As of the 1st of June, Gas and Electricity Year Ahead Wholesale costs were higher, when compared to last month’s report. The Oil price is also higher at $123 per barrel from $105, due to supply concerns.
During May we saw Year Ahead prices fall back to a three-month low. It had been expected that more countries would refuse to pay Russia in roubles for its Gas, by the 20th of May. This would have resulted in them being cut off, creating shortages and price volatility. Initially Finland was the only country to have supplies suspended, joining Poland and Bulgaria, which caused the short-term easing of costs. However, both the Netherlands and Denmark have now been added. The EU has outlined their intention to stop using Russian energy by 2030, specifically a 90% reduction of Oil imports by the end of 2022. They have yet to agree Gas restrictions, which are likely to follow.
The EU has set Gas Storage targets, with the intention of ensuring there are sufficient supplies for the winter. Storage is currently an improved 47% full compared to 37% last year and 72% in 2020. Covid lockdowns in China have meant that Europe has been receiving additional LNG deliveries.
The Met Office forecast suggests we will generally see seasonal norm temperatures in June, with the potential for a period of strong winds, which may help reduce some of the burden from Gas for Electricity generation.
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 Q3, and monitoring the remainder of 2022. There is an opportunity to contract for two or three years to dilute the impact of the higher short-term costs.
On the 1st of June, the Gas Year Ahead Wholesale cost was 223.65p/th, up from 207.15p/th in last month’s report and 255% higher than 2021. Prices for 2023 and 2024 are considerably lower.
Initially the impact of Russia cutting off countries due to their refusal to pay for Gas in roubles was minimal, which brought some relief to prices. More recently the Netherlands and Denmark have been included, which adds to the continued uncertainty of future Gas supplies. Splits within the EU are delaying sanctions against Russia and making them less effective in the short term. The commitment to a 90% reduction of Oil imports by the end of the year was most likely a compromise and they have yet to tackle the future for Gas.
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. The EU’s levels were very low earlier this year and so it was fortunate there was not a prolonged cold spell. To ease concerns, they have set a target of Storage being 80% full in November, currently at 47% from 34% last month. The UK has been receiving high levels of LNG deliveries, with the surplus being exported to Europe via our Interconnectors. We have a very low Storage capacity which adds to the volatility when there are supply issues. There are reports that we may open a large Storage facility that was closed due to maintenance costs.
Let us know if you would like us to research your options for 12, 24 and 36 month contracts.
On the 1st of June, the Electricity Year Ahead Wholesale cost was £216.80/MWh, up from £201.35/MWh in last month’s report and 195% higher than 2021. Prices for 2023 and 2024 are considerably lower.
Despite the increase in renewable generation assets, Gas contributed a high 46% of Electricity in May and Wind 20%. This means that Electricity prices follow Gas very closely.
The events in Ukraine and the measures being taken in response by all parties, continue to be the main driver for prices. Costs are reflecting the concern for future supplies, with the EU likely to impose sanctions on Russian Gas exports and the threat that Russia may also take measures, despite the harm this would do to their economy. We are seeing the UK and the EU look at investment options to reduce their exposure to the impact of cutting off Russian energy supplies, which may include the opening of a mothballed Storage facility, prolonging the life of Nuclear plants, building new Interconnectors, new LNG terminals and a focus on efficiency.
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.
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