Although it has been long discovered that fossil fuel consumption would result in significant increases in greenhouse gas (GHG) emissions, and therefore closely connected to global warming, many economies worldwide are still heavily reliant on hydrocarbons. The UK economy, for instance, spent around £55 billion in total annual expenditure in 2019, or 2.9% of the total GDP.[1]
Due to its fundamental nature as an energy source for both households and manufacturers, any small changes in the energy market would significantly impact the wider economy. For example, the recent rise in electricity and gas bills from £1,277 to £1,971 for typical households, or a 54% increase, has triggered major concerns about standard living costs.[2] Energy-intensive industries (such as steel and other heavy industries) might choose to raise sales price, exacerbating the already-rampant inflation rate (5.5%, right above the Bank of England’s target rate of 2.0%),[3] deterring business confidence and investments negatively affecting aggregate demand. In addition to the negative economic impacts, however, rising energy prices are also a decent opportunity to accelerate the economy’s exploration of renewable energy sources, such as biomass, nuclear, hydropower, solar, etc.
Energy Crisis & Inflation
The main reasons for rising energy prices are falling supplies, which could be explained by less natural gas storage levels due to the cold winter in Europe in 2020/21 and less energy replenishment because of the relatively windless summer. Given 85% of UK households have gas-fuelled central heating, the UK is more severely hit than its continental counterparts. What followed is electricity price; one-third of which is generated by gas.[4] Reports have also warned of skyrocketing energy bills topping £3,000 in England, Wales and Scotland as gas supply issues are exacerbated by limited exportation and supply bottlenecks in Norway and Russia, though more of a subsequent effect of rising energy prices in major Russian gas importers, including Germany, France, and Turkey.[5] Figure 1 shows oil, gas, and electricity price changes in Germany and the Netherlands.

Figure 1: Index of weekly power price (German baseload, blue), gas price (Dutch TTF, orange) and oil price (UK Brent Oil, grey), January 2021 to January 2022 / Source: Think Economic and Financial Analysis
As explained, the first economic effect of higher energy prices is rising living costs. For certain households in Scotland, their energy bills have reached over 10% of their annual income. According to The Office for National Statistics (ONS), electricity bills were up 19% in the year to January and gas bills up by 28%.[6] Rising food prices and an announced increase in National Insurance and the Social Care Levy also push up living costs.[7]
Climbing energy prices, however, did not bring additional profits to energy firms; in contrast, due to the existence of an energy price cap, which prevented them from passing on all of their increased costs to customers, many collapsed, including Avro Energy and Pure Planet, affecting millions. Figure 2 shows the number of households affected for each collapsed energy firm.

Figure 2: Companies that have collapsed since 1st September 2021
Source: BBC News
Since energy firms are usually natural monopolies, describing the scenario in which a firm in a particular market if a single firm can serve that market at a lower cost than any combination of two or more firms,[8] in their operating regions, their business would be run by the energy regulator Ofgem despite their failures. Customers would not be affected in the short run. Ofgem would then attempt to find a buyer or move the customers elsewhere, who must accept the new provider, even if it means a more expensive tariff.[9] Given the current scenario, it is very likely that customers who have ended their fixed deals would be moved to higher energy cost rates, regardless of their willingness. Even customers in Northern Ireland, which has its own energy market usually with stricter price caps and therefore lower prices, were affected and saw increases in their energy prices (9% for SSE Airtricity and 29% for Budget Energy, Northern Ireland's third-largest electricity supplier).[10]
In addition to consumers, energy-intensive companies were also severely hit concerning a sustained increase in energy prices. Depending on the sectors’ energy intensiveness, some companies have already undergone unprecedented pressure for months, while others have just experienced the effect of rising energy prices. No matter which sector the company lies in, though, if the energy price remained high, as indicated by the current trend, it is predicted that companies would face a sustained increase in production costs and are pressured to transfer the burden to clients by raising prices.
