William John Market Report 17-09-21
Gas prices are on the rise at record levels - what does this mean for the UK power market and the British consumer? William John assesses the situation.
William John, natural gas, electricity, UK, power market, wind power
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William John Market Report 17-09-21

William John Market Report 17-09-21

Category: Reports

Natural gas prices have soared to record highs amidst concerns of tight supplies and weather-induced shortages ahead of winter. According to Ofgem, the Office for Gas and Electricity Markets, the price for forward delivery contracts of natural gas in the UK have skyrocketed since the start of the year:

 

Source: William John Analytics, Ofgem

Forward gas prices have risen steeply over recent months as UK and European gas storage levels are at historically low levels due to cold temperatures persisting into April and May in key gas extraction states such as Russia and Norway. The need to fill storage levels, which will need to be filled beyond the end of summer to meet Winter demand, has driven increased demand across Europe.

Furthermore, many gas deliveries have been diverted this year to Asia and South Africa due to increased demand and prices relative to Europe and the UK in those regions. Additionally, there have been periodic issues with Norwegian and Russian pipelines which has reduced gas imports from these major suppliers.

On 14/09, day ahead prices for gas in the UK jumped to more than £1.65 per therm, up over 70% since early august and 99% since the last data point on the Ofgem graph above.

What makes the natural gas supply shortage dramatically worse, is that Europe and the UK are reliant on wind turbines for electricity generation as they endeavour to meet their emissions targets and transition to a net-zero economy. In recent months, however, wind speeds have been consistently low. This has contributed to low wind energy generation, which currently stands at approximately 2,000MW.

Compared to gas generation, which stands at over 16,000 MW (according to energynumbers.info/gbgrid) wind energy has had a diminished role to play and consequently has been backfilled by gas generation – increasing the UK’s power market exposure to gas prices.

So, what does this mean? Large industrial users are unlikely to be dramatically affected – they usually engage in hedging strategies by locking in their future resource prices (in this case gas prices) in forward or future contracts.

Regarding the UK electricity consumer, there is short term good news and long term bad news. In the short term, consumers are unlikely to feel the impact of a record surge in gas prices as they usually have contracted fixed tariffs (a locked in rate per kilowatt hour for a designated term).

However, with the way prices are going, Ofgem will have no choice but to raise price caps on power to account for the increasing strength in wholesale energy prices – especially given the UK’s unfortunate reliance on gas energy at the moment. If and when Ofgem start to raise price caps, fixed tariffs on future energy bills are likely to dramatically increase. Ultimately, this could lock in consumers to expensive electricity bills for the forthcoming years, even if the wholesale markets settle down and adjust supply in the near future.

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.