Every six weeks Andrew Sissons - deputy director of the sustainable future mission - will assess the most important signals and trends underpinning the UK’s energy transition. Andrew is a specialist in climate change and economic growth, as a previous Chief Economist of the Environment Agency and civil servant in the Cabinet Office.

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The conflict in the Middle East has caused significant concerns over the world’s supply of oil and gas and driven a major rise in prices. As the war spreads and key energy trade routes - particularly via the Straits of Hormuz - are closed, the risk of a serious energy crisis looks ever more likely. This inevitably invites comparisons to the energy crisis of 2022 following the Russian invasion of Ukraine. Could Europe and Britain face another energy crisis of similar proportions? And if we do, how should we respond?

Will this be a repeat of the 2022 crisis?

Predicting the impact of the Iran invasion on energy bills is extremely difficult, but there are already signs about how it might develop. The 2022 crisis provides us with a recent template for how an energy crisis might unfold, although we need to be careful not to assume it will play out in the same way.

There are already some potential differences between 2022 and 2026. One is a bigger focus on oil. The 2022 crisis affected gas more than oil, which meant the focus of attention was on household and business energy bills. If the current conflict results in a full blown energy crisis, we could expect oil to be a bigger factor in this than previously, with serious implications for transport and industry as well as the energy industry.

Two key things have also changed in European energy markets since 2022.

1. The first is that Europe now relies more heavily than before on Liquefied Natural Gas (LNG), which is shipped around the world on tankers. LNG is generally more expensive than pipeline gas – which helps to explain why gas prices have remained higher since the 2022 crisis. It also tends to come from different places: Europe has largely replaced its reliance on pipeline gas from Russia with LNG from the USA and Qatar (which has had to shut down LNG production following attacks from Iran). This reliance on LNG presents new risks for Europe: supplies may be vulnerable to a war that targets shipping, while a large part of Europe’s supply is dependent on the whims of the US President.
2. The second change since 2022 is that Europe has made progress on electrifying its economies. The share of electricity coming from wind and solar grew from 17% in 2019 to 29% in 2024, while the share from gas fell from 20% to 16% over the same period. Heat pumps have continued to replace boilers in many countries, although some of the rapid momentum from 2022 was lost. Electric vehicles have also proliferated, accounting for over 20% of new car sales every year since 2022. Having more renewable energy is extremely helpful in a fossil fuel crisis, and heat pumps and electric vehicles are arguably even more important, as they replace oil and gas use at scale.

Unfortunately, neither Europe nor Britain’s switch to clean electricity has gone far enough to avoid a fossil fuel-driven energy crisis. If oil and gas supplies remain constrained – or if some other event with the USA cuts off or limits LNG supplies to Europe – then electricity, gas and petrol prices will all rise significantly, much like they did in 2022.

How do energy crises affect energy bills?

1. There are three ways an energy crisis directly pushes up household bills.
2. First, rising oil prices (which seem more likely in this crisis than in 2022) raise the cost of petrol and diesel. Households using oil boilers (around 4% of the GB total) will also see prices rise, with major impacts on heating oil prices already reported.
3. Second, rising gas prices directly raise the bills of anyone who has a gas boiler (around 85% of GB households). Home heating is the single biggest use of gas in the UK, and makes up a little under half of a typical household energy bill. A lot of recent commentary has focused on the electricity part of the energy bill, but in a crisis it is vital to keep gas bills front of mind as well.
4. Third, high gas prices raise the cost of electricity. This is because gas-fired power stations provide the marginal unit – the last bit we need to keep the lights on – most of the time, which means they usually set the market price (this is a core feature of how energy markets work). More expensive gas means higher electricity prices whenever we are reliant on gas power.

Taken together, nearly 5% of UK household spending goes on energy and petrol. If prices rise across electricity, gas and fuel, this would be extremely painful for many households.

Households may also face rises in the costs of goods and services they buy, as the businesses that produce them also face higher energy bills. The significant bout of inflation after 2022 was not solely down to energy – there were also food price spikes and supply shortages following the re-opening from Covid – but energy was a crucial factor. There are early signs that other prices may also rise this time as well, with rising fertiliser prices a risk to food production.

What impact could this have on the economy?

Energy crises are always bad news for economies, like Britain’s, that are net importers of fossil fuels. An energy crisis is what economists call a supply shock: a key input into the economy (energy) is less available and commands a higher price, which lowers economic output and drives up inflation.

