Record High UK Energy Prices Cause Chaos

The UK energy market is in unchartered territory – as I write this, day ahead prices are trading at over £500/MWH for electricity. Putting that into perspective – last year, during lockdown, Day Ahead prices traded as low £10/MWH. Over the last 12 months, the Winter 21 price has risen from £51/MWH to £159/MWH, a 211% increase!

What has caused this?

We have seen an incredible amount of bullish market drivers over the last few months, leading us to this point. A few of the key drivers are:

1. Russian Gas Flows– The Nord Stream 2 pipeline debacle has made been ongoing for some time now. Russia is keen to export gas; however, Ukraine is concerned it will miss out on valuable royalties over Russian gas passing through its territory, and Europe is eager to see increased inflows as a tight winter approaches. Meanwhile, the US isn’t so happy about Russia controlling more of the European energy markets and so has waded in with sanctions and threats of sanctions.

This political push and pull have led to a stalemate in what is now an essential project to provide some security of supply to Europe. With no end in sight to the situation and gas unlikely to flow until 2022 through this new pipeline, the situation isn’t good.

2. LNG prices – LNG has historically provided a reliable source of gas to UK shores, and we have become increasingly dependent on this world priced commodity. The risk with LNG is it is a world price. LNG cargoes have been less frequent and more expensive because the price in Asia has been so high.

3. European Gas Storage – Storage across Europe is at its lowest levels in 4 years due to a diminished stock at the start of the year and higher pricing making injections less cost-effective and commercially viable. As the price of gas increases, the profit delta and confidence to inject gas over the summer lowers, so this situation is unlikely to improve. This situation has raised the risk premium on the price going into Winter as fears over the security of supply worsen.

4. Low Wind Generation – Summer just wasn’t windy enough! The UK saw an average drop of 20% over the summer on wind generation, which increased reliance on CCGT (gas) generation to buffer the supply picture. This further reliance on gas has only deepened the crisis in gas prices.

5. Carbon – Carbon markets are at record highs. The UK Carbon market opened on May 19th and added uncertainty to an already high price driven by the need for more carbon permits as renewable generation was low across Europe. This lowered renewable generation picture has resulted in a heavier reliance on coal than expected over the summer and grabbed headlines in the media, with some suggesting coal is making a comeback. However, kept into perspective, this is simply a price response.

6. Fire at Interconnector – To add the icing on the cake, on September 16th, one of the Interconnector facilities that transmit power between the UK and France caught fire! The resulting damage is a massive blow for the electricity market, going into what was already a tight winter. It will almost certainly result in a sustained increase in the prices over the next few months due to the 1GW capacity that has been lost and is not due to return until March 22nd.

Summary and Outlook

Over the next few months, the whole market will closely monitor the bullish drivers listed above, and these drivers will continue to dictate direction as we head into Winter. However, the prices already reached on the back of these drivers is a significant concern and doesn’t bode well for the potential of even higher pricing as we enter the colder winter months.

In my opinion, the likelihood of a fall in price is very low without the removal of many of these bullish drivers.

Since lockdown last year, the market has been on a rollercoaster ride, with record lows going into record highs in just 12 months. If you have a contract renewal due within the next 12-18 months and don’t know what this latest market movement will cost you commercially, I strongly recommend making inquiries now. Start the process to renew your contract. This way, you are ahead of the game if the market falls, and you can take the heat out of the increase if prices don’t soften.

The only saving grace in this current market is that the further dated contracts haven’t been affected as adversely as the markets for this Winter and closer. So, prices may not be as bad as you expect on a longer-term contract.

We are always happy to discuss market movements and outlooks with customers, so please get in touch if you have any questions.

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