When gas prices rise, we consumers are the first to notice. But why do gas prices fluctuate? In this article, we take a look at the reasons behind the price of gas.
What Contributes To The Price Of Gas?
If we say the cost of natural gas is 4p/kWh for a unit of gas, we breakdown the parts of each element into 4 areas:
- Wholesale Costs
- Network Costs
- Environmental & Social Obligation Costs
- Supplier Operating Costs
Wholesale costs make up 46% of the overall amount. The raw energy cost makes up the largest element of the gas price. 41% of the gas price is taken up by the raw commodity cost.
Energy Losses in the network make up just 1.1%. This is where gas may be lost along the way through the various networks that gas travels along to reach its final destination.
19% of the total cost is by distributing and transmitting the gas, the second largest element.
Distribution costs make up a larger part of the price, coming in at 17% and transmission making up just 1.7%. Suppliers will pay different distribution companies for their services.
Environmental & Social Obligation Costs
Energy companies support numerous government programs that aim to lower carbon emissions. The cost is 2.8% of the price. Government initiatives are less common in the gas market in comparison to the electricity sector.
ECO or The Gas Energy Companies Obligation are schemes for supplies to invest in, making up 2% of the price. 0.8% is the Higher Distribution Cost Levy for supporting supplying more remote networks such as the North of Scotland.
Supplier Operating Costs
Finally, the cost of delivering your gas supply to the customer. 12.3% is the cost of supplying the gas, including metering, customer services and profits. Energy companies usually employ a third part metering agency.
VAT and Climate Change Levy
Additional government taxes add 20% VAT for business use and the Climate Change Levy (CCL), which is currently 0.406p per kWh (roughly 10%)
Domestic gas is charged at 5% VAT, with no CCL
When we add this all together, proceeds from the price of gas that you pay each money is shared between:
What Are The Factors That Determine The Price of Natural Gas?
When you check your gas bill, you may be wondering how they work out the gas prices. Well, it depends on various factors, such as:
- Raw energy cost (or wholesale cost)
- Metering cost
- Supplier’s margin
- Transportation costs
- Environmental and social obligation cost
- Supplier operating costs
There are also other factors than can decide the price of natural gas, such as market supply and demand for gas. When there is an increase in the gas supply, prices usually lower, and when there is a decrease in gas supply, prices tend to increase.
What Supply Factors Affect Natural Gas Prices?
When talking about business, you may have heard the term ‘supply and demand’. With supply, the more people that want gas, the higher the prices usually go. Supply factors that affect natural gas prices are:
- Amount of gas production
- Storage levels for natural gas
- Volumes of gas exports and imports
- What Demand Factors Affect Natural Gas Prices?
Just think during winter, when the weather gets a bit colder you tend to see more people using gas for heating. In 2021, Gazprom reported their highest ever gas sales due to the cold temperatures recorded across Europe. Other factors that affect natural gas prices include:
- Economic growth
- Prices of other fuels
Why Is Gas So Expensive In The UK
The UK has been a net importer of gas since the early 2000s. Roughly 55% of the UK’s gas is from the North Sea Fields. Around 38% is imported from Norway, a small amount from gas storage and the rest from across Europe.
These sources from across Europe all compete with each other to meet the demands the UK has for gas. This dictates the prices for wholesale UK gas.
Also, with the closure of the UK’s main gas storage facility in 2017, the UK is a lot more reliant on gas imports. This includes liquefied natural gas (LNG) ships and importing from Europe. Before the closure of the largest facility, the UK would inject gas into the storage facility during the summer, then withdrawing in winter, reducing exposure to heavy prices across Europe over the colder months.
Brexit has a part to play too, with the pound weaker compared to the Euro. This makes a greater incentive for Europe to import energy from the UK. However, this puts a huge strain on the supply/demand curve and increases UK prices. With this currency deficit, it costs more to import gas from Europe.
Weather can contribute to gas prices. With colder weather during winter, prices can spike with gas shortages. Warmer summers can also increase prices, with more fuel used for air conditioning, this has a knock-on effect on normal winter storage rates causing a cycle of increased prices.