Expert Comment: Why the UK energy market is in distress

In response to the emerging UK energy crisis, Hirbod Assa, Senior Lecturer in Finance and Fintech in Kent Business School explains how this has happened:

‘The UK energy market is in distress, as the gas price hikes have resulted in the electricity price explosion. This will definitely end up with the smaller energy supplier companies’ bankruptcy as the Government has pledged not to bail them out. More importantly, customers will suffer too, regardless of the energy price caps and the Government reassurance of no energy shortage; they will have to pay for part of this adverse event ultimately.

‘Besides the major reasons for the ongoing crisis, a combination of international political antagonism, natural events, and post-Covid economic resurgence, many now talk about the fact that the smaller companies did not hedge themselves against price hikes in the energy market; a market of almost 50 companies that, except the so-called “big-six”, are small.

‘But hedging is not cheap, especially in markets that the major risk is systematic, (i.e. price increases here means price increases everywhere). The hedging costs must be reflected in supply prices, which seem to remove the primary advantage of forming a competitive market of many smaller companies that offer lower prices. But that is the beauty of the market, it can correct itself, in this case by removing under-pricing.

‘Energy is directly related to the people’s livelihood, so the Government will need to protect the customers (who also benefited from low prices), but standing with the market principles, we can expect changes in the energy market.’

Hirbod Assa, Senior Lecturer in Finance and Fintech covers research including Fintech, Insuretech, Machine learning and Risk Management. Hirbod has developed theories in Pricing, Hedging, Optimal Contract Design, Agricultural Finance and Machine Learning in the field of quantitative finance. He is also a member of the advisory board of the Agricultural Finance Review.