What’s behind the current surge in gas and electricity prices and how can you mitigate the worst effects?
It probably hasn’t escaped your notice that electricity and gas prices keep rising with seemingly no end in sight. The causes are varied but have coalesced to create a perfect storm affecting supply and demand.
Liquid Natural Gas (LNG) gas has been abundant and cheap over recent years. However, in 2021 prices ballooned as demand drastically outpaced supply. UK and European gas rates have reached record highs while deliveries of liquid natural gas (LNG) to Asia are near an all-time high for this time of year.
In the UK, LNG is a key component for generating both heat and electricity. Approximately 40% of electricity is generated by LNG and any price increase in this core commodity quickly translates into increased electricity prices. So, where gas prices go, electricity prices are sure to follow.
Gas storage at record lows throughout Europe
A cold, wet and prolonged winter in Europe resulted in record low levels of gas storage. Gas stocks, which would usually be replenished during summer months when demand is weaker, have remained low, and with limited supplies heading to Asia, prices have soared.
Carbon prices in the world’s biggest market are soaring
Sky-high carbon prices are getting added to electricity bills. The EU Emissions Trading System (ETS), charges power companies for each tonne of carbon dioxide they emit. Prices have risen from €11 per tonne to €55 per tonne since 2020. In the UK prices reached an average of £44.15 ($61.34) in July.
Surge in demand in SE Asia
Demand for electricity in the Association of Southeast Asian Nations (ASEAN) countries has grown by 80% since 2000 and is set to grow another 60% by 2040.
Higher temperatures have led to increased use in air-conditioning, and the demand for cooling has placed a major strain on power supply in the region. The overall number of air-conditioner units in 2040 could rise from 40 million units in 2017 to 300 million units in 2040.
Climate Events
Climate change is all about seeing more frequent and more extreme weather events,
Whether it is searing heat in Canada and SE Asia, or prolonged cold and wet in Europe, the effects create spikes in demand, and disruption to supply. Events hitting distant locations have worldwide effects as they ripple across the world to the UK and impact the costs of generating electricity and heat for our homes and businesses.
The price of gas on UK markets has soared by about 80% this year to surpass 16-year highs and could continue climbing into 2022 and beyond.
The big question. Where do gas prices go from here?
Current low storage levels and increases in carbon market costs continue to impact prices. The question is whether this is purely a temporary anomaly or a long-term trend. To find out, we need to look at the market fundamentals and understand what is driving them.
Why has gas demand increased so quickly?
Climate change is playing a big part as heavily polluting coal fired electricity generation being phased out and replaced by gas-fired generation.
Natural gas emits 50% less CO2 than coal and has become the fuel of choice for countries urgently seeking to reduce their CO2 emissions.
With few other options, governments will increasingly rely on natural gas as a ‘cleaner’ replacement for coal as they seek to reduce carbon emissions.
- Gas demand is forecast to increase by between 3% and 4% per annum until 2035. These increases will drive gas and electricity prices higher as we heat and power our homes and businesses.
- The International Energy Agency is forecasting a 7% jump in worldwide gas consumption from pre-Covid-19 levels by 2024.
- Demand for Liquid Natural Gas (LNG) will continue to rise as Southeast Asian countries move away from coal and open dozens of new gas-fired electricity plants to meet increasing electricity needs.
- China needs to shut down 600 coal fired power stations to achieve its renewable energy goals. The vast majority of these will be converted to run on LNG, resulting in even more demand on natural gas.
What is the consensus on future energy prices?
Choosing the right energy contract and safeguarding your budget is important and anticipating where prices might go from here is critical.
Whilst predicting future energy prices is an inexact science, the underlying factors are hard to ignore. Even if more LNG becomes available, the sheer increase in demand suggests that prices will be under sustained pressure for the foreseeable future.
The world is facing a fundamental shift, driven by the clean energy transition.
Gas provides a readily accessible (and currently) affordable transition fuel. As major economies commit to fighting climate change and reducing carbon emissions, natural gas helps bridge the gap between coal and a carbon-free future. The conclusion must be that no matter how you look at it, the price of gas is likely to stay elevated over the medium-term and probably rise over the longer-term.
CONCLUSIONS
1. Fix your energy prices for the long term
With continual fluctuations and potential for more price rises over the long-term, fixed-price/fixed-term contracts are seen as the safest. Many suppliers offer contract lengths up to 5 years and recent analysis shows that 36 month terms deliver the best balance between price and risk. Larger organisations may have the luxury to procure flexible contracts, which involve short term pricing tracking market trends, but SMEs would be ill advised to follow this route. Procuring a mid to long term fixed contract at a fully fixed price provides the budget security that small and medium size organisations need.
2. Cut the waste and manage your energy effectively
With every kilowatt hour of electricity costing close to 20 pence it’s more important than ever to eliminate energy waste. All businesses can agree that cutting costs is important, but when considered in the context of global warming, the need to cut energy use becomes overwhelming.
It’s more important than ever to employ energy management best practice in reducing gas and electricity consumption!
Some UK estimates put energy wastage at close to 20%. The causes range from simple inefficiencies to using energy unnecessarily whilst buildings are empty or partially occupied.
Good quality energy management tools are easy to use and readily available at a minimum cost and enable you take the first step in managing and reducing your energy.
3. Is now the time to think about generating your own energy
According to the International Renewable Energy Agency (IRENA), Solar PV costs have fallen 82% over the last decade. In 2019 alone, the cost of electricity from solar fell by 13% to just over five pence per kilowatt-hour.
Francesco La Camera, the director-general of IRENA said, “The new figures show we have reached an important turning point for the energy transition. Renewable energy is increasingly the cheapest source of new electricity, offering tremendous potential to stimulate the global economy and get people back to work. Renewable investments are stable, cost-effective and attractive offering consistent and predictable returns while delivering benefits to the wider economy.”
What are the benefits of Solar Power?
- Solar energy is 100% green and doesn’t release any carbon dioxide or greenhouse gases.
- Renewable energy will reduce your carbon footprint
- Generating your own energy can provide and income stream from excess energy you generate
* Each individual solar site will perform at different levels of efficiency.
What else can be done?
There is widespread agreement within the business community that there are many practical steps that can be taken to improve energy efficiency and sustainability.
The Government is targeting energy efficiency as a way of reducing UK wide energy demand and is urging organisations to act by exploiting energy efficient equipment and processes. Managing demand and implementing energy efficiency measures could save up to 30% of your energy consumption.
Do you know that you can get detailed data on how, when and where you use gas, electricity, and water in your organisation?
Many people realise that data is being collected from energy and water meters for billing and other purposes yet have no idea just how useful that data could be to their organisation. The fact is, it furnishes vital evidence about the energy efficiency of your organisation and provides a simple and accessible solution to help manage and reduce your consumption. Why not try using it?
Energy Management allows you to view your energy data, anytime, anywhere and on any device with customisable, strategic detail.
