Why energy prices continue
trading at record highs

The unprecedented price of wholesale energy is now widely reported with many labelling the current position a ‘’national crisis’’ and many parties lobbying government to interject ahead of a hike in the domestic price cap in April. It should be noted however that the current crisis isn’t limited to the UK with high energy prices being felt across Europe and the rest of the world.

As a result, we have now seen 26 suppliers exit the market since the crisis began, impacting some 3.8m households in the UK. Those suppliers left in the market and ultimately, the consumer, will be picking up the tab for those supplies who have gone out of business over the coming years.

To give the situation some context, on Wednesday 21^st December 2021, gas prices reached another all-time record high. On that day, gas prices were nearly 500% higher, than just one year previous, December 2020.

But what lead to this “crisis” which will impact us all, over the coming months and years?

Gas Storage Levels

After a lengthy and colder than usual winter in 2020-21, European gas storages were at record low levels going into this years’ Winter heating season.

Generally, gas storage replenishment season starts in April, but a cold April and May last year depleted European gas reserves more than usual.

Storage levels are currently at 51%, down from 56% last week. More cold weather, or an extended winter could see storage levels further depleted, or worse, emptied completely which will provide support to energy prices as we refill storage sites into the Summer months.

Reduced Gas Supply from Russia

Russia has been reducing gas supplies to Europe since May in what many see as an attempt to try and encourage Europe to approve the Nord Stream 2 gas pipeline connecting Russia to Germany.  The construction of the pipeline was completed on the 10^th September 2021.

It is now thought that Nord Stream 2 gas pipeline could remain idle as late as September 2022, compounding gas supply uncertainty in Europe.

Liquefied Natural Gas Deliveries (LNG) / Increased demand in Asia

With the continuing uncertainty with regard to Russian gas flows and the low levels of gas storage, LNG deliveries into European have become ever-more important. Europe continues to compete with Asia for LNG supplies, particularly from America where supply is more price-sensitive.

In order to attract the additional LNG Asian gas prices have surged along with European prices. Currently UK and European gas prices are at approximate parity with Asia which, allowing for the higher transportation costs for shipping US cargoes into Asia, has seen more cargoes heading towards Europe in recent days / weeks.

Relatively windless year

An unusually windless summer meant that wind turbines produced less electricity. (We experienced the least windy summer since 1961) The result of less wind generation means that we require more gas to generate electricity. Increased costs of gas are then fed through to electricity.

This has been exacerbated by countries moving away from coal-fired power stations. 

Interconnector Issues

A recent fault was detected on the North-Sea Link between the UK and Norway while an interconnector supplying 4% of UK power in a link between France and UK remains offline following a fire which is likely to continue until at least March.

In addition, French company, EDF, had to take more nuclear reactors offline last week, after faults were found at its Civaux nuclear power station, with one other plant also shut down, understanding the second reactor was of a similar specification.  

These issues alone, would not normally have a significant impact on energy prices, however with margins tight due to the reasons mentioned above, things that would have in previous years had a small impact, can now cause significant movements in energy prices.