The UK has bucked the pan-European trend of soaring wholesale gas prices as shipments of liquefied natural gas have alleviated a shortage that squeezed prices higher last year and kept them there. But consumers won’t feel pricing relief any time soon.
Bloomberg reported this week that the day-ahead price for natural gas in the UK has dropped to some 156 euros or $164.88 per megawatt-hour this month. In comparison, the average day-ahead gas price in Germany is 210 euros or $220.84 per MWh, and in France, the price is 213 euros or $224 per MWh. In Italy, prices are even higher despite the country’s access to pipeline gas from Algeria, at 241 euros or $253.44 per MWh.
But there are more factors that go into consumer pricing.
The UK has been ramping up LNG imports in recent months amid the heating season, but recently, as the weather began to warm and the demand for energy for heating declined, the country started running out of storage space for all the LNG it has been importing, Bloomberg reported last month. It cannot even export it all to the European Union because of capacity constraints, the report noted. While this is good news for power utilities operating gas-powered stations, for the end consumer, all this won’t make much of a difference, according to a recent Telegraph report. According to the report, energy market regulator Ofgem planned to extend a rule that obliges electricity suppliers to pay consumers’ existing suppliers if they want to offer them lower rates. This will likely discourage utilities from offering such rates, no matter where wholesale prices land.
Meanwhile, the crisis of living in the UK, which was caused in large part by energy prices, is gathering pace. One of Britain’s largest energy suppliers, ScottishPower, warned this week that households would need to prepare for another substantial jump in their annual electricity bills after Ofgem raises the cap on prices again in October.
“All of a sudden a whole host of people who have never found themselves in debt and have never struggled to pay their bills are going to get hit by this crisis,” the chief executive of the utility said, as quoted by the Financial Times. “Time is running out fast. Let’s get in a room and come up with the solutions now,” Keith Anderson added.
The outlook for the medium term is not too rosy, either, despite the current drop in gas prices. Investment bank Stifel reported earlier this week that the current level of volatility in natural gas prices is not going anywhere in the next three years, extending the cost of living crisis in one of the world’s wealthiest countries.
“We see energy markets remaining tighter than previously expected into 2024/2025; for oil, we increase our long-term oil price assumptions from $65 per barrel to $70 per barrel for 2024 onwards, reflecting higher longer-term risks to supply. We also now expect high UK gas prices to persist into 2025,” said Stifel analyst Chris Wheaton, as quoted by City A.M.
The factors driving this volatility range from the continuing supply chain disruptions and higher liquefied natural gas prices as the world swings into a shortage. According to Stifel’s analysts, the UK will not be able to protect itself from the effects of this shortage even if it boosts local gas production. The reason: underinvestment.
“The global LNG industry has been struggling with uptime and the ability to produce the LNG its customers need – a combination of issues with maintenance on aging fleet of liquefaction capacity, but also decline of supply of natural gas feedstock after years of under-investment,” Wheaton said.
In other words, the current drop in prices is a temporary development that will not last anywhere near long enough to make a palpable difference in the prices that UK consumers pay for electricity. And that doesn’t bode well for either the UK economy or, indeed, the EU economies, which are struggling with much higher gas prices.
By Irina Slav for Oilprice.com
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