Following the Money: Who Pays for a Barrel and a Kilowatt-hour

On Friday 26 August 2022 the front-month gas contract at the Dutch Title Transfer Facility, TTF, the benchmark for most of Europe's gas, closed at a record of about €340 per megawatt-hour, the equivalent of roughly $100 per million British thermal units (ICE Endex). In a normal year before 2021 it had traded at about €20. Russia had cut off gas to Poland and Bulgaria in April, reduced flows through the Nord Stream pipeline to 40% of capacity in June and 20% in July, and would halt it entirely from 31 August. Power prices in Germany and France rose with gas, because in most hours a gas plant was the last and most expensive generator needed to meet demand, and its cost set the price for every megawatt-hour sold (Chapter 8). Across the Atlantic, Henry Hub gas, the US benchmark, traded at a fraction of the European price, because America produced its own gas and could not export more of it than its liquefaction terminals could handle.

That summer Britain's energy regulator, Ofgem, set its default tariff cap for October. The cap limits what a supplier may charge a household on a standard variable tariff, and it is set from wholesale prices over earlier months. For a typical household using both gas and electricity it had been about £1,277 a year from October 2021 and about £1,971 from April 2022; from October 2022 it was to rise to about £3,549 (Ofgem). Before that figure took effect, the government announced an Energy Price Guarantee that limited unit rates so that a typical household would pay about £2,500, and paid suppliers the difference.

The cap had already shaped the industry. From September 2021, when wholesale gas first rose roughly fivefold, suppliers that had promised customers a capped price for six months without buying their energy in advance were selling below cost. About 29 British suppliers failed between September 2021 and 2022 (Ofgem, reported). Their customers were moved to surviving suppliers, and the extra cost of serving them was later recovered through a levy on every household's bill, reportedly about £2.7 billion in total. The largest failure, Bulb, which had grown to about 1.7 million customers (reported), was too big to move; it entered special administration on 24 November 2021, the first use of that regime for an energy supplier, and was later sold to Octopus Energy. The National Audit Office put the government's spending on Bulb at about £3.02 billion, with an expected net cost of about nil once the money was recovered. In Germany the state rescued and then nationalised Uniper, the country's largest gas importer. European governments spent several hundred billion euros on price caps and support (reported).