Since January, wholesale gas prices have increased by 250%.
Even more recently, gas prices have surged by 70% since August. With energy companies struggling to survive, some even going bust, something isn’t right. Both small and larger energy suppliers are facing massive challenges, which will likely have an impact on consumers.
The UK Government has been holding emergency talks with Ofgem and suppliers, with many are worried about the upcoming winter. Add in the CO2 shortage and it can be overwhelming.
But what is going on with the gas market? Why are wholesale gas prices so high? Will energy suppliers be able to survive this crisis?
This article will cover everything that is happening in the gas markets.
Why are gas prices so high?
Well, we can’t say it is one factor causing the problem of rising gas prices. It is many smaller problems, all adding up to create a larger issue. After a recent trip to New York, Prime Minister Boris Johnson stated that there were “a lot of short-term problems”.
Firstly, the world economy is still waking up after COVID. The current prices in the UK are reflecting the global, high gas prices. Countries are still recovering from the COVID pandemic as economies begin to reopen, with gas demand starting to rise.
In spring 2020, the COVID pandemic saw gas demand fall dramatically, with gas prices and UK production plummeting. With maintenance work delayed and investments across global supply chains lowered, we may now be playing catch up.
In addition, last year was a cold winter in Europe, adding extra pressure on supplies. This has resulted in lower levels of stored gas than usual. Gas storage in Europe is 22.9 billion cubic metres under normal levels, with experts predicting Europe cannot catch up.
When you combine Britain and European countries, gas storage is roughly 72% full. However, this time last year, gas storage was 94% full. This drop is significant compared to the average over the last 10 years of 85% full, according to Gas Infrastructure Europe data.
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Over the last few weeks, there has been calmer weather in the UK, cutting output from 11,000 wind turbines. These wind turbines account for over 20% of electricity generation, meaning the demand for natural gas to produce electricity has increased.
As a result, Britain will use coal-burning stations to make up for the energy shortfall.
Increased Demand From Asia
Asia also had a colder winter, leading to an increase in demand from the continent. This has seen countries prioritising the use of gas over coal more than normal, due to lower carbon emissions when burning the fuel.
Countries in Asia such as China, South Korea and Japan have increased imports of liquefied natural gas (LNG). LNG can be transported on tankers, creating a market that doesn’t rely on pipelines and links to oil for pricing.
However, with high temperatures in the summer, high demand has continued in Asia, with air conditioning demand soaring and with environmental pressure on more countries decrease their reliance on coal.
Fires, Maintenance And CO2 Impact
In recent news, there was a fire at a key import cable from France, cutting off a major electricity supply source. A fire on The National Grid site at Sellindge in Kent also added to the issues. The facility will be offline until 25 September, running at half capacity until March 2022.
This had a domino effect, increasing the UK’s dependence on gas power plants to make up for the loss of the electricity supply source.
You may have also heard about the carbon dioxide supply chain being affected too. With wholesale gas prices increasing, two UK fertiliser factories in Chester and Teesside have stopped working, creating a 60% drop in the UK’s food-grade CO2 supply.
LNG From Abroad
The UK does not have a problem with its physical supply of gas. There is no physical shortage. Half of the physical supply is from UK production sites and the rest is piped in from all across Europe.
LNG is also shipped in from further afield with the likes of Qatar, Russia and The United States being suppliers to the UK. This is where we see some of the issues, as the UK has to continue to pay the prices to receive the supplies from abroad.
Several gas platforms located in the North Sea have been closed for maintenance, unfortunately coming at the wrong time. The maintenance was delayed during the pandemic. Usually, Europe will use the summer to fill the gas reserves for the winter.
Gas prices are typically lower during the summer months due to heating demand being limited. However, due to the closure of the Rough storage facility, the UK doesn’t have long-term storage.
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Furthermore, there have been recent allegations that over the summer, Russia has been deliberately withholding gas supplies to northwest Europe. The allegations are that Russia could ensure the approval of the highly controversial, Nordstream 2 pipeline that links Germany to Russia via the Baltic.
Russian gas giant Gazprom and the Kremlin have denied this. The pair say that all contractual requirements were met, however, there is evidence that suggests that in comparison to previous summers, pipeline deliveries to northwest Europe declined.
Gazprom, one of the biggest energy companies in the world, has prioritised the filling of domestic gas storage, with high gas prices meaning that Russia can make a lot of money through lower exports to Europe.
There has been a lack of investment in new sources of supply in Russia too. This could be down to the continuing ambivalence towards Russian gas imports, as well as the uncertainty over the EU’s energy strategy and the future role of gas.
Impact On Energy Suppliers
So, what impact will this all have on energy suppliers in the UK? Well, the larger energy companies have asked the Government to lift the price cap.
This price cap limits the rates that suppliers can charge for default tariffs. This helps to protect consumers from sharp rises in gas prices.
This price cap allows Ofgem to block gas suppliers from charging more than the central price that is calculated from various inputs. Meanwhile, smaller energy companies may suffer, with four already going bust and more likely to follow suit.
These energy companies have customers signed up and agreed to fixed-priced contracts. The gas companies are then bound to sell energy to their customers.
However, most will be at a lot less than what it costs them now to buy, due to the sharp rise in wholesale prices. Customers are paying less than the gas company buys it for, meaning losses will be made rapidly, causing the business to go bust.
It’s not just the smaller companies that are facing huge difficulties, Bulb, one of the UK’s biggest energy companies is seeking a bailout.
With more smaller energy providers fighting to stay afloat, the UK government has stated they do not expect supply emergencies and will not be bailing out failed companies.
There is a current system in place for managing the failure of energy companies, with ministers believing it is working satisfactorily. Companies can recoup losses through an industry-wide levy, but this does add costs to millions of customers’ bills.
Gas Prices And The UK Future
Looking towards the future, the UK is facing a high risk of cold winter weather in 2021, which could cause an even greater demand for gas, with estimates of sky-high gas market prices until 2023.
The United Kingdom faces a greater than normal risk of cold winter weather this year. This winter, meteorologists in the UK have predicted a drop in temperature, which threatens to ignite greater demand for gas and keep gas market prices sky-high until 2023.
If the weather is as predicted, then the UK has enough gas storage for only four to five days, with other European countries usually storing several weeks’ worth of gas. This will only add to the mounting pressure the UK government faces over the management of the economy.
However, the UK government have said there are plans in place to protect the energy market and consumers from rising global gas prices. A meeting with energy regulator Ofgem took place last week to discuss the current situation.
On the UK government website, there are statements that there are benefits, such as having access to highly secure and diverse sources of gas from Norway and the North Sea.
Could things have been done differently?
In 2018, the UK government decided against building new gas storage facilities. There were suggestions that if the idea was supported by the market, the industry would build it.
With the government’s net-zero by 2050 targets, the future role of gas in the UK is uncertain. Will we see a limited role for natural gas, or will it be phased out gradually and replaced with hydrogen? Only time will tell.