JANUARY ENERGY MARKET UPDATE

Updated: Feb 23

WE TAKE A LOOK AT THE CURRENT ENERGY MARKET CONDITIONS

12th January 2022


Despite the market falling sharply across the festive period, the movement in the prior six months will result in a 51% increase to Ofgem’s price cap for residential customers from 1st April. Due to the price cap, domestic consumers are lagging behind the pain already being experienced by many business energy customers. In this edition of BMU’s Market Narrative, we look at the drivers causing prices to soften at the end of last year, and consider current market pressures in early 2022.

Natural Gas Prices

UK temperatures rose well above seasonal averages toward the end of December, taking some of the pressure out of wholesale markets. There was also an increased volume of LNG deliveries that arrived at UK terminals across the period, the net result being a significant fall in natural gas prices. The below graph highlights movement in month-ahead gas prices across the last year:


However, as suggested by the uptick in early January, as liquidity returns to the market, we are seeing underlying pressures resurface with prices returning to levels seen in early December. Many suppliers continue to be absent from the market, choosing only to price for renewal business, and only then with significant risk premia factored in.

As temperatures in Moscow hit -20C into the new year, we have seen limited flows of Russian gas into Europe. The key Yamal pipeline continues to operate in the opposite direction at time of writing. And Europe faces stiff competition from Asia for LNG deliveries. There is some upside with increased temperatures expected again next week. However, with Russian flows into Europe down ~45% year-on-year, and European gas storage ~15% lower, it seems our challenging winter is set to continue.

Power Prices

Power contracts have continued to track natural gas pricing due to the UK’s high dependence on gas as part of our electricity generation mix. The below graph shows gigawatts generated by source in the past two weeks, clearly highlighting how Combined Cycle Gas Turbines (CCGT) remain the UK’s go-to source of generation at times of peak demand:


Wind and solar generation are forecast to be above seasonal norms in the near-term, however the forward curve has been dragged higher by European markets, largely driven by reduced French nuclear availability. This is expected to impact the market until late April.


Summary

There appears to be strong fundamentals supporting the bullish markets early in the new year. Additionally, it is speculated that rising tensions between the US and Russia may be behind the reduced flows of Russian gas into Europe. Indeed, we are currently seeing the lowest levels of Russian flows in the last seven years during peak winter months.

We all hope for a period of stability, born out of increased availability of Russian gas or sustained higher temperatures, to give confidence to suppliers and encourage more competition for contract pricing. And there have been calls for the government to temporarily reduce green levies until markets stabilise. However, this may be wishful thinking and, until such time, we will continue to experience significant price increases that may unfortunately prove too much for some businesses to swallow.

Whatever comes next, the team at BMU will keep you posted regarding market activity over the coming months and the options available, however please pick up the phone and speak to your Account Manager if you have any questions. The position can change daily.

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