Are energy prices increasing?
In a word, yes.
There are a number of reasons for this, which we will take a closer look at.
Gas price increases being driven by the sun and wind
Or rather, the lack of any sun or wind.
During the winter, gas prices generally rise as demand for gas is clearly higher than at other times of the year. Gas storage levels are therefore quite low at the end of winter. While gas is imported to the UK from various sources, during winter it is often used as fast as it can be replaced. Especially during very cold spells.
Historically, spring and summer months are when gas storage is replenished. Although heavy industrial users still demand high volumes of gas, there is less need for heating as warmer weather takes hold.
We can also utilise more solar and wind power to generate electricity from March/April onwards, through to the end of summer.
However, 2021 has seen little in the way of sun and wind to date. This has meant more reliance on gas fired power stations to generate electricity. 30-40% of UK electricity generation already comes from gas power stations. A further reliance on gas to generate electricity means gas storage is not increasing as quickly as it would usually.
This pushes up gas prices, and also increases electricity prices.
If gas storage levels don’t improve significantly, there could be significant price rises during the winter months as gas levels fall.
LNG deliveries heading to Asia
Historically, when gas storage levels have needed a boost, the UK buys LNG cargoes. These are massive vessels carrying Liquified Natural Gas around the globe. These generally go to the highest bidder.
Unfortunately, at the moment most LNG cargoes are heading to Asia. They are paying record levels for LNG shipments as their economies open up after lockdown.
This clearly does not help European gas storage, and puts more pressure on energy prices.
Outlook for the rest of 2021
Recent weeks have seen a balancing act. Energy prices increase one day due to low gas flows from the continent, or a spell of colder weather or no wind. Then a spell of lower gas demand can help counteract the pressure on prices.
However, there is a clear upwards curve which is a concern as we approach the end of the summer months.
Demand for gas is going to increase as we head into autumn and winter. And if gas levels don’t improve significantly, this will surely mean further price increases – for both gas and electricity.
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