In this guest blog Michael Savage, Head of Sales & Partnerships Consultus International Group, explores the outlook for the UK energy market, the associated impact on industry energy costs, and the potential tax savings available to your business.
Wholesale Energy Market History
Those involved with energy buying over the last couple of decades will know that it’s not unprecedented for global events to drive major price movements in the wholesale energy market.
Landmark events such as the Rough gas storage facility fire in the North Sea, the Arab Spring and the Fukushima disaster all caused spikes in electricity and gas contract prices. At the time, these events all appeared relatively significant, interfering with fuel availability and bringing shocks to the market.
The spikes we saw in the past pale compared to the effect the Russian invasion of Ukraine has had on the energy market. It has led to unprecedented energy prices, causing widespread difficulty for many nations across the globe
Gas Prices – Calendar-22
There were several different stages to the initial rise in prices and the subsequent market volatility: over the course of 2022. Below is a timeline of events:
- Russia launches their invasion on Ukraine
- Record amount of LNG deliveries recorded
- New gas storage legislation
- Speculation around Nord Steam 1 supply
- Nord Stream 1 maintenance period
- Strong LNG forecasts and the quick filling of storage stocks
- Milder temperatures cause supply to outweigh demand.
- Colder than average temperatures, lower renewable generation and contained concerns surrounding French nuclear supply.
Aside from the invasion itself, price rises were also driven by damage to the Nord Steam – a key pipeline that supplies Europe with natural gas.
The high level of LNG (Liquefied natural gas) deliveries has played a key role in helping to bring market prices down somewhat and keep them (relatively) stable.
There has also been a collaborative international effect to ensure that there are high levels of gas storage in place to ensure adequate supplies to get us through winter. Fortunately, the winter of 2022 proved to be milder than expected.
Market outlook: near curve 1-6 months
The outlook in the short term is mixed, with prices in the summer months shedding value due to strong storage levels and LNG supply however, uncertainty still surrounds winter 2023 (October to March) should Asian LNG prices start to increase.
The main things to look at to understand what will happen in the short term are gas supply, power supply and weather. We explore each of them below.
Gas supply
Continued strong LNG supply with weak Asian demand is keeping EAX (East Asia Index) prices muted, with Europe seen as more desirable. However, planned outages across Norwegian infrastructure has seen reduced exports to Europe and UK, potentially limiting downside potential on the prompt and near curve.
Power supply
In all but extreme circumstances, the UK has sufficient import capacity and wind generation capability to meet demand.
Weather
Milder conditions are forecast for the majority of Europe for the next fortnight and increased wind and solar forecasts will help ease spot prices and allow for further gas injections into storage.
Market outlook: far-curve (6+months)
The continuation of LNG supply, record storage levels, and demand destruction will continue bearish pressure, but uncertainty over long-term supply remains.The key areas to look at to understand the market’s potential far-curve term are macroeconomics, China’s economic growth and gas storage, which we explore below.
Macroeconomics
The global slowdown will bring demand destruction as business activity levels decrease and businesses fail. Typically demand for energy falls between 5% and 15% in a recession.
China’s economic growth
Increased demand in Asia is typical in Q3, with the short-term nature of LNG certainty (in comparison to pipeline gas) causing some risk to be added to the market should economic growth in China boost demand at a time when Europe still needs to inject gas into store.
Gas storage
Europe finished winter with record volumes in storage. This has the benefit of a lower requirement to replenish stocks during the summer months (April to September), which has been a key benefit for the bearish trend over recent months.
Our recommendations for your energy strategy
Prices will remain volatile, but having some level of certainty is a priority for many organisations. So how can this be achieved?
We recommended that you:
- continue to engage with the market as competitive offers do remain available and a supply contract is always cheaper than Out of Contract rates;
- ensure all offers are compared like for like – avoid hidden charges and unwelcome surprises;
- Adopt a suitable risk management strategy to manage prices and volumetric risk;
- Consider adopting a Power Purchase Agreement for long-term price certainty and a diversified purchasing strategy
- Continue to pressure sector representatives and trade federations to ensure energy costs remain a focus of government attention.
- Engage with schemes and initiatives to reduce demand and avoid waste.
Energy tax exemptions can help
Companies working in a variety of industries may qualify to benefit from a number of government compensation schemes, including Energy-Intensive Industries (EII), Climate Change Levy (CCL) and Energy and Trade Intensive Industries (ETIIs).
Leyton’s dedicated Energy Tax team provides an end-to-end consultation service, ensuring you receive your full benefit entitlement. We handle all the admin, making the process smooth and pain-free.
Our trusted partner Consultus International is an award-winning international net zero & energy consultant. Market intel is correct at the time of writing.
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