In today’s Exponential Investor:
- Energy doomsday
- How to handle the energy crisis
- Crisis, or opportunity?
What caused the 2022 energy crisis?
The 1 October energy cap is looming.
Or, for want of a better term, “energy doomsday”.
It will mark the start of UK households paying an average of £2,500 per year in gas and electricity bills until October 2024, and most likely beyond.
For perspective, the average annual energy tariff for a UK household on 31 March 2022 was £1,277.
That’s effectively a 100% increase in energy bills from 31 March to 1 October 2022.
It could have been worse, too.
But for the intervention of the country’s new prime minister, Liz Truss, we’d all be facing an average annual tariff of £3,500.
So, why are we suddenly facing such astronomical energy bills?
A misconception is that the Russia-Ukraine war is entirely responsible.
However, that has only played a small part.
It’s true that, in retaliation against Russia for invading Ukraine, the UK no longer imports any energy from Russia. But, even before the war, the UK only got around 3% of its gas from the country. It now obtains much of its gas from nations such as Saudi Arabia, Kuwait and Belgium.
So the impact of the Russia-Ukraine conflict on the UK has been rather more indirect.
The EU imports around 40% of its gas from Russia, via the Nordstream gas pipelines.
And with Russia playing around with the gas tap, supplies have been constrained, leading to a global increase in gas prices, which we face here in the UK.
However, the energy crisis was brewing well before the conflict.
The easing of lockdowns back in late 2021 led to a surge in energy demand, as the world got back on its feet again.
This, combined with a long, cold European winter last year puts even more strain on energy supplies.
These factors created the recipe for an energy crisis, and we are bearing the brunt of this now, with the UK arguably being most affected.
The UK has a greater proportion of homes heated by gas than other European countries.
Because of this, spending power in the UK as a percentage of household budgets is set to fall 8.3% this year – the largest decline across Western Europe.
How long will the crisis last?
According to Liz Truss, the £2,500 energy cap will be in place for two years, to October 2024.
To be clear, the cap is what a typical household can now expect to pay, based on new price limits being applied to gas and electricity use.
Under the new terms, this will be 34p/kwH of electricity and 10.3p/kwH of gas.
Bear in mind that your bill will still depend on how much energy you use. So your energy payments won’t be limited to £2,500 if you use more than this in gas and electricity.
Beyond October 2024, it’s difficult to know what energy prices will do.
If winters continue to get colder and longer, and Russia continues to flex its political muscle, energy supplies may remain strained.
Then, if inflation endures, we could easily surpass the £3,000 annual energy bill threshold.
What’s more, help from the UK government may not continue.
The energy caps are set to cost the UK government £150 billion, and will be funded by treasury bills and borrowings.
With the UK’s government debt pile already sitting at a whopping £2.3 trillion, the sustainability of the scheme is under question.
However, there is hope.
The government is working hard to secure its “energy independence” as it seeks to end reliance on costly foreign energy sources.
In doing so, the UK is looking to achieve its “net zero” carbon emission target by 2050.
The country is targeting renewable energy sources such as hydrogen and nuclear energy to achieve this.
Crucially, these could provide a cheaper as well as greener source of energy when powering our homes.
For example, hydrogen is expected to be around 17% cheaper than natural gas by 2025.
In addition, by 2030, it’s estimated that around three million UK households will be using clean hydrogen to power their homes.
The crisis won’t last forever, with the green energy transition slowly taking over.
Nevertheless, households are likely to be in for a tough ride over the next few years.
What should you do during an energy crisis?
From a lifestyle perspective, there are several things you can do.
These include checking your thermostat, insulating your home as well as you can, and turning off appliances when they’re not in use.
Even wearing thicker clothing indoors could help you save some pennies. During times like these, every little helps.
Then, from a financial standpoint, there are also ways you can turn this crisis into an opportunity.
It’s no coincidence that energy companies are outperforming the wider market right now, given the soaring profits they are generating.
Take a look at this chart.
It shows the S&P 500 stock index (blue) against the S&P 500 energy index (white).
The latter is comprised of companies in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) energy sector.
In other words, they’re energy giants that are involved in the exploration, production and storage of fossil fuels, such as oil, gas, and coal.
You can see its full breakdown here. It includes major energy players, such as Exxon Mobil and Chevron.
As shown, the S&P 500 energy index is vastly outperforming the S&P 500 index.
In fact, the energy index has generated a yearly return of 62.08%, versus -12.93% for the S&P 500.
Adding some oil and gas companies to your portfolio at this stage may be prudent.
See the 21 September edition of Exponential Investor, where you can learn how to profit from dividend-paying energy companies.
Then, you could also turn your attention to renewable energy companies, which are being driven by strong tailwinds from government agendas in the face of soaring bills.
In particular, many nuclear energy companies are faring well at the moment.
For example, uranium supplier Cameco is up around 37% year on year.
NuScale Power, a provider of nuclear energy infrastructure, is up almost 33% year on year.
Finally, a £400 energy grant is set to be given to each UK household that pays for their own electricity.
That’s almost 30 million households altogether.
The £400 grant will be credited to your energy account from 1 October, or taken off your bills, depending on your administrator.
Be sure to check with your energy provider on how you’ll receive it.
Until next time,
Contributing Editor, Exponential Investor