We take a look at the current energy market conditions.
As Rishi Sunak becomes our third PM in seven weeks, this month’s Energy Market Update examines the latest updates to government energy policy and reviews the factors that are influencing energy prices across winter-22 and beyond.
Government Policy Updates
Following our review of the Energy Bill Relief Scheme (EBRS) in last month’s edition, last week finally saw the Department for Business, Energy and Industrial Strategy (BEIS) release their schedule of discounts. It is relatively simple to identify the discount that will apply to your winter energy bills. Simply open the spreadsheet here, select the Fixed Contracts tab, and scroll to the date you signed your contract (note – signature date rather than contract start date).
It should be noted that with the release of the EBRS discounts we can now confirm that electricity customers currently sat on default/deemed rates would see a significantly greater discount this winter if they signed a fixed contract. Gas customers in a similar circumstance would currently see no increased reduction for signing a contract, however this would change if natural gas prices increased.
In the domestic market, on 21st October we saw the period of protection offered by the Energy Price Guarantee shortened from two years to just six months. And there has been further clarification regarding discounts for heat network consumers. For a complete summary of measures due to be introduced, please visit the government web page here.
All the above policy is subject to the Energy Prices Bill hitting the statute book. It is being treated as emergency legislation and should complete all its stages before the end of this month.
Natural Gas Prices
The below graph highlights movement in day ahead, month ahead and season ahead gas prices across the last month. The table provides a market snapshot at close on 21st Oct:
Nov-22 is now trading below 200 p/Th and has more than halved in value from a month ago when we reported it trading above 450 p/Th. Dec-22 has also dropped by around 200 p/Th since last month. Q1-23 has fallen by around 180 p/Th and, further down the curve, winter-23 dropped circa 75 p/Th month-on-month, although winter-24 has gained value in the period. So, what has driven this downward movement?
Despite a lack of gas flowing from Russia via the critical Nord Stream pipeline, a combination of mild weather and strong LNG imports has seen European gas storage fill much faster than expected leading into this winter.
With storage already looking very healthy, gas has not been required for injection, which has further reduced market demand and softened prices. Temperatures are expected to remain above seasonal norms heading into early November. And 10 LNG cargoes are due to land in the UK within the next three weeks. On the continent, Germany has targeted 20% demand reduction heading into winter, which has been comfortably achieved thus far but will become more challenging when temperatures fall.
The below graph compares winter-22 pricing to the following two winter periods, and the table reflects market close on 21st Oct:
Similar to gas pricing, power prices for Nov and Dec have fallen significantly. However, Q1-23 is slightly up from last month’s report, apparently bolstered by some of the unknowns in the second half of this winter, and no doubt further buoyed by the likely impact of industrial action at French nuclear facilities (last week saw strikes preventing maintenance work at 18 nuclear sites). Q1-23 is widely regarded as the riskiest period in terms of the ongoing concerns regarding supply for this winter and is consequently priced at a significant premium to the rest of the forward curve.
It is the premium to Q1-23 pricing which means the EBRS for electricity this winter is currently much more attractive to customers in a fixed contract, versus those on out-of-contract rates. This is due to the ‘maximum discount’ applicable to variable/deemed rates under the scheme. Although this position may change later in the winter, keeping costs to a minimum in the early winter months will rely upon you having signed a contract.
It would be a fool’s game to attempt to predict whether energy prices will rise or fall in the coming months. However, regardless of the direction of travel, it seems we should continue to expect market volatility, with substantial intra-day price movement remaining the norm. This makes it more challenging to secure value when placing contracts, with many customers struggling to find the time to become energy wholesale market experts on top of their already demanding roles. If this is something you can relate to, please don’t hesitate to contact us for assistance.
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.