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UK Energy Market: What’s driving energy price rises

08/10/2021

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What’s driving the current energy price rises?

Energy prices are volatile at the best of times, but prices have soared over the last few weeks, so what is driving it?

Why are wholesale energy prices increasing?

The price of gas has increased.

 

uk gas price curve

 

The UK has become increasingly reliant on gas to generate power as old coal-fired power stations are decommissioned. Currently around 40% of the UK’s electricity comes from burning gas. Therefore, as gas prices increase, the cost of energy increases, and gas prices have soared recently due to the following:

Low storage

UK and European storage are at record low levels driven by very low temperatures in the year’s first half. As winter approaches, gas storage is a crucial indicator of the expected price of gas, covering periods of low production in the coldest months. Gas storage is currently low.

High Liquified Natural gas (LNG) prices

The UK often receives top up gas supply in the form of LNG cargos from abroad. As the global economy has recovered following COVID, demand for these cargos has increased from the far east as gas prices also remain high there.

European gas pipeline deliveries are lower.

A large proportion of UK gas comes from Europe via pipelines. However, as most of Europe is suffering the same issues as the UK, supply through these sources has reduced. Supply flows from Russia, in particular, have been reduced.

The new Russian pipeline is still to come online.

Due to various political issues, the much-hailed Nord Stream2 pipeline connecting Russia and Germany has taken longer to gain certification.

 

The price of power has increased.

UK electricity price graph Oct 21

 

As discussed above, the gas price has a significant impact on the cost of power and has been driving up prices.

 

What else is driving up Power prices?

Low renewable generation

The UK has become increasingly reliant on wind and solar to power the grid. However, the last months have fallen short in this respect, meaning other forms of generation have had to fill the gap.

The increased cost of carbon offsets

The price of CO2 emission has doubled since last year, making it increasingly more expensive to generate using traditional forms such as coal. In addition, using gas has put more pressure on gas reserves and further squeezing supply.

The cost of Oil

Oct 21 uk oil price graph

 

Traditionally the cost of power has been linked to oil and coal, the fuel used to generate. However, these base materials have increased in cost over the last year. This has put further pressure on global sources of generation, rising the demand and cost of gas.

 

Looking ahead – are the energy price rises here to stay?

Supply and demand determine prices; as discussed above, supply looks to be constrained, but what about demand? Demand is seasonal and increases during Winter as heating homes comes into play. For example, a very cold or unreasonably long winter could push prices up and strengthen cost into Summer 22.

The completion of Nord Stream2 from Russia to Germany will increase gas supply into Europe. However, this is still some way off with political obstacles to be overcome and will not happen soon.

Recovery of markets from COVID will still have an input as demand begins to settle to normal levels.

UK Net Zero ambitions will continue to effect carbon auction levels and in turn, the price of energy. However, a return to normal carbon auction levels could also soften market prices.

 

Conclusion

As we write this, we are in unprecedented times, gas has reached 400p a therm on the 6th October 2021 only to reduce to 300p because of Russia promising to supply more gas

France is threatening to turn off the interconnectors to the UK over a trading dispute, and the market is racked with fear, panic, and speculation. 

The laws of supply determine market prices and given the supply issues listed above and the spectre of a cold winter ahead, there is little hope that prices will reduce anytime soon. The market also continues to react widely to any shocks so the question now is how high can prices actually go and can your business afford not to act now?

If you would like to chat through your options and how you can protect your business, please call one of the troo team now on 0808 164 2222

 

Author : A Richardson 

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