You would have done well not to have either heard about the high price of Gas and Electricity and better still not to be feeling the impact.
Each day when we look at the Wholesale costs, like everyone else, we are surprised at just how far the current spike continues to go. There have been some false alarms along the way, with costs falling, giving hope that finally the industry sees sense and returns a more realistic price.
By far the biggest impact on prices has been for 2021 and earlier in 2022, essentially the winter period. As we comment on each month and we see in contract analysis reports for customers, costs further out show much better value, demonstrating a greater long-term confidence in the supply / demand position.
Since April 2021, as a result of a number of cold spells and a draw on Gas Storage, this has been a focus on why prices have continued to rise for Gas and the knock-on impact to Electricity, due to Gas frequently providing the bulk of Electricity generation. Looking at the graph below, you can now see that our Storage levels are above those seen in 2019 and 2020 and yet prices have continued to increase.
So, what is driving prices higher now?
High Gas costs are not just affecting us but are a global issue. The demand for LNG has increased post lockdowns with many shipments heading to Asia where prices are even higher. We have relied on LNG over the winter period in recent years following the closure of our largest Gas Storage facility. The concern is, will be receive deliveries if we need them and how much will we need to pay?
Europe has its own Gas Storage worries for the winter, as although their capacity is much greater than ours, their levels are still in the region of just 75% full. They have a heavy reliance on Russian Gas and flows are lower than expected. Russia state this is due to their own demands, whilst others feel they could be applying pressure to Europe to speed up the certification of their new pipeline, Nord Stream 2. The thought is that Russia would prefer to use this and avoid some of the existing routes which are politically sensitive.
Wind generation has been low in recent months adding to the demand for Gas and Coal generation, increasing the Electricity Wholesale price. In September the available supplies from our largest Electricity Interconnector were reduced after a fire, with an estimation that half will not be available until March 2022. Fortunately, a new connection between the UK and Norway has become operational which can potentially compensate.
We are also seeing that energy suppliers have in some cases not purchased enough Gas and Electricity to cover the requirements of contracts for the winter. In some cases, this is a result of a great deal of uncertainty as to requirements due to lockdowns, but now means they need to secure those supplies at short notice, very much at a premium. There is the potential that they may need to revisit contracts where the initial consumption forecasts have proven to be too low.
Unfortunately, there have been a number of casualties where domestic suppliers are restricted by the Price Cap, so where they have not bought the energy in advance, are losing money on each contract. The government sees these as issues with their business models and has not stepped in provide financial assistance. There are measures in place to restrict the impact on domestic customers, by moving them to another supplier.
Looking at the graphs below which show the Wholesale price for a twelve-month contract start dates for November 2021 / 2022 / 2023, the huge premium for 2021 prices could in part be driven by sentiment rather than completely by fundamentals. Prices tend to build in all the concerns, including a very cold winter, short supplies etc, so hopefully, should more moderate conditions emerge, prices may start to fall.
For customers the difficult decision is whether to act now for contracts ending later in 2021 and early 2022 or wait to see if prices ease. If the financial hit for the next twelve months is too great, then taking a longer-term contract and essentially smearing the higher costs with the lower 2022 and 2023 could provide some relief. For those that can afford the higher short-term costs, then there may be opportunities to revisit 2022 and 2023 next year in the hope of lower costs.
Read some of our other recent blog posts here
