Higher demand for gas, paired with lower supply from Norway, Russia, and the U.S., has helped create a perfect storm in the energy markets ahead of the winter months, pushing up prices worldwide. In Europe, the benchmark Dutch TTF gas futures contract is up by more than 300% since the start of the year.

The effects of that spike have spread from fertilizer plants to slaughterhouses and heavy industry, providing a sharp lift to already rising inflation. And in the U.K., that’s led to a chain of failures among smaller energy providers, with at least seven going out of business since the start of the year—and five since the beginning of August alone.

The customers for those failed suppliers are typically rerouted to other, larger suppliers. While many of those bigger suppliers have larger balance sheets and have hedged their supply contracts in order to weather price moves, they don’t have extra gas for new customers and would have to buy more at spiking prices on the spot market to serve them. But because customers in the U.K. are protected by a consumer cap on energy prices, those larger suppliers can’t pass on the extra costs and face the prospect of having to absorb them.

Bailouts and a ‘bad bank’

On Sunday, the U.K.’s business and energy secretary Kwasi Kwarteng reported that the British government and the official energy regulator, Ofgem, would step in as administrators if an alternative supplier for customers of failing companies could not be found.

“The objective is to continue supply to customers until the company can be rescued or customers moved to new suppliers,” he said in a tweet.

A shortage of CO2, a knock-on effect from lower gas supplies, is also affecting the food and energy sectors, he said. The food sector, in particular, is already under strain in the U.K. owing to widespread labor shortages exacerbated by Brexit-era labor rules and the pandemic, which drove away many of the European workers on whom the British economy relies.

Further meetings with the industry and the government will continue on Monday, with British media reporting that energy suppliers are asking for a number of options, including the creation of a “bad bank” to absorb customers of failed companies; government-backed loans; or effective nationalization of failing suppliers. The Financial Times reported that the industry had warned government that several more suppliers were in danger of failing, with the risk that only six to 10 companies would be left standing by the end of the year. According to regulator Ofgem, the U.K. had 49 active suppliers as of March 2021.

‘Temporary’ situation

On Sunday, Prime Minister Boris Johnson insisted that the situation was “temporary”—and indeed, on Monday, Norwegian media reported that Equinor was due to increase gas exports from the country by the start of October.

However, even if the spike is quickly reversed, the volatility shows the vulnerability not just of the U.K.’s competitive energy supplier market, but the overall risk of concurrent shocks to the energy market.

The increasing reliance on intermittent renewable energy, particularly wind energy, has been just one contributing factor to the spikes, as gas is a still-crucial base fuel when the wind doesn’t blow. That has raised concerns about how economies like the U.K.’s, which is officially expected to transition to net-zero emissions by 2050, will rely on renewables going forward.

But one of the major contributing factors to the current shortage is a string of extreme weather events, from a freak winter storm in Texas, to drought conditions that undermined hydropower and put a strain on summer gas supplies, to a succession of hurricanes which disrupted exports of LNG from the U.S. Together, these have produced a feedback loop that has distorted energy markets and often led to frenzied competition for limited gas supplies.