Electricity and gas market prices in the UK have risen to unprecedented levels in 2021, with the media warning of a potential energy crisis, in addition to possible gas shortages to come this Winter. Electricity in Winter-21 contracts hit highs of £228.50/ MWh, with gas reaching as much as 218p/thm.

Key reasons for the rise in prices include:

  • Several gas interconnectors across Europe were forced to temporarily close, in order to perform planned maintenance, which exacerbated the already tight gas supply across Europe.
  • LNG deliveries into Europe have been lower than anticipated throughout 2021, as Asian LNG prices have traded at a premium to the EU market equivalents, thereby diverting LNG away to Asian buyers. 3.
  • Limited gas injections into storage across Europe reflected in multi-year storage lows
  • The Nord Stream 2 pipeline has led to upside risk premiums in the gas market, as a result of uncertainty around the start date, in addition to the expected volumes to flow through the pipeline.
  • A fire on the British-French interconnector removing potential import volumes of electricity from France.

Market Drivers

Many market background drivers have appeared over the last few months. Driven primarily by international factors, which have not only affected gas prices, but electricity issues in the domestic market as well.

Price Impact

These factors have had direct impacts, with current prices as shown below. Figure 1 shows the increases against this time last year. 

Figure 1

External Influences

Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, stated that he is “convinced we will have full energy supply” despite soaring wholesale gas prices. Possible options of subsidising energy firms were considered over the last few days, until Kwarteng stated that bailing out of large energy industries was not going to be committed to, as:

“We are not in the business of bail-outs. What we are in the business of, is ensuring the security of supply, and that is what I am focused on”.

In other words, guaranteeing supply to businesses and households over a tight winter, rather than low prices.

Last week, Vladimir Putin offered to export additional volumes of gas to Europe in an effort to ease the soaring prices, without firmly committing to dates of implementation. Prices in the market remain extremely volatile and every rumour, announcement, or change in weather is likely to influence pricing for the remainder of this winter, as well as subsequent seasons.

Government Intervention

Without government intervention and direct fiscal support there is the potential of seeing larger energy consuming companies that have not hedged fully their positions ceasing their operations. It remains to be seen what support will be offered, if any, for how long and which sectors would be targeted for a bail out. The costs could be exorbitant and could lead to accusations of unnecessary state support further complicating the picture.

Conclusions

In terms of where the commodity markets go next, it is very difficult to make accurate and reasonable forecasts, with the gas market being so extremely tight, making short-term prices so volatile.

Until there is more certainty over aggregate of UK and European gas demand, which will be driven by weather conditions and industrial demand; in addition to clarity of the amount of gas supplied by Russia, then the markets will continue to soar to new highs, where demand outweighs the supply.

The markets remain internationally driven, leaving localised solutions almost powerless to ensuring that the UK can remain aloof from these global factors forever.

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