Energy market view for businesses

The energy markets are notoriously volatile, and as we start to recover from the global upheaval of the Covid-19 pandemic and economic activity...

Energy market view for businesses

The energy markets are notoriously volatile, and as we start to recover from the global upheaval of the Covid-19 pandemic and economic activity rebounds, increasing demand for power and gas is creating uncertainty among energy consumers as to how best to respond. I wanted to provide an overview of energy market activity so far this year – and share some key pointers to look out for as we approach the winter season.

It's been an interesting year for all commodity markets and none more so than electricity and gas. After a big drop in demand during earlier lockdowns, UK power and gas markets have both gained strength over recent months, leading to increasing prices. This has been driven by rising demand for all fuels, as well as carbon – alongside supply concerns for the forthcoming winter.

Drivers for increased prices

Oil in particular has rallied, with Brent trading back above $75/barrel from lows of below $20 in April 2020. The Organization of the Petroleum Exporting Countries (OPEC) is now discussing further increases to production, as global demand is looking much stronger with Covid-19 restrictions easing.

On the renewable energy front, output has been particularly low, due in part to a lack of wind. This has increased reliance on more costly gas-fired generation both here in the UK and across Europe.

There has also been an increase in domestic energy demand due to spring and early summer temperatures being below seasonal norms.

Gas supplies depleted

In terms of supply, the cooler spring temperatures saw a heavy reliance placed on gas-fired generation into May. As a result, medium-range storage sites both in the UK and in Europe have fallen below five-year averages.

Gas output generally is lower at this time of year due to summer maintenance on gas pipelines and fields. So, storage injections will be needed into October and November 2021 to ensure we have enough supply over the peak winter months.

Liquefied natural gas (LNG) deliveries to the UK and mainland Europe have also started to fall, as the Asian economic recovery has directed tankers east. This poses a further issue to refilling storage levels this summer.

Market Movement graph

Reduced supply from Russia

What's more, Gazprom – the Russian-owned gas company that exports to Europe – has not booked extra Ukrainian transit capacity in July, which means Russian gas flows into Europe will drop significantly this month. This comes at a time when two other Gazprom pipelines are undergoing maintenance.

These factors combine to create higher than seasonally-expected prices for gas. And this trend is expected to remain for some months to come, and likely into the winter season.

Higher temperatures impact nuclear output

Additional energy demand could come with above-average temperatures expected as we move into midsummer. And this could cause cooling issues with the French nuclear fleet, as river temperatures become too warm to effectively cool, which could lead to unplanned nuclear outages.

This is in addition to the extra air conditioning load that comes with warmer temperatures. So European power imports to the UK via our interconnector network may be curtailed, posing yet further upside risk.

Carbon prices rising

The cost of carbon is another factor influencing our energy markets. Carbon prices have risen dramatically following a dip last year when the Covid-19 pandemic first hit, when they fell from the mid-to-high €20s to around €15 per tonne. They are now topping €55. Hedge funds have largely been blamed for the hike in prices, as carbon permits were seen as a safe investment bet.

With many countries now committing to becoming net carbon neutral, the expectation is that we will continue to see the price of carbon rise over the coming months and years.

Looking towards winter

While it’s been a turbulent year in the energy markets, further upward pressure on energy prices is likely as the economic recovery continues and demand starts to fully recover. The weather this winter will also be a big driver of energy prices. An early cold spell could be a disaster, with gas storage not replenished and Asian demand increasing.

Also worth keeping an eye on is the French nuclear situation, as a number of reactors will be scheduled for planned maintenance over the summer – and any delays could impact future imported power supply.

If you need help or advice as to how to structure your energy-buying activity, please talk to your Client Lead.

1 npower Business Solutions (nBS) now part of the E.ON group.

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