Headlines:
- Very high Gas and Electricity Wholesale costs.
- Potential for further disruption to Gas imports from Russia.
- EU Gas Storage levels are an improved 60% full, compared to 49% last year.
Energy Overview
As of the 6th of July, Gas and Electricity Year Ahead Wholesale costs were higher, when compared to last month’s report. The Oil price is lower at $101 per barrel from $123, due to the potential for a global recession.
The period of relative price stability ended mid-June. With the war between Russia and Ukraine showing little sign of ending, there remains the threat that Russia could reduce or cut off Gas supplies to Europe. This was demonstrated when they announced the maintenance of Nord Stream 1, which some believe was not necessary. Full maintenance is due from the 11th until the 21st of July, with the suspicion this could be prolonged. It was reported that the outage of the US Freeport LNG plant would be longer than initially thought, adding another concern for Gas supplies. The EU has outlined their intention to stop using Russian energy by 2030, but for now remains dependent on Russian Gas.
The EU has set Gas Storage targets, with the intention of ensuring there are supplies for the winter, to help with any increase in demand or supply cuts. Storage is currently an improved 60% full compared to 49% last year and 81% in 2020. The additional LNG deliveries heading to Europe may continue, as China announced new Covid restrictions.
The Met Office forecast suggests we will see above seasonal norm temperatures at times in July, with little mention of strong winds, which would mean the continued high use of Gas for Electricity generation.
What does this mean for me?
Wholesale prices for 2022 remain very high when compared to recent years. Prices for 2023 and 2024 show 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 are currently much higher, estimated in excess of 60% and 80%.
Increasing third-party costs are noticeable in Electricity contracts. These include Transmission, Distribution, Balancing and government policy levies, which ensure we have enough energy to meet demand and provide investment.
Over the next year, the way 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 Transmission and Balancing charges in some fixed price Electricity contracts, as the pricing method is due to change from April 2023.
Indigo Swan will be working closely with energy suppliers to best help all our customers through this worrying time, where there is a great deal of uncertainty as to developments in Ukraine and the impact they have on energy costs. Some suppliers are still hesitant to provide contract offers and they may be withdrawn at short notice.
We would advise looking at your options for contracts ending 2022. There is an opportunity to contract for two or three years to dilute the impact of the higher short-term costs.
Please contact us on 0333 320 0475 to discuss options or to get a latest update.
Gas market overview
On the 6th of July, the Gas Year Ahead Wholesale cost was 363.23p/th, up from 223.65p/th in last month’s report and 331% higher than 2021. Prices for 2023 and 2024 are considerably lower.
Costs are being pushed higher due to the concern that Russia can reduce Gas supplies into Europe at any time, as they demonstrated in June by reducing flows via Nord Stream 1. Full maintenance is due next week. Statements have made it clear they see Gas as their product, which they have the right to control. The EU is focusing efforts on increasing Gas Storage levels to 80% full by November and are currently 60% compared to 47% last month. Germany is just one country that is encouraging less Gas use, with the potential for enforced rationing should the supply position deteriorate. Gas Storage levels are an important tool, as they are a sign of how well prepared we are for the winter. If stocks are too low, then that creates an added price premium to Wholesale costs.
Industrial action by Norwegian Oil and Gas workers which threatened UK Gas supplies, created a price spike early in July, until their government stepped in and resolved the issue. It was also announced in June that some LNG supplies from the US to Europe would potentially be unavailable until September due to a fire at the Freeport LNG plant. The Covid restrictions in China and a reduced LNG demand has meant that we have been receiving a large number of shipments, with some of the Gas being exported to the continent via Interconnectors.
Let us know if you would like us to research your options for 12, 24 and 36 month contracts.
Electricity market overview
On the 6th of July, the Electricity Year Ahead Wholesale cost was £325.83/MWh, up from £216.80/MWh in last month’s report and 273% higher than 2021. Prices for 2023 and 2024 are considerably lower.
Electricity prices continue to be driven by the high costs of Gas generation, which accounted for 44% of supplies in June. Wind’s contribution fell to just 17%, the lowest since September 2021. Most of our Coal generation has now closed and is frequently not used. However, due to the erratic and sometimes extremely low contribution of renewables, Coal provided in the region of 2% on a number of days. With the concern that Russia could reduce Gas supplies into Europe and the resulting shortage and price spikes, Coal generation is being prepared by a number of countries as an emergency backup, despite the obvious environmental concerns.
Interconnectors between European countries could play an important role in providing some degree of stability, allowing the import and export of supplies, when for example, there are excessive renewables in a region.
The National Grid has mechanisms in place to secure additional supplies or reduce demand. These do come at a cost premium, in the form of higher third-party charges within Electricity bills, but provide an element of stability to prices which otherwise may react even more dramatically.
Let us know if you would like us to research your options for 12, 24 and 36 month contracts.
