0333 101 4424
Contact Us
Latest News
Use Cleaner Use Less
Gas and power prices have steadily increased over the past year since their low in February 24. Gas prices have risen by 46% and power prices by 31% for 24/25, though they remain below 23/24 levels. Prices for 25/26 have also climbed. Several factors contributed to these market increases which warrant further examination.
Market drivers over the past year
1) Weather
Weather significantly affects energy prices, mainly due to temperature changes in winter that increase heating demand for gas. With growing reliance on renewable energy, wind has become equally important. This winter, below average wind generation across Europe has increased gas dependency and supported gas prices. This has led to the prevalence of the term ‘dunkelflaute’, which relates to a period of low wind and sunlight. In addition, this winter has been closer to average in terms of temperature than the last two winters which were particularly mild. Renewable energy's role will grow, bringing more volatility due to its intermittent nature.
2) Storage
The importance of gas storage has grown due to reduced Russian gas flows. Gas is traditionally injected into storage in summer when demand and prices are low, for winter use during high demand. With the loss of Russian gas, storage withdrawals now supplement other sources throughout winter. The EU has mandated interim storage targets, aiming for 90% by November 1st. The last two winters were mild and windy, needing fewer summer injections to reach 90%. This winter's colder and less windy conditions have led to high storage withdrawals, leaving storage levels lower than in 2023 and 2024.
3) Liquified Natural Gas (LNG)
LNG is natural gas, that is cooled to a liquid state, reducing its volume significantly for easier transportation. The UK and Europe import LNG, mainly from the US and Qatar to supplement pipeline gas from Norway. With reduced Russian gas flows, LNG has become crucial for meeting demand. However, it is more price sensitive than pipeline gas, with Europe competing against Asia for supplies. In the latter half of 2024, lower LNG supply to Europe contributed to increased energy prices.
With EU gas storage levels lower than the last two years, there is an increasing the need for LNG to ease the reliance on storage and avoid levels falling too far, which will increase the summer gas demand to re-inject.
4) Demand
Following the 2022 energy price shock caused by the Russian invasion of Ukraine, demand dropped as companies exited the market due to higher costs. This reduction, along with increased LNG imports and a mild winter, helped Europe adjust to the loss of Russian gas supplies. As energy prices fell, demand began to rise again.
5) Russia
As a result of Russia’s invasion of Ukraine in 2022, the share of Russia’s pipeline gas in EU imports dropped from over 40% in 2021 to about 8% in 2023. For pipeline gas and LNG combined, Russia accounted for less than 15% of total EU gas imports. Of the 8% pipeline gas, approximately half transited Ukraine courtesy of a 5 year transit agreement which ended 31st December 2024.
Flows ceased on 1st January resulting in a further increase in gas and power prices. A new agreement could still allow the swift resumption of flows, and speculation continues to impact on the energy markets, with the potential for some sort of swap agreement or flows from Azerbaijan replacing the Russian gas.
6) Geo-politics
Over the past year, Middle East tensions and the Russia/Ukraine war have increased energy market uncertainty. Security issues in the Red Sea have forced LNG shipments from Qatar to Europe to bypass the Suez Canal, resulting in longer, costlier routes adding to LNG costs. Oil prices have also been affected, indirectly impacting European gas and power prices due to index-linked contracts.
Outlook
The relatively low EU gas storage levels will result in additional gas demand in order to bring levels back to the mandated 90% target for 1st November. Up to the middle of February we saw a steady increase in gas prices for the coming summer in order to attract the additional LNG cargoes required to supplement the other sources of supply.
During the second half of February, we saw a sharp fall in prices, mainly as a result of a combination of regulatory and geo-political factors.
Peace talks between Russia and the US aimed at ending the war in Ukraine increased optimism of a resumption in Russian gas flows to Europe. Speculation that Germany would be looking to potentially subsidise summer storage injections increased confidence that storage targets would be achieved. EU talks regarding a new price cap in order to maintain European competitiveness in the global markets also signalled to the markets that the EU would intervene if prices rose too high, effectively creating a price ceiling. At the time of writing the energy markets are awaiting news which will largely determine their future direction.