Sectors including aviation, shipping, chemical industries, primary metal industries, etc., are classified as heavily energy-intensive and highly susceptible to change in energy prices. [11] The UK’s steel industry, for instance, is suffering painfully from the “huge extra costs” of the UK's current spiralling energy bills. According to S&P Global, the industry leader British Steel is struggling to maintain its production at normal levels of around 3 million MT/year in the UK and Europe but is under an unprecedented challenge from surging energy price, which strongly affects its profitability. As of 17th September, last year, the UK's day-ahead gas price was assessed by Platts at GBP 66.00/MWh ($90.23/MWh), up 83% since 1st August 2021.[12]
Surprisingly, while aviation and shipping are the most energy-intensive industries, the fact that aeroplanes and cars primarily use oil products where the price has gone up much less compared to gas and power means that there was relatively little change in flight and shipping prices.
The food industry, classified as lightly energy-intensive, together with the rubber and plastics industry, travel agencies, hospitality, etc., has demonstrated pressure likewise. While the cost of many foods has already undergone increases, with pasta prices up 15%, cooking oil up 16% and margarine soaring 37% in the year to January,[13] customers might see a further increase in the future. According to John Allan, the Chairman of Tesco, “the worst has yet to come” on food prices, which could have risen as much as 5% by the spring, a startling figure given Tesco's food price inflation in the last three months had been contained to about 1%.[14] Like Tesco, Unilever, Greggs, and Heineken have all announced price increases.[15]
In total, rising energy prices have brought significant effects to many sectors of the UK economy, adding tremendous pressure to inflation. With less disposable income, consumers are expected to increase their savings while spending more on assets and durable goods such as washing machines and electronics to reduce their susceptibility to price fluctuations and protect their wealth. According to a survey conducted by Financial Times, more than half (51%) of the respondents said they had cut down spending on non-essentials. In comparison, over one-third (37%) claimed they had reduced gas and electricity consumption at home to save costs.[16] Unfortunately, sustained increases in the cost of living means consumers may have to modify their consumption behaviours even further. It is undoubtedly hard to forecast the exact timing at which the effects of inflation would wane.
Journey to Renewables
After analysing the negative economic impacts of rising fuel prices, here comes the good news: it may push economies to explore alternatives such as renewables and undergo a transformative energy shift. To reduce GHG emissions caused by the long-term use of fossil fuels and contain subsequent climate change, governments worldwide have made multiple attempts, from setting binding emission targets to abatement measures in manufacturing sectors.[17] In 2019, the UK Government made remarkable progress by becoming the first major economy to pass net-zero emissions target into legislation.[18]
Multiple paths are necessitated to reach the net-zero emissions goal, with reliance on existing renewable energies such as wind power coming first. Described by the renewable energy trade association RenewableUK, the UK is the world leader in offshore wind, with more installed capacity than any other country.[19] Official data shows that offshore wind powers the equivalent of 4.5 million homes annually already and generates around one-fifth of the country's total electricity generation.[20]

Figure 3: Wave Resource Distribution
Source: The Transition between Technology Push and Market Pull Government Support Mechanisms in the UK Marine Energy Sector
The UK also aims to rely on its natural advantage as an island nation with strong maritime currents to generate more electricity through wave and tidal powers (particularly in Scotland, see Figure 3). The country is endowed with around half of Europe’s tidal energy source, potentially adequate to generate 30-50 GW of electricity and satisfy 20% of the UK’s current electricity demand.[21] A world leader in the field, the UK now seeks to build and scale these industries to global markets, stressing the promising potential total available market of £76 billion.[22] Databases such as Marine Energy Supply Chain Gateway has vividly demonstrated the UK’s world leadership in researching marine-based energies and commercial commitment to power the production for the marine energy sector, from Original Equipment Manufacturers (OEMs) to innovative small- to medium-sized enterprises (SMEs).[23]
Other promising renewable alternatives include solar PV, geothermal energies, as well as thorium-based nuclear power. Indeed, it is highly worthwhile to research and develop renewable energy options when we haven’t run out of hydrocarbons entirely and climate change is still solvable. Since financial interests are one of the primary drivers of human behaviours, hopefully, the current energy crisis will foster a sense of urgency for more practical and transformative innovations in renewable energy.
