Pylons at sunset
Monday 7th of February 2022 | Posted In: Contracts

Farmers facing substantially higher energy input costs this year

Like the rest of the UK economy, farmers are facing substantially higher energy input costs this year - but is there really a shortage of fossil fuel gas?

It was announced in early February that typical domestic energy bills are likely to jump by more than 50% this year, due to the raising of the energy price cap, the maximum price that suppliers in England, Wales and Scotland can charge households.

Many NFU members will have already noticed big increases in the cost of commercial energy contracts, amounting to thousands of pounds per month in some cases.

So are world supplies of natural gas running low, and has the confrontation on the Ukraine/Russia border reduced supplies to Europe?  Or is net zero policy and the switch from fossil to renewable energy responsible for driving up our energy costs?

The truth is more complex than this.  The prices presently paid by UK energy users are influenced mostly by commodity prices in a global energy market, and only partly by national supply and demand:

  • Market perceptions of disruption, shortage or a worldwide squeeze on energy supplies can cause both short-term and long-term wholesale price volatility, even if there is fundamentally no lack of resources to meet needs.
  • A cold winter across Europe in 2020/21 put pressure on supplies and depleted the amount of gas in storage – and the UK’s shutdown of the large Rough gas store under the North Sea in 2017 only made matters worse.
  • As the world’s economies recovered from Covid-19, increased Asian gas demand - especially from China – caused intense competition for liquefied natural gas supplies, resulting in dramatic price increases.
  • Lower than average wind power output in 2021 meant Britain was more dependent last year on gas for electricity generation.

British consumers have been relatively hard-hit because about 85% of homes have gas central heating, and gas still generates over a third of UK electricity.

The bad news for consumers is that industry analysts are expecting that prices will stay high throughout 2022. Looking to the future, wind and solar power are now cheaper than fossil fuels, so the government’s Net Zero Strategy should actually help us to build our way out of this problem, while low-cost renewables and energy efficiency measures have already saved British energy users millions of pounds.  But in the meantime, the legacy of past policies has left us too dependent on gas for heat and electricity, with leaky domestic and commercial buildings that cost too much to keep warm.

Dr Jonathan Scurlock, NFU Chief Adviser - Renewable Energy and Climate Change

Call us on 024 7669 6512 for advice on energy efficiency and managing energy costs, as well as your options for buying energy wisely, such as through our NFU Electricity Buying Groups.