Why are energy prices at an all-time high?

Our Market Intelligence bulletin for January breaks down the reasons why it is costing us so much to power our homes and businesses.

Gas

The tension between Russia and Ukraine is likely to have significant consequences for the UK and the rest of Europe in terms of gas supply, as severe market volatility and price spikes continued towards the end of January. 

UK annual gas demand currently stands at 74 billion cubic metres, with 47% of this demand met domestically, 22% from LNG imports and 31% from European imports (via Norway, Netherlands, and Belgium).  

A halt in gas flow from Ukraine would impact nations like Germany which sources over 40% of their gas from Russia. Sweden and Finland source an even higher percentage, while Norway is at its limit in terms of the amount of gas it can export.  

This means there would be less surplus supply in mainland Europe, ultimately resulting in reduced exports to the UK, therefore, the difference would have to be made up domestically, or by additional LNG deliveries. 

This possible supply crisis is expected to result in a surge in prices, with consumers already expecting a large increase from April when the energy price cap will be lifted by Ofgem. 

Electricity

Electricity prices are likely to mirror gas prices, with gas-fired power generation still vital to the energy mix, especially on days when renewable energy production is not sufficient.  

Both domestic and commercial consumers should prepare for prices to soar even further in the coming months, as the geopolitical situation involving Russia, the lifting of the UK energy price cap and economic uncertainty caused by the Omicron variant has all combined to create an extremely bullish outlook.  
Meanwhile, expectations of a prolonged winter is another factor that has added to the current situation.  

Oil

Oil prices have already increased by 10% in 2022, rising to around $85/b, with analysts predicting that prices could climb above the $100/b level for the first time in eight years. 

However, there is one country that could have a major say on whether prices reach triple digits… Iran.  

Iran has reopened negotiations in regard to its nuclear power programme which was blocked by sanctions imposed by the West. Talks are currently taking place in Vienna between Iranian officials and China, Russia, the EU, the UK, and other major economic nations, with direct negotiation with the US rumoured to be in the pipeline.  

The sanctions are in place to prevent Iran from developing nuclear weapons – in order to do this Uranium would need to be enriched to 90% to achieve ‘weapons-grade’ levels. 
Instead, Iran is requesting to increase Uranium levels to above 60%, if approved, the country may be able to increase Crude oil exports to help balance the global oil market. 

Market Info 

Economic confidence is at its lowest point since the winter lockdown imposed by the Government one year ago.  

This pessimism has been further fuelled by Ofgem’s decision to lift the energy price cap in April 2022 which is expected to result in a sharp rise in wholesale prices from the 1^st of April.  

The likely consequence of this is that the annual energy bill for each household in the UK will rise by hundreds of pounds, at a time when inflation is already pushing up the costs of things like food, broadband and TV subscriptions, while Council Tax is also open to a 2% increase. 

The current price cap is set at £1,277, but this could rise to almost £2,000 in April.  

This extra financial strain on the general public and businesses will doubt be felt in almost every sector and organisations of all types are advised to budget accordingly.