Five reasons why energy prices are higher this year

UK energy prices are higher year-on-year. They start the winter on the back of an upward trend in contracts which dates back to early 2016. Year-ahead power prices have risen 10%, while gas contracts are over 17% higher compared to this time 12 months ago.

Until last year, energy prices had been falling since 2011. However, over the following 18 months, wholesale gas and power prices have risen steadily, with contracts rising more than 50% and 33% respectively.

We’ve outlined five reasons why energy prices are higher this year.

1. Higher coal prices

Calendar Year coal prices have more than doubled since early 2016. The cost of coal for 2018 is just under $80/tonne, the highest it has been since October 2014. The upward move has been driven by the front of the curve – prices for the month of September 2017 reached close to $90/tonne – reflecting recent changes in supply and demand for the fuel. Flooding as a result of Cyclone Debbie in March 2017 reduced coal production in Australia, with exports still to recover.

Chinese coal production has been curbed by the government in an attempt to tackle air pollution and reduce carbon emissions in the region. However, reduced hydropower availability in China, following a dry winter, has driven up demand for coal-fired power generation this year. With Beijing trying to cut 800 million tonnes of domestic coal output, the country turned to imports, which have increased 18% year-on-year in 2017. Tensions in North Korea and a ban on imports from Pyongyang – as a result of international sanctions – further tightened supplies, driving up the price. With coal-fired generation acting as the marginal fuel – providing the vital last MW of power to meet demand – the cost of coal has a significant influence on the wholesale electricity market.

2. The closure of the Rough storage facility

On 20 June Centrica announced the permanent closure of the Rough gas storage facility. Rough was the UK’s only long-range gas storage facility and its permanent shutdown is likely to have a significant impact on UK gas supply availability, particularly for the upcoming winter season. Ordinarily, gas supplies are built up in storage during the summer season for use in the winter when temperatures are colder and demand is higher. However, following two years of maintenance work and a slowdown in operational activity, Rough has now closed permanently.

Operator Centrica has applied to withdraw a portion of the cushion gas (still left in storage) at the site. Now the site has been closed, the cushion gas could be withdrawn as part of the decommissioning process. Around 54TWh of cushion gas is estimated to be recoverable, enough to cover the gas demand for 4.5 million homes for a year.

Centrica wish to withdraw around 9TWh this winter. However, this low level will be of little assistance to overall supply during the winter. Imports from Europe over the Interconnector, pipeline gas from Norway, and LNG tanker deliveries will be required to offset this and provide additional gas to meet demand.

Still, the UK will be competing on price with other destinations for that supply.

3. Cold temperatures last winter draw down gas storage stocks

Gas storage reserves, particularly on the Continent, were depleted faster than anticipated as a result of cold temperatures. In January 2017, temperatures on Continental Europe plunged to five year lows, triggering a sharp increase in heating demand. Total European gas storage entered last winter with record high volumes of over 1,100TWh. However, high demand sharply drew the stocks down. By February 2017, reserves had more than halved to just 500TWh – over 150TWh lower than the previous year. The heavier depletion of reserves meant that more injections were required to rebuild reserves ahead of the 2017/18 winter season. This has added to the demand picture and helped to push up gas prices.

4. Reduced LNG availability

The UK has imported less LNG in 2017 to date, compared to the first eight months of 2016. High gas demand in Asia has meant the UK has struggled to compete with the Asian LNG market on price. China is looking to reduce its use of coal, while Japan is still without most of its nuclear fleet following the Fukushima accident in 2011. With Asian prices at a premium over the UK market, this has encouraged floating, non-contracted cargoes to head east rather than to Europe.

Furthermore, diplomatic tensions in Qatar have slowed the delivery times for tankers out of the Middle East, with tankers taking an extended route to Europe. The UK has imported 8.5 million cubic metres (mcm) of LNG so far in 2017. This is down from 14mcm over the equivalent period last year.

5. Exchange rates

The value of the pound has fallen around 15% since the UK voted to leave the European Union in June 2016. This has resulted in increased costs for UK buyers of imports from overseas. Given some of the factors already outlined, the UK will be more dependent on Europe for energy supplies in the coming months. The weak value of the pound means imports cost more, pushing up wholesale gas and power prices.

We can help you mitigate the impact of increasing energy prices

Our energy buying team keep a close eye on the energy markets and price movements, making sure our clients stay well informed. Your overall energy bills are becoming more expensive, not only because wholesale costs are rising but also due to rapidly increasing non-commodity costs.

Here at Utilitywise, we can help you manage your costs on both sides of the meter. On the ‘supply side’ we can support buying better with smart, fixed or flexible procurement contracts and bill validation. In addition, on the ‘demand side’ we can provide actionable insights into utility usage with our intelligent building controls and bureau solutions that go hand-in-hand with our procurement services.

If you’d like to find out more about Utilitywise energy procurement services call us on 01527 511 757, email corporate@utilitywise.com, or visit our website.

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