For households, real wages would likely be lowered, as bills go up without a corresponding increase in pay. This would be the most important effect, which could have a knock on effect of reduced spending in other areas. Interest rates may also rise in the short term to deal with higher inflation (bad news for renewables projects among other things). The UK government may need to borrow more to help deal with the crisis; the OBR estimated that having three more 2022-style crises by 2050 would raise the UK’s debt-to-GDP ratio by 12%.

Most businesses will face similar problems to consumers – higher input costs with no rise in production – and some export-facing businesses may find themselves unable to compete and survive.

One group of businesses may profit from the crisis however: energy producers. Britain’s remaining oil and gas extractors should benefit a lot from higher prices, and some renewables providers who aren’t locked in to long term contracts may also be able to raise prices accordingly. Depending on how the UK government decides to respond, some of these excess profits could be channeled back towards consumers. Ultimately, though, Britain’s energy businesses will benefit by much less than households will lose out, because the UK imports much more oil and gas than it exports. It is producers of fossil fuels in other countries – possibly including the USA and Russia – that would benefit most from a crisis.

A crisis would highlight the progress and the gaps in Britain’s switch to clean energy

The best way to deal with a fossil fuel crisis is preparedness – to have spent the previous years and decades reducing your reliance on oil and gas. Building renewable and nuclear energy, replacing boilers with heat pumps and heat networks and swapping petrol cars for electric vehicles is by far the best response. Electrification means much more predictable prices, less reliance on imports and using far less energy overall, because heat pumps and electric vehicles are so efficient. But electrification takes a long time to do; and the best time to do it is before a crisis strikes.

European countries that have already invested heavily in electrification – such as France with its nuclear and renewables fleets, and Scandinavian countries with their ubiquitous heat pumps – will find themselves more sheltered from any future energy crisis. They will not be able to avoid the effects altogether, because the interconnected European energy market means price rises will spread wherever electricity is traded, but they should be better off.

Britain’s recent record on electrification is mixed. It has made great progress in building renewable energy in recent years, although its electricity system still relies too often on gas. The share of time when gas set the marginal price fell from 97% in 2021 to around 85% in 2024, but it still has further to go.

In this context, Britain’s decision to commit to going faster on renewables looks like a decent bet, even at the higher price agreed at AR7. Every wind farm and solar panel that comes on stream would help to lower Britain’s energy bills for as long as gas prices stay high.

However, previous decisions to restrict onshore wind and large scale solar (now undoubtedly the cheapest power we can build) after 2015, as well as to allow the 2023 offshore wind auction to fail, look even more disastrous.

Unfortunately, Britain has underperformed badly on the electrification of home heating. Heat pump uptake in Britain has been extremely slow in the 2020s so far, with the UK persistently near the bottom of the European league tables. After the 2022 crisis, many European countries rapidly accelerated their uptake of heat pumps; Britain’s acceleration has been only modest, and from a low base.

The Sixth Carbon Budget envisaged the UK installing around 1.4 million heat pumps between 2022 and 2026; as it turns out, we’re on track to install fewer than 0.5 million. Given how much we rely on gas for home heating, this has left Britain’s households especially vulnerable to gas price shocks.

What can Britain do if there is a new energy crisis?

Although the best actions to tackle a fossil fuel crisis are long term ones, there are still things governments can do immediately to help. It is likely to be a few months before higher prices fully feed through into consumer energy bills, and there is some time before next winter, but this time must be used effectively to reduce our reliance on oil and gas.

The first is to encourage widespread action on energy efficiency among households and businesses. There are many no- or low-cost measures that can save energy without major disruption, from draught proofing to insulating hot water tanks. In 2022, Nesta’s Money Saving Boiler Challenge helped millions of households to turn their boiler flow temperature down, making it more efficient and saving gas and money.

However, the UK government struggled to spread the word on energy efficiency as much as it could have done in 2022. It was nervous about providing advice to people, and its initially high profile Energy Efficiency Taskforce fizzled out without much impact. If there is another energy crisis, the UK government should have no qualms about encouraging people to raise their energy efficiency this time. There should be increased funding in public campaigns offering advice and guidance to people, delivered alongside partners in local government and the energy industry. Every bit of energy saved via efficiency measures will help save money, protect the economy and keep people warmer.

