The volatility in the energy market has been compounded by the current military conflict in Ukraine.
In this latest article, Head of Flexible Purchasing and Energy Strategy at Northern Gas and Power, Latif Faiyaz, looks at nine factors driving up UK energy prices.
Factor 1: The conflict in Ukraine has affected energy prices in a few ways. As the war escalates, there is a high possibility that gas pipelines will be damaged. This risk is increasing current energy prices. The likelihood of European sanctions on Russian gas is fast becoming a possibility. As soon as this happens, the market will rise higher. Since May 2021, Russia has been reducing gas supplies to Europe. This was seen as a bargaining tactic to have Europe approve the Nord Stream 2 (NS2) pipeline. Now amidst the war, gas volumes in the European market are likely to decrease. This is compounded by the decision to halt the certification of NS2 by the German Chancellor. Finally, the UK has banned Russian LNG cargoes from UK terminals. Ofgem may also revoke Russian-owned Gazprom Energy’s supply licence. This could cause 20 percent of the UK commercial market to buy energy at the current high prices.
Factor 2: EU gas storage is currently at a historical low. Any prolonged cold weather will rapidly deplete storage reserves, increasing the price of gas due its limited supply. There are also concerns that a prolonged shortage reduces gas storage levels for next winter.
Factor 3: The high demand for LNG in Asia has impacted global gas supplies, as countries such as China are willing to pay a higher premium. China’s growing economy and harsher winters are influencing this. Furthermore, China’s climate goal to achieve net zero by 2060 has led industries to look towards gas as an alternative energy source to coal.
Factor 4: Droughts in the Amazon rainforest impact the ability for Brazil and Argentina to use hydropower, the main source of electricity generation. As a result, they resorted to gas-fired power plants to help meet domestic needs.
Factor 5: Outages on gas pipelines from the North Sea to the UK led to sharp price spikes, especially in the depths of winter. Any outage reduces supply, amid an alreadytight market. This has so far led to price increases of 10-30 percent.
Factor 6: Low wind generation has forced the UK to rely on coal and gas-fired generation. In turn, this increases gas demand and, consequently, the price of gas.
Factor 7: A September 2021 fire to the FranceUK interconnector affected supply and prices. The UK will export electricity to France if French prices are higher. Conversely, the UK will import electricity from France if prices in the UK are higher than in France.
Factor 8: Nuclear plants are being phased out in the UK and Europe. The power generated by these plants is not being fully replaced. Phasing out nuclear forces the UK to rely on alternative sources of power generation.
Factor 9: Carbon prices have risen from £15, to £90/tonne in the span of 18 months. This is due to increasing participants in the carbon trading scheme and governments tightening countries’ carbon commitments. The higher the price of carbon, the more demand there is for gas. If you have any questions about the energy market, your business energy contracts, or if you want to reduce energy costs, contact Northern Gas and Power on 03300300800
