The British government is considering bailout loans to help steer energy suppliers through the ongoing gas pricing crisis.
U.K. Business Minister Kwasi Kwarteng told Sky News on Tuesday that “a lot of options” were currently being considered, including potential state-backed loans. However, he suggested not every energy supplier would be eligible to benefit from such a scheme.
“Every year between five and eight companies exit the market and I don’t want to prop up failing companies, I don’t want there to be a reward for failure,” he said. “I don’t think we should be throwing taxpayers’ money at companies which, let’s face it, have been badly run.”
Fears that some of Britain’s energy suppliers may struggle to stay afloat have been rising in recent weeks, as wholesale gas prices continue to rise to unprecedented levels across Europe.
The October gas price at the Dutch TTF hub, a European benchmark for natural gas trading, was volatile on Tuesday, trading just above 74 euros ($86.9) per megawatt-hour by the early afternoon in London. Last week, the contract hit a record high of 79 euros per megawatt-hour.
Since January, its value has risen by more than 250%.
The British October gas price was trading lower on Tuesday at around £1.88 per therm, but it continued to hover around recent record highs.
Kwarteng said Tuesday that the U.K. would need to ensure its “Supplier of Last Resort” mechanism — which helps customers transition to a new energy supplier if their current supplier collapses — was made more robust ahead of the winter to ensure a continuous supply of energy.
“It costs a company to absorb up to hundreds of thousands of customers from a company that’s failed, and that may well be a provision for some sort of loan — that’s been discussed,” he told Sky News.
“When I became energy minister more than two years ago, there were 65 suppliers. Today the figure is around 55. Am I going to bailout all 55 of those companies? No, I don’t think we can do that because a handful of them would have exited [the market] anyway.”
Companies’ financial positions may be considered to evaluate whether they should be granted any potential financial assistance from the government, Kwarteng, who is meeting with some of the U.K.’s smaller energy firms on Tuesday, said.
Start-up Bulb, the U.K.’s sixth-largest energy supplier, is seeking a bailout, while four smaller competitors recently ceased trading, the BBC has reported.
Meanwhile, the chief executive of challenger supplier Green told BBC Radio 4 on Monday that the outlook for the company was “looking bleak.”
“We are currently in discussions with the Government and Ofgem on what measures can be taken to manage the situation and these continuing talks will include domestic suppliers of all sizes,” trade body Energy UK said in a statement on Monday.
“There are no easy solutions, but the priority of all involved is to protect customers as much as possible, and whether there needs to be additional support provided to them on top of existing mechanisms, while also trying to minimize further disruption to the retail market.”
A spokesperson for Energy UK told CNBC via email on Tuesday that it was “clearly a very difficult market for suppliers” but that the focus of discussions with the government so far had been on protecting customers rather than direct financial assistance for companies.
Why has the U.K. been hit so hard?
Gas is crucial to the U.K.’s energy supply, playing a significant role in heating, industry and power generation. More than 22 million households are connected to the country’s gas grid.
The largest single source of gas in the country is the U.K. Continental Shelf, which made up around 48% of total supply last year. However, the UCS is a mature source, meaning it has to be supplemented with gas imported from international markets.
The U.K. has limits on how much suppliers are able to charge consumers for energy, with price caps reviewed by the government every six months. Some companies are reportedly pressing the government to lift those caps, but Kwarteng stressed on Tuesday that he would not be rescinding the regulation.
As the U.K. scrambles to mitigate the impact of the crisis, its impacts are also being felt across Europe, and industry sources have warned that the issue is a global problem.
Soaring wholesale prices have partially been caused by a surge in demand, particularly from Asia, as economies emerge from Covid-19 induced lockdowns. A cold European winter and spring also meant supplies had already been heavily depleted by the summer.
Meanwhile, falling domestic production, adverse U.S. weather conditions and essential maintenance works have created a tight gas market and made restocking gas supplies ahead of the coming winter difficult across the region.
In a note on Tuesday, analysts at Barclays warned that another harsh winter could keep prices elevated well into 2022 and push core price inflation sharply higher.
“We see the gas price surge so far adding 1 percentage point year-on-year to U.K. CPI this winter, lasting for most of 2022,” they said, referring to inflation. “In the EA [euro area], we see a 0.5 percentage point contribution to HICP inflation in late 2021 and early 2022. We estimate every sustained 10% increase in consumer gas prices to generate 0.1 percentage of headline inflation in the U.K. and 0.2 percentage point in the EA.”
Limited pipeline imports, caused by a tighter Russian market, have also contributed to the crisis.
“Without additional Russian supply, European buyers will have to compete fiercely with their Asian counterparts to attract the needed LNG cargoes,” analysts at research firm Engie EnergyScan said in an update on their website on Tuesday.
Spain’s government released a decree this week to cap retail energy prices amid the crisis. Some experts have speculated that the gas crisis could damage the EU’s green ambitions, as governments could prioritize keeping energy cheap over transitioning to greener alternatives.