References
[1]Ofgem, 2019. State of the Energy Market 2019. Available at: https://www.ofgem.gov.uk/publications/state-energy-market-2019#:~:text=Energy%20is%20an%20essential%20service,billion%20on%20energy%20each%20year.
[2]BBC News, 2022. Why are gas bills so high and what's the energy price cap? Available at: https://www.bbc.co.uk/news/business-58090533
[3]Bank of England. Available at: https://www.bankofengland.co.uk/
[4]BBC News, 2022. Why are gas bills so high and what's the energy price cap? Available at: https://www.bbc.co.uk/news/business-58090533
[5]Race, M., BBC News, 2022. Ukraine crisis: Warning UK energy bills could top £3,000 a year. Available at: https://www.bbc.co.uk/news/business-60506940
[6]Martin, J., BBC News, 2022, Living costs rising at their fastest rate for 30 years. Available at: https://www.bbc.co.uk/news/business-60390527#:~:text=The%20cost%20of%20living%20hit,the%20squeeze%20on%20household%20budgets.
[7]Reubon A. et. al., BBC News, 2022. National Insurance: What’s the new Health and Social Care tax and what will it cost me? Available at: https://www.bbc.co.uk/news/uk-politics-58436009
[8]OECD. Available at: https://stats.oecd.org/glossary/detail.asp?ID=3267
[9]BBC News, 2022. What can I do if my energy supplier goes bust? Available at: https://www.bbc.co.uk/news/business-58662667
[10]Rice, C., 2022. Two NI energy companies announce further price hikes. Available at: https://www.bbc.co.uk/news/uk-northern-ireland-59091748
[11]Sante. M. V. et al., ING, 2022. The ripple effects of soaring energy prices. Available at: https://think.ing.com/articles/the-ripple-effects-of-soaring-energy-prices#a7
[12]Kinch, D. et al., S&P Global, 2022. Available at: https://www.spglobal.com/commodity-insights/en/market-insights/latest-news/metals/092121-british-steel-cant-absorb-high-energy-costs-uk-says-supply-not-an-issue
[13]Martin, J., BBC News, 2022, Living costs rising at their fastest rate for 30 years. Available at:
https://www.bbc.co.uk/news/business-60390527#:~:text=The%20cost%20of%20living%20hit,the%20squeeze%20on%20household%20budgets.
[14]Hotten, R., BBC News, 2022. Worst to come for food price rises, Tesco boss says. Available at: https://www.bbc.co.uk/news/business-60279019
[15]Timmins, B., BBC News, 2022. Cost of living: Heineken to put up beer prices as costs soar. Available at: https://www.bbc.co.uk/news/business-60403547
[16] Pickford, J., Financial Times, 2022. UK households feel the pain of inflation. Available at:
[17] European Environment Agency. Available at: https://www.eea.europa.eu/themes/climate/policy-context
[18]Department for Business, Energy & Industrial Strategy and The Rt Hon Chris Skidmore MP, UK Government, 2019. UK becomes first major economy to pass net zero emissions law. Available at: https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law
[19]Renewable UK. Available at: https://www.renewableuk.com/page/WindEnergy#:~:text=The%20UK%20is%20the%20world,of%20UK%20electricity%20by%202020.
[20]UK Government, Special feature – Wind powered electricity in the UK, 2019. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/875384/Wind_powered_electricity_in_the_UK.pdf
[21]Marine Transition,
The Transition between Technology Push and Market Pull Government Support Mechanisms in the UK Marine Energy Sector. Available at:
[22] Renewable UK, Wave & Tidal Energy. Available at: https://www.renewableuk.com/page/WaveTidalEnergy
[23] Catapult: Offshore Renewable Energy. Available at: https://www.mescg.co.uk/
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