Soaring gas prices are a cost of this war – and Britain can’t avoid them

Russia’s invasion of Ukraine has brought with it crippling increases in the price of gas.

On Friday, the price per therm spiked 25% to hit a record high on energy markets before slipping backwards. A fresh peak above 500p per therm – nine times the price seen just over a year ago – is expected over the next few days as traders panic about the course of the war.

Fears that Moscow is planning to restrict supplies of natural gas in response to further rounds of sanctions, driving the price higher still, cannot be easily dismissed, according to some analysts, who concede that Vladimir Putin’s administration is deliberately undercutting any rational view of his tactics in this increasingly bitter, destructive war.

Not surprisingly, the major recipients of Russian gas across Europe have spent the last week scrambling to find alternative sources.

Italy, which uses gas to generate 40% of its electricity and imports more than 90% of its gas, mostly from Russia, has looked to Algeria and Azerbaijan for alternative supplies.

German politicians have talked about cancelling plans to shut down nuclear power plants and ramping up electricity production from coal-powered generators.

In the short term, though, Russian gas is an essential element of the energy mix, and without it rationing would be widespread.

Heavy industries across Europe have already adopted short-time working or, in several cases, weekly shutdowns to cope with rising prices. Car-company bosses are among many who believe they would never be able to pass on the cost of higher energy to consumers and so have made the choice to restrict production until prices fall.

Boris Johnson rightly says Britain has successfully reduced the supply of gas from Russian gas fields to below 5%, but the privatisation of UK supplies in the North Sea ties consumers to the going rate on international energy markets, leaving the UK as exposed as any other country to rising prices.

According to industry body Energy UK, recent increases could push the average energy bill from more than £2,000 a year after the lifting of a price cap in April to nearer £3,000 in October, when the cap is reviewed. Consumers are already being quoted fixed-rate tariffs of £3,500 a year.

It leaves Britain and Germany among the worst affected by rising prices, in part because they have so little control of domestic supply via public ownership.

Energy analyst Ano Kuhanathan says any restriction on Russian gas supplies would hit industrial and residential users hard.

He works for Euler Hermes, a branch of the giant German insurer Allianz, and concluded in a report with two colleagues last week that much of Europe will be dependent on Russian gas for several years, despite action to reduce demand and develop alternative energy sources.

He dismissed a report by the International Energy Agency (IEA), which said European leaders could reduce their dependency on Russian gas by a third in just one year, as “extremely aggressive” and almost certainly probably impossible.

The IEA highlighted a 10-point plan that included a strong push to insulate homes, a faster windfarm building programme and an advertising push to persuade people to turn down their thermostats by 1C.

Emphasising the need to move swiftly, IEA executive director Fatih Birol said: “Nobody is under any illusions any more. Russia’s use of its natural gas resources as an economic and political weapon shows Europe needs to act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter.”

Jim Watson, a professor of energy policy at UCL, said Britain was in a similar position and “reducing demand for gas should be at the centre of the UK’s response to the invasion of Ukraine and high prices”.

But Kuhanathan said a shift in strategic planning would leave the energy market dynamics largely unchanged in the short term and that, without rationing, there was little choice but to continue using Russian gas.

“Most gas in Europe is carried by pipelines. There could be a switch to liquefied natural gas (LNG), but there is not the storage capacity.

“And anyway, Japan and China are among many nations that want huge amounts of LNG, which means the extra supply isn’t there at the moment,” he said.

Britain also lacks the storage capacity that could cushion the UK from the full impact of volatile gas prices.

Germans were under the illusion that a lack of storage was not something they needed to worry about. But reports last week in the German press revealed that the largest gas storage facility in the country is part owned by the Russian gas supplier Gazprom and was run almost dry in the weeks leading up to the invasion.

Given that Russia accounts for 17% of global gas supplies and 12% of oil production, it will be a painful transition to alternative sources, especially if the switch must take place in months rather than years.