Why is the energy market rising? 9 factors influencing energy prices
The UK has been grappling with soaring energy prices for over a year. Factors ranging from limited gas reserves to environmental limitations have resulted in record-setting prices for electricity and gas.
In this piece, Latif Faiyaz, Head of Flexible Purchasing & Energy Strategy for Northern Gas and Power, shares nine factors influencing energy prices in the UK.
1. Gas storage is at a 5-year low
EU gas storage is currently at a historical low. Any prolonged cold weather will rapidly deplete storage reserves, increasing the price of gas due its limited supply.
Stored gas is used by European countries during winter. If the weather turns cold, the EU will now have little storage to help meet demand. There are also concerns that a prolonged shortage could have an impact on gas storage levels for next winter.
2. Strong LNG demand from Asia
Asia, particularly China, has been importing vast amounts of liquified natural gas (LNG) since June 2021. China’s growing economy, harsher-than-usual winter and climate change targets across the continent are influencing this.
The high demand for LNG in Asia has impacted global gas supplies, as countries such as China are willing to pay a higher premium. Furthermore, China’s climate goals to achieve net zero by 2060 has led industries to look towards gas as an alternative energy source to coal.
3. Brazil’s rainforest drought has increased their gas demand
Brazil and Argentina’s summer droughts consequently drove up their demand for gas-fired power generation. This has taken global supplies of gas to South America and away from the UK, another factor that has caused the UK’s soaring gas prices.
Droughts in the Amazon rainforest impact the ability for Brazil and Argentina to use hydropower, the main source of electricity generation. As a result, they must start up their reserve gas-fired power plants to help meet domestic needs. This may be an annual occurrence due to climate change.
4. Planned and unplanned gas pipeline failures
Outages, both planned and unplanned, on gas pipelines from the North Sea to the UK led to sharp price spikes, especially in the depths of winter.
Any outage reduces supply, amid an already-tight market. This has so far led contracts to rise by 10-30 percent.
5. Low wind generation
When wind generation is low, the UK must turn to using more coal and gas-fired generation to produce sufficient electricity. In turn, this increases gas demand and, consequently, the price of gas.
6. Interconnector fire in September 2021
The UK plays the market when deciding to import and export electricity to and from France. The UK will export electricity to France if it has higher prices. Conversely, the UK will import electricity from France if prices in the UK are higher than in France.
This trade is made possible through an interconnector, which runs between England and France. Any major issues with the interconnector affects supply. In September 2021, a fire broke out on a cable supplying 4 percent of UK power. This link remains offline, with 1GW currently out of use. The inability to import this 1GW reduces the potential supply in the UK even further.
7. Russia reducing gas supplies to Europe
Russia has been reducing gas supplies to Europe since May 2021. This is a bargaining tactic in order for Europe to approve the Nord Stream 2 pipeline (the pipeline between Russia and Germany) and sign long-term gas import contracts. Although the UK is not directly linked to Russia, we are increasingly importing and exporting gas to and from Europe which is exposed to the fluctuation caused by the volatile Russian supply.
The EU has relied heavily on Russian gas to fulfil their domestic energy needs. Due to climate change goals, the EU has decided not to renew long-term gas import contracts with Russia. Russia, however, needs the EU to sign these contracts, as it usually uses this money to build and boost their economy. In order to persuade the EU to sign long-term gas import contracts, Russia has strategically lowered their supply to the EU, hoping to approve the pipeline. However, on account of Russia’s “serious breach of international law”, German Chancellor Olaf Scholz has announced he will not be going ahead with the certification of Nord Stream 2.
8. Nuclear plants scheduled to go offline
Cold War-era nuclear plants are being phased out in the UK and Europe. The power generated by these plants is not being fully replaced, therefore reducing energy output.
Nuclear has been a vital source of electricity generation in the UK and EU. Phasing out nuclear forces the UK to rely on alternative sources of power generation.
9. Carbon prices increased with net zero targets
Carbon prices have risen from £15, to £90/tonne in the span of 18 months. This is due to increasing participants in the carbon trading scheme and governments tightening countries’ carbon commitments.
All gas-fired power plants must pay carbon tax. The increased cost incurred by power companies paying carbon taxes passes through to consumers.
The carbon market was introduced to make the use of carbon-based fuels more costly. So far this has served its purpose. However, industries that are using less coal often turn to using gas, and this has led to higher gas demand.
The higher the price of carbon, the more demand there will be for gas.
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By Latif Faiyaz
Latif is our Head of Flexible Purchasing & Energy Strategy. Latif has a wealth of experience from within the energy industry, with experience in developing carbon projects and trading carbon internationally at Alfa Energy. Latif has also worked at Engie and Orsted, implementing the integration of energy service offerings into supply contracts. His experience is varied too. He’s worked “on the other side of the fence” as an Energy Manager for the NHS, before returning back to energy trading for LG Energy and Yorkshire Energy.
With Northern Gas and Power, Latif heads our Flexible Purchasing department of Energy Traders, Analysts and Bid Managers, converting some of our 32 TWhs of energy under management into flexible purchases.