After soaring over the summer months, wholesale gas costs in the UK and Europe have fallen dramatically in recent weeks.
But prices are unlikely to stay low long enough to have a major impact on bills, analysts say.
This is mainly due to the way the gas market works.
When gas prices rose dramatically on international markets earlier this year, households and businesses faced huge increases in their energy bills. This prompted the government to step in and use taxpayers’ money to cover part of the cost.
Until April, the government’s energy price guarantee scheme caps the bill for the average household at around £2,500 a year – although people who use more gas pay more.
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Since then, international wholesale prices have fallen. In August, the UK benchmark price for next-day delivery of gas peaked at 550p a year. Last week it dropped to just 38p.
This means that the government subsidy need not be as high as it would have been had wholesale prices remained high.
However, wholesale prices are expected to rise again as the weather turns colder.
“I think we’re going to have a lull just before the start of winter,” explains Jack Sharples, a research fellow at the Oxford Institute for Energy Studies.
“My expectation is that prices will go back up as the weather gets colder and demand therefore increases.”
Forecaster Cornwall Insight expects the ceiling on the average household bill to rise to £3,700 from April without further government intervention – and to stay above £3,000 by the end of next year. So despite the low prices, consumers will still end up paying more.
Most utilities will not be able to take full advantage of the current low prices as much of their gas has been purchased up front at a higher cost.
There is no single price for gas. Instead, it can be sold, for example, for delivery next day, next month, next year, or for use in two years’ time. The price you pay depends on the option you choose.
Businesses anticipating high gas consumption typically buy part of their needs months in advance to protect against a sudden price spike. This process, known as hedging, allows them to lock in some of their energy costs. If there is a short-term need, they can later buy more gas on top of that.
At the moment, day-ahead prices are low because there is a lot of gas. Those who buy now benefit from these lower prices. But those who bought in advance are not.
After the recent scramble for additional supplies, European warehouses are almost full and tankers full of liquefied natural gas (LNG) lie off European shores awaiting access to processing facilities.
But gas sold for delivery in the middle of winter is already costing much more than the supplies available now.
On the Dutch TTF platform, which is considered the European price benchmark, gas for day-ahead deliveries was trading below 30 euros per megawatt hour earlier this week. But gas for delivery in February cost more than 130 euros/MWh. This reflects market expectations that mid-winter shipments will be tighter than they are now.
This price is many times higher than what would have been considered normal prior to the disruptions caused by Covid and the war in Ukraine.
“While Europe as a whole appears to be weathering the storm this winter, it’s becoming more of an issue for the winter of 2023,” said Leon Izbicki, senior associate for natural gas at consultancy Energy Aspects.
Europe has become increasingly reliant on liquefied natural gas (LNG) imported by sea after pipeline imports from Russia plummeted.
Flow through the Nord Stream 1 pipeline, which used to transport gas from Russia to Germany, was halted in September. Shortly thereafter, the pipeline itself was severely damaged by a series of explosions.
Shipments from Russia to Poland via the Yamal pipeline have also been halted, while experts believe shipments through Ukraine are also at risk.
This has led to a sharp increase in demand for LNG – meaning much more will be needed over the next year to refill storage facilities – leaving consumers exposed to volatility in LNG prices.
“European LNG imports from January to September 2022 were already 23% higher than for the whole of 2021 and even 5% higher than for the whole of 2019,” explains Mr Sharples.
This increasing reliance on LNG means European buyers have to pay whatever the market asks to attract cargoes that might find buyers elsewhere, particularly in Asia.
Right now, China is buying much less LNG than usual due to the impact of the Covid shutdowns on its economy. But once that demand returns, prices are likely to rise sharply.
“High prices are here to stay,” says Mr. Izbicki.
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