Headlines:
- Very low Gas Storage levels.
- Warmer temperatures in June may allow us to divert Gas into Storage.
- Oil prices are at a two year high.
Energy Overview
As of the 2nd of June, Gas and Electricity Year Ahead Wholesale costs are higher, when compared to last month’s report.
Oil is at a two year high of $71 a barrel, despite production increases by OPEC+ through to the end of July and a possible deal between the US and Iran which could see additional supplies made available. The coronavirus continues to suppress demand due to high cases and lockdowns, notably in India.
Gas prices remain volatile, seeing considerable daily fluctuations. With Gas Storage levels being so low both here and in Europe, there is a nervousness built into prices, as we should have started to replace the Gas used in the colder months in readiness for this coming Winter. Although the use of Gas for Electricity generation was slightly lower in May compared to April, it was still considerably higher than 2020 and places a burden on supplies.
There was a small improvement in the combined contribution of Wind and Solar in May, but Electricity prices followed Gas, as it provided 42% of generation. High Carbon prices and the use of Coal also contributed.
The Met Office forecast for the next month suggests temperatures just above seasonal norm, however there is little indication of the significant winds we need to reduce the burden on Gas for generation.
What does this mean for me?
Wholesale prices for 2021 are very high when compared to recent years, only comparable to short periods of 2018. Prices for 2022 and 2023 show much better value. Generally, the Wholesale element makes up in the region of just 40% of the total cost of an Electricity bill and 60% for Gas, but these percentages will be higher for 2021 prices.
Increasing third-party costs are noticeable in Electricity contracts. These include, Transmission, Distribution, and government policy levies, which ensure we have enough energy to meet demand and provide investment.
Over the next year or two, the way some of these charges are calculated will change, under the Targeted Charging Review. Energy suppliers can choose whether to fix Electricity contract costs, pass them through or leave that decision until a later date. This does allow for the possibility of a review of the Distribution charges in some fixed price Electricity contracts from April 2022. It is very likely the Transmission element will be delayed until April 2023.
The weather outlook is indicating some relief for Gas supplies due to a lower heating demand which may allow for injections into Storage. However, the possible low Wind contribution may mean that Gas is required to meet the shortfall. The very low Storage levels and the need to increase them, will likely continue to add price pressure.
We would advise looking at your options for contracts ending 2021 and potentially incorporate lower future prices.
Please contact us on 0333 320 0475 to discuss options or to get a latest update.
Gas Market Overview
On the 2nd of June, the Gas Year Ahead Wholesale cost was 63.08 (p/th), up from 60.61 (p/th) in last month’s report and 130% higher than 2020. The prices for 2022 and 2023 are considerably lower.
Gas was required for the above seasonal norm heating demand in May due to the continued cold spells and to support Electricity generation, which although was high, fell from 46% of total supplies in April to 42% in May.
Storage levels continue to be extremely low, about 20% of those in 2020. The injection season should have started, where we divert Gas into Storage for the winter. The fact that levels are so low and continue to be utilised, is causing substantial pricing pressure. It is likely, until this changes, we will experience volatility for Gas and Electricity Wholesale costs.
With warmer temperatures due in June, we may be able to divert some of the Gas that has been used to meet heating demand, into Storage. It is hoped that LNG deliveries will continue at a similar rate to those seen towards the end of May, which would be another opportunity for the Gas Wholesale cost to move lower.
Let us know if you would like us to research your options for 12, 24 and 36 month contracts.
Electricity Market Overview
On the 2nd of June, the Electricity Year Ahead Wholesale cost was 73.45 (£/MWh), up from 70.16 (£/MWh) in last month’s report and 91% higher than 2020. The prices for 2022 and 2023 are considerably lower.
There are a number of factors which are contributing to this.
Gas accounted for a reduced but still high 42% of Electricity generation in May, from 46% in April. As Gas costs are volatile, this is a significant reason for the higher Electricity price. Until Gas Storage levels are replenished, it is not likely to change. With warmer temperatures due in June, there may be an opportunity for Gas Storage levels to increase, removing some of the price premium due to concerns and in turn, lower Electricity Wholesale prices.
Wind generation provided a modest 15% of supplies, despite a number of days when it reached between 30% to 40%. The erratic nature of Renewables often means we have too much or too little available. Without the ability for large scale Electricity Storage, we remain heavily reliant on Gas.
The National Grid has mechanisms in place, to secure additional supplies or reduce demand. These do come at a cost, in the form of higher third-party charges within Electricity bills but provide an element of stability to prices which otherwise may react far more dramatically.
Let us know if you would like us to research your options for 12, 24 and 36 month contracts.
