Energy firms struggle to absorb rising gas prices

After Avro Energy and Green stopped trading on Wednesday, t1.5 million customers were impacted (reported by the BBC).

Green, which employs 180 people, blamed “unprecedented market conditions and regulatory failings” for its collapse.

This resulted in their customers having to switch to a new, potentially more expensive provider.

However, it must be noted that many energy consumers never switch, despite cheaper plans being available. Therefore, although energy prices are likely to rise for previous Avro energy and Green customers, they could also find cheaper plans, as they are forced to act in a rational way by choosing the cheapest deal.

There are a few reasons behind the two firms' collapse.

Firstly, there has been a recent spike in wholesale gas prices, causing prices to rise by 250%.

Avro energy only has 2.4% of the gas supply domestic market in the UK, however is the largest supplier to exit the market so far.

The domestic energy market is an oligopoly as 5 firms own over 50% of the market share (owns 61.9% currently). Therefore, it is likely that Avro could not absorb the increase in costs like British Gas could (they own 26.6% of the market share).

In other markets, firms would pass on the high prices to consumers. However, energy suppliers are unable to due to the price cap on energy bills.

This reduces their profit margins, resulting in smaller, more inefficient firms, which do not benefit from the same economics of scale as larger firms do, suffering.

An economy of scale occurs when lower average costs are gained by increasing production. It happens because the costs are spread over a larger number of goods than previously when the firm is operating on a smaller production level.

This price rise has also occurred during a fall in offshore wind-generated energy from 25% of the UK's energy makeup in 2020 to 7%.

As wind energy and natural gas are substitute goods, previous offshore wind energy users have been forced to switch to natural gas, further increasing the demand for natural gas. This has caused gas prices to rise even further.

The issue regarding high prices has been further intensified by reportedly lower output of gas from the British North Sea areas, reducing supply.

The gas imported from Russia has also fallen, with Russia being accused of deliberately exporting less gas to Europe.

The reasons behind Moscow's move are rather speculative. The aim, the theory goes, would be to boost prices to such a level (which has definitely happened) that Germany rushes through the approval of the politically controversial Nord Stream 2 pipeline.

The construction of this pipe has been completed, however, it was beset by US sanctions and opposition from Eastern European countries.

Nord Stream 2 pipeline is the longest subsea pipeline in the world and would transport natural gas from Russia, through Europe to Germany.

However, it has been fiercely opposed by the United States, Ukraine and other European countries because of concerns that the pipeline would increase Russia’s influence in Europe.

With Russia owning the pipeline, they could attempt to exert political influence on Eastern European countries by treating their gas supply, without affecting Western Europe.

On the other hand, the building of Nord Stream 2 could just be an attempt by Russia to capitalise on their natural resources by increasing the number of consumers it is accessible to.

Whatever their motives have been, the rise in demand (caused by a fall in the supply of substitutes) and the decrease in supply has caused a price rise.

The Increase in prices is affecting wholesale gas firms, as there has been a rise in their variable costs (costs to a firm that vary with output). This has led many to decrease their factor inputs as they buy less gas due to their limited operating budgets.

It is predicted that there will be only 10 gas companies left by the end of the year, a substantially reduced number compared to the 70 currently operating. Therefore, both consumers and suppliers are feeling the impact of the rise in gas prices, potentially resulting in dramatic changes to the domestic market for natural gas.


Written by Charlotte Hurst


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