warned that technical trouble at a string of its reactors would cut its electricity generation, meaning gas plants across Europe may need to run more than expected.
Gas plants were already in high demand over the past year after slow wind speeds reduced Europe’s renewable energy output in 2021. This played a role in draining Europe’s gas storage facilities to record lows after a long, cold winter last year.
Ministers have reportedly been warned that the UK could face further record-breaking prices for gas and at the petrol pumps. So, could Europe’s energy crisis become a catastrophe?
How vulnerable are the UK’s gas supplies?
The good news is that the UK imports barely any gas from Russia. It meets about half of its gas requirements from the North Sea, while another third is sourced from Norway. The rest is imported by pipelines connecting the UK to Europe, or in the form of liquefied natural gas (LNG), which is transported by tankers typically from Qatar or the US.
The bad news? The UK’s gas sources could all becoming eye-wateringly expensive if markets in Europe soar. The UK’s market is closely connected to markets in Europe, so a price rise in Germany or the Netherlands would lead to higher prices in Britain.
There is no end in sight to Europe’s gas market woes. The US investment bank Goldman Sachs said on Monday: “The high energy prices seen in recent months are not necessarily a one-off.” Gas prices are likely to stay twice as high as normal until 2025, it said, and if Europe faces colder than average temperatures in March and February, blackouts could be likely.
How vulnerable are Europe’s gas supplies?
Very. Russia typically supplies about a third of Europe’s gas via a complex network of pipelines that run through Ukraine, Belarus and Poland to Germany. From Germany, pipelines carry gas to the rest of western Europe and through to the UK.
A major gas supply disruption to Ukraine, last seen in 2008, could cause severe market volatility and a shutdown of factories to help conserve gas. Market experts at S&P Global warned that “any conflict impacting gas supplies into Europe could have knock-on impacts on power, carbon and coal prices”.
At the same time, Europe may become more dependent on gas to run its gas power plants after EDF warned that it would reduce the electricity it generates from nuclear power by 10% this year because of technical problems at a handful of its reactors.
In the UK, lower imports of electricity from France – supplied via two interconnector cables beneath the Channel – could mean more gas power generation, according to Tom Edwards, a senior analyst at Cornwall Insight. This could lead to a rise in prices across the gas and electricity markets.
In the meantime, the French government has asked EDF to take an €8.4bn (£7bn) financial hit to protect households from rocketing energy costs by limiting bill increases to 4% this year. Barbara Pompili, France’s environment minister, said the government planned to help EDF withstand the blow but it has raised questions over how EDF plans to finance new nuclear projects, including the Hinkley Point C and Sizewell C projects in the UK.
Does the UK government have a contingency plan?
It appears not. If the government is concerned about the impact on UK energy supplies, it hasn’t admitted it.
A government spokesperson did not respond directly to the Guardian’s questions over whether there was a contingency plan in place to secure the UK’s energy supplies, or protect against further record market prices as tensions along the Russia-Ukraine border intensify. The spokesperson said that unlike other countries in Europe, “the UK is in no way dependent on Russian gas supply” and relied on less than 3% of Russian gas in 2020.
“Thanks to our diverse mix of nuclear, natural gas and renewable technologies, the UK has one of the most reliable energy systems in the world,” the spokesperson added.
The UK government is under pressure to take action to safeguard households from a cost of living crisis that is expected to deepen in the coming weeks as the energy regulator prepares to raise its cap on bills to close to an average of £2,000 a year on 7 February.
The government was reportedly in talks late last year with Qatar over a deal that could result in the gas-rich nation supplying extra cargoes of gas in the event of an energy emergency, according to the Financial Times. But the government denied requesting that Qatar act as a “supplier of last resort”.
How high could gas prices climb?
The weekend tensions caused the price of short-term gas to climb to 205.1p per therm in the UK on Monday morning, up from 188.75p/th on Friday. The price is more than threefold higher than this time last year, and six times higher than typical pre-pandemic levels, according to Tom Marzec-Manser, a senior gas expert at ICIS.
The UK’s gas market price climbed to more than 450p/th in the run-up to Christmas as Russian gas supplies slumped in line with temperatures that drove demand for gas heating higher.
“I don’t think it’s unreasonable to believe that gas markets could return to the highs we saw late last year if things were to escalate to the point that gas supplies were affected,” Marzec-Manser said.
For now, there are a few lucky breaks that have helped to keep soaring gas markets in check, he added. Gas demand in Asia is lower, which has allowed Europe to receive a record number of LNG deliveries from the US this month, and it is on track to reach an all-time monthly LNG import high.
However, a major gas supply disruption could be enough to cause gas prices to soar back to record levels.
