The last two years have been the most remarkable period for UK energy in decades.

The energy crisis triggered by the Russia/Ukraine conflict caused UK gas and power prices to increase tenfold, driving inflation up and weakening economic growth.

Thankfully, over the winter, energy prices finally started to fall. And now, as we head towards the summer, prices are as low as they have been for over three years.

So looking ahead, what drivers and potential risks do you need to be aware of?

Along with fellow market experts on the npower Business Solutions (nBS) Optimisation Desk, we have created a Summer Outlook to highlight key trends and explain important market dynamics.

Here follows a summary of the main points:

Why gas (and the weather) are still key drivers this summer

As Europe’s dependence on liquified natural gas (LNG) grows, it feels as though this super-cooled fuel has become the primary supply driver this summer.

Our increasing dependence on LNG means that the UK and continental Europe are now more strongly linked to the global gas market.

If demand increases in Brazil due to drought, or Japan due to nuclear issues, then UK and European gas prices need to move higher to keep attracting LNG deliveries.

And Summer is the time we traditionally want to attract cheaper LNG deliveries, so as to fill not only our storage – but now Europe’s expanding storage – capacity, ahead of the winter period.

The weather is another key factor to watch. As while gas demand falls in the UK during the summer months, extreme heatwaves can drive increased demand to meet cooling requirements in many other parts of the world.

So competition from hotter places including Asia is important to monitor. As is output from the US, with issues currently reducing supply from the major supply terminal at Freeport in Texas.

How global geopolitics impact UK price

With the Russia/Ukraine conflict impacting energy prices so dramatically, it’s clear to see how activities elsewhere in the world can influence our economy.

For now, the situation in Israel/Gaza is affecting LNG shipping routes from Qatar into Europe. Rather than sail the most direct route via the Red Sea and Suez Canal, many ships are now diverting around the Cape of Good Hope, which adds travel time/cost of 30-50%.

Any escalation in tension in the Middle East – or elsewhere – could prolong or add to these price-increasing factors.

Why interconnector flows are important

Interconnectors are an important part of the UK’s energy mix. They tend to help to reduce our power prices by providing access to cheaper electricity from abroad. So their performance is a key wholesale power market price driver.

We rely heavily on the French nuclear fleet to export crucial baseload capacity to us to balance our expanding renewable sector.

However, France’s reactors are getting older. Maintenance issues in 2022/23 helped worsen the energy crisis caused by the Russia/Ukraine conflict by turning France into a net power importer.

So we’ll be keeping a close eye on any further unplanned maintenance and performance issues there.

On the upside, we do now have access to some new interconnector feeds. See our latest blog on this for more information.

Will demand destruction recover?

The energy crisis significantly reduced energy demand from businesses and consumers, and the market has adjusted to these lower demand levels.

There is clearly now potential for an increase in industrial demand due to lower wholesale prices (albeit still more expensive than previous years).

This is something we’ll be closely monitoring, alongside the ongoing shift in energy use patterns which will increase power demand, typified by the growing number of electric cars on the road.

Overall, it looks likely that there may be a small uptick in power demand compared to the past two summers. Although overall levels are still expected to be below historic averages.

Access the full Summer Outlook for more insight

The full Summer Outlook explores each of the key factors in more detail, alongside additional drivers including:

  • The impact of expanding renewables capacity
  • Gas storage levels in the UK and Europe
  • The global economy – and what growth or reduction means for us in the UK
  • A look back at the key drivers from winter 23/24

This report – and others – is usually prepared exclusively for nBS flexible purchasing customers supported by the Optimisation Desk. But you can request a copy by emailing the desk direct at flex.optimisation@npower.com.

 

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