The second is to encourage households and industry to electrify as quickly as they can. Demand for domestic solar panels is likely to rise sharply if there is an energy crisis, and the UK government is well placed to encourage this, especially given the focus on solar in its recent Warm Homes Plan.

Heat pumps are also the ultimate solution to a gas-driven energy crisis – there is no single measure a household can take which reduces reliance on gas more.

A spike in gas prices generally lowers the all-important electricity-to-gas price ratio. This is because wholesale costs make up a bigger share of the household gas bill than for electricity, so gas gets affected more by a spike in prices. In fact, the lowest the price ratio has been in recent times is the 3.5 recorded from October 2022 to March 2023, when high gas prices combined with Liz Truss removing levies from electricity bills (remember that?). The chart below shows how the 2022 energy crisis brought down the price ratio from its previously very high levels.

On heat pumps, solar, batteries and tariffs, the UK government should again be enthusiastic in encouraging people to switch if they can. If more subsidy is needed in the short term, it will quickly be compensated for by lowering gas use. Now would be an ideal time to cut more of the sludge around getting a heat pump - it could further relax planning restrictions and tackle some of the ten barriers we found.

To support households and businesses with electrification, the UK government should also support boiler engineers to get into heat pumps over the coming summer – perhaps via Nesta’s Start at Home scheme. And as always, it should look to remove as many fixed costs – levies, network costs – from the electricity bill as possible. An energy crisis would be an ideal time to make the underlying cost of electricity even lower.

Third, government also needs to prepare for the possibility of needing to subsidise energy bills. The Energy Price Guarantee, which effectively capped the domestic price cap at £2,500, was hugely expensive for the UK government, but it was probably hard to avoid. The consequences of allowing energy bills to exceed £4,000 for a typical home would have been severe, both in terms of personal misery and economic damage. At a time of acute crisis, it is appropriate for governments to step in, as long as it remains temporary, and as long as it is accompanied by serious action on energy efficiency.

The corollary, though, is that the government probably needs to consider tightening fiscal policy slightly, by raising taxes in the long term. That is partly to compensate for the damage to the public finances from another emergency subsidy, but also to help tackle inflation. The mistake Liz Truss’ government made in 2022 was to announce huge, unfunded tax cuts at a moment it was splurging on energy bills and at which inflation was rising – which led to a further surge in inflation expectations and a crisis in the market for UK government debt.

If the government does have to step in to help with energy bills, it should consider introducing a price ceiling and floor for gas bills. This would set a range – perhaps between 5p and 10p per kWh – that the gas price could move between. Above 10p, the government would subsidise bills (at roughly the same level as the Energy Price Guarantee), while below 5p it would tax them, building up reserves against future crises in the process. Volatile gas prices are a big problem for the economy, and limiting their movement upwards and downwards could help make the UK economy more resilient in future.

Finally, the government also needs to think about what help it could provide to businesses. There is no equivalent of the price cap for non-domestic customers, which leaves them exposed to much greater price fluctuations. The ideal solution for many businesses is the same as for households – build their own generation capacity, invest in energy efficiency, flex their electricity use and pick the right tariffs. Government may be able to support more businesses to become more self-reliant in energy, perhaps via a combination of grants and advice. For areas with highly energy-intensive industries, government could consider creating special low cost electricity zones, which are separate from the grid and can provide much lower cost electricity on site.

Alongside this, the government may need to look again at the UK’s oil and gas reserves in the North Sea, as considered by Nesta’s chief economist Tim Leunig. The North Sea won’t make a lot of difference – reserves are dwindling, lead in times are long, and more domestic production will not meaningfully lower prices. However, any increase in oil and gas production would reduce net imports and could also boost tax revenues, which may help fund subsidies to households and businesses. The government should be cautious about lowering taxes, though – after all, a rise in oil and gas prices primarily benefits oil and gas producers, and the aim should be to maximise tax take.

Conclusion: energy security was never an empty phrase

If we do end up with a serious energy crisis this year, we won’t be able to say we weren’t warned. There was one big lesson to take from 2022: energy crises can happen as long as we are reliant on fossil fuels. The period after 2022 was an ideal time for Britain to reduce its reliance on gas, and it only partly took the opportunity. We must not keep making that mistake. Fossil fuels are not about to stop being volatile, and the best course of action has long been to reduce our use of them and replace them with clean electricity.

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