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No short-term fix to the UK’s painful energy crisis
Amid soaring energy prices and talk of fuel rationing, there is real pressure for the UK to come up with a sustainable plan for secure and affordable energy.
While a published document from the Government may still be some weeks away, comments from ministers suggest there are likely to be three key areas of focus as a move to reduce reliance on overseas oil and gas ramps up. These are wind (onshore and offshore), solar power and nuclear energy.
On the solar front Stifel analyst Ian Scoulter notes: ‘A key issue for potential investors will be the subsidies and other incentives which may be available to cover construction costs.
‘At current power prices of around £200 per MWh (megawatt hour), unsubsidised solar is very viable – in the past we have suggested that non-subsidy solar projects start to make sense with a price in excess of £50 to £60 per MWh.
‘However, investors may be looking for some form of subsidy scheme that provides downside protection if power prices fall back from current significantly elevated levels to more normal levels.’
Shares will look at the nuclear issue in a more detail in an upcoming edition and the outlook for some of the other energy sources were discussed in a recent feature, but the key point is that not one of them is likely to be a short-term fix. Even trying to ramp up supplies of domestic gas and oil will take time.
And yet the pressure on UK households and businesses is acute right now as those on default energy rates endured a 54% surge in regulator Ofgem’s price cap on what is being called Bleak Friday (1 Apr). A further rise is coming down the track later this year.
There have been some attempts by the Government to ease the burden and the issue is certainly receiving plenty of airtime. However, the impact on businesses is perhaps getting less of a hearing.
Cornwall Insight, a consultancy, calculates small and medium-sized enterprises in the UK are facing an average gas bill rise of 250%.
In an online blog, Cornwall’s principal consultant Craig Lowrey comments: ‘Wholesale market volatility, amongst other factors, has seen gas prices jump significantly for all consumers. However, unlike domestic customers, non-domestic customers have yet to see any dedicated government support to manage the record high energy bills they are facing.
‘Insecure contracts and record high energy bills will eat further into SME profits in an already challenging economic environment.’
Investors will need to be alert to small caps which are significant users of energy as there is a growing risk that such an eye-watering rise in gas and electric bills could eat into their profits.