Welcome to the AUGUST edition of our monthly energy market insight.
With the cost-of-living crisis dominating the news cycle, and rising energy bills the main cause of inflation hitting double digits for the first time in 40 years, this month we review the factors that have driven UK commodity prices to unprecedented levels.
Natural Gas Prices
Inevitably it has been the lack of Russian gas flowing into Europe that has continued to be the main driver of rising energy prices in the last month. The Nord Stream 1 pipeline continues to flow at 20% of capacity (approximately 33 mcm per day), with its Russian state-owned operator, Gazprom, issuing increasingly tenuous reasons for the lack of throughput. A damaged turbine from the Portovaya compressor has been repaired by Siemens Energy in Canada but is yet to be accepted back by Gazprom. This week, Russia said they require official confirmation of sanctions imposed by Canada and the EU, apparently seeking assurance there would be no repercussions if they took receipt of the repaired turbine. Gazprom has further stated that the repaired turbine should have been returned directly to Russia from Canada, and not via Germany, describing this as a breach of contract.
Despite gas storage across the EU now sitting at more than 73% of capacity, which is aligned to the five-year average and on track to achieve the requirement of at least 80% of capacity by November, it is the absence of Russian gas that has continued to push markets higher, particularly in the last week. The following graph highlights the increases seen in winter-22 gas prices since April, and the table provides a current snapshot at close of markets on 16th August:
In addition to the increased commodity cost for this winter, the last two weeks has seen a clear acceleration in rising costs further down the forward curve. Summer-23 prices started this month at 321p/Th (currently trading at 533p) and as far out as winter-24 prices have jumped from 205p/Th to 338p at time of writing. These spikes began shortly after the German energy regulator stated gas demand would need to be reduced by 20% in order to operate their system safely across the next two winters. The increases clearly signal that markets no longer hold out hope of increased costs being a short-term problem only affecting this winter.
Compounding the major concerns over gas flows from Russia, we are now entering a period when Norway will be conducting annual maintenance across their infrastructure, with major outages further tightening the supply outlook.
There has been more positive news, with Germany announcing they will be bringing online two floating LNG terminals before the end of the year. And closer to home, Centrica will be reopening the Rough gas storage facility to strengthen UK security of supply across this winter. However, these announcements did little to stem the tide and the outlook remains bleak for those with imminent contract renewals.
Power Prices
As per usual, the reliance on natural gas for electricity generation has ensured power prices continued to track the pattern we’ve seen at European gas hubs. The following graph plots the upward trajectory of UK baseload prices since April, and the table lists UK market prices at close of markets on 16th August:
The last week and a half has seen power prices increasing more rapidly than gas. This has been driven by a tighter European supply picture, largely caused by the recent heatwave which affected much of the continent.
Several French nuclear facilities were taken offline earlier in August due to a lack of water for cooling, although water regulations have since been relaxed and these sites should come back online in the coming month. In Germany, low river levels inhibited the transportation of coal which, combined with a lack of wind generation and an increased power requirement for air conditioning during the heatwave, prompted an increased demand on gas for generation, further lifting prices.
Summary
Companies such as Shell and BP, who extract the raw resources from the ground, are reporting vastly increased profits this year, which has been widely reported in the media amidst calls for further windfall taxes. However, energy retailers without these upstream divisions continue to feel the pinch, particularly those with domestic supply portfolios where the price cap results in them haemorrhaging money.
Consequently, the last month has seen many more suppliers either withdrawing from certain sectors (hospitality, property management, and manufacturing sectors being high on that list), ceasing the acquisition of new customers, limiting the contract durations they will offer, or declining to quote for all business (acquisitions and renewals alike). This winter will inevitably see the demise of further energy suppliers, albeit those without domestic portfolios should be secure.
Currently, there are a limited number of factors which analysts believe could cause downward pressure on prices. Amongst these would be reduced gas demand due to a mild winter, reduced demand due to a resurgence of Covid cases prompting further lockdowns, and reduced demand caused by a downturn in world economies (poor data in early August out of China, Japan, Europe and the US has already prompted a reduction in oil prices). However, you will note these factors are all demand-side, and nobody seems to be forecasting increased supply, with many experts suggesting the war in Ukraine is set to continue for the foreseeable.
With prices surging as they have in the past few weeks, most customers with imminent contract renewals are rushing to sign before the situation deteriorates further. And this is hard to argue against right now. The only decision for many is whether they can look at a longer-term contract in order to slightly reduce the impact of the price increase when it hits.
The only way to ensure downward movement in prices is to vastly reduce our reliance upon natural gas. But the chain cannot be broken quickly, and this requires investment in longer-term solutions that won’t help businesses in the here and now.
If you'd like more information about current market conditions or would like specific advice with your specific business needs, please don't hesitate to get in touch with us.