ENERGY UPDATE
In this latest update, Daniel Veasey from the Energy procurement team provides an insight into why the market is seeing record high UK gas and power prices.
Why?
The perfect storm of drivers has caused UK gas and power wholesale prices to reach record highs. Low gas storage levels, a reduction in Russian flows to Europe and global competition for Liquid Natural Gas (LNG) cargoes have been the main drivers.
European gas storage levels
Europe entered the 21/22 winter season (Oct-Mar) with storage levels around 20% below average. This was due to a combination of factors - a cold end to 20/21 winter season saw a very cold April, with cold weather still around in May, this meant that gas was still taken from storage facilities when it should have been used to fill them. This lead to higher demand for gas during the summer months to fill these depleted storage facilities to normal levels, however additional supply did not materialise and pushed up prices.
Russian flows
On average Russia supplies around a third of Europe’s gas demand through numerous pipelines. During the current winter period we have seen flows through these pipelines full by around 50% compared to last winter. The reason for the drop is unclear, some would argue that European buyers would prefer to take cheaper gas from storage facilities rather than pay the high spot prices for Russian gas. Others would argue that it is to put pressure on Europe to open the multibillion pound Nord Stream 2 pipeline from Russia to Germany. This is ready to start flowing gas, however, has been delayed due to Germany’s certification process. Gas is expected to start flowing in the second half of the year, however with the political situation in Eastern Europe, uncertainty is very high.
Competition for LNG
Europe and the UK is increasingly relying on LNG to meet demand as domestic production falls. USA, Qatar and Australia are the biggest exporters of LNG in the world. China is currently the biggest importer of LNG as it looks to move away from more polluting coal for power generation. Throughout summer 2021, the combination of heatwaves in Asia and droughts in South America, kept additional LNG shipments to UK and Europe at bay. It is only recently we have seen a large increase in cargoes arriving in Europe and this is down to the high prices that has attracted this supply away from Asia.
If you’d like further information on any of the above, or would like support with your energy procurements, please get in touch [email protected].
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