Why are energy prices rising?
It’s difficult for businesses not to notice that energy prices are at an all-time high. According to Ofgem, there’s been an increase of over 400% in wholesale gas prices in the UK over the last year. Here’s our breakdown of why we’re seeing record high energy prices that keep rising.
Wholesale markets going up
One of the biggest causes of the increase in energy prices is wholesale markets going up. The conflict in Ukraine is causing issues with supply of gas which is driving up market prices. The amount of gas being transported through the Nord Stream pipelines from Russia has slowly come to a halt following the conflict. The lack of gas coming through the pipelines has caused issues with a lot of EU countries who have a heavy reliance on the pipes. This has left them having to look elsewhere for their gas supply, driving up the global market prices.
While the UK imports little from Russia, global price increases effect everyone. Due to these high prices, we are still exporting electricity. For example, on 31st October 2022, the UK exported 1.8 GW of electricity.
Issues with storage are also one of the key factors causing energy prices to soar. The UK’s gas storage is 95% full but it may not be enough. The UK can only store nine days’ worth of gas, which is low in comparison to other countries. Therefore, if the UK’s gas supply was cut off completely, we would only have nine days’ worth of power.
This is partly due to the UK’s biggest gas storage facility being closed in 2017 due to operational issues. However, the storage facility in Dundee, Rough, is set to reopen in Winter after engineering upgrades. If Rough was only used at one fifth of its capacity, it will add around 50% to the amount of gas the UK can store at any given time. Centrica have said they hope to “turn the Rough field into the world’s biggest methane and hydrogen storage facility”.
Even with the opening of the Rough storage facility, the UK is still quite far behind in comparison to other European countries. For example, France has 103 days’ worth of gas supplies in storage. A lot of EU countries’ storage facilities are nearly full, meaning that LNG tankers are unable to unload their cargo, causing prices to fall across Europe. Prices even dipped below €0 in October for Dutch gas spot prices. This is mainly due to warmer temperatures reducing consumption.
Increased demand for gas
As the winter months hit, the shorter and colder days mean that more people are looking to keep their homes and businesses warm. Therefore, more people are turning on their boilers to keep warm, but this is placing more pressure on the UK’s already low storage facilities.
Climate change has caused a change in the temperatures we’re used to seeing, meaning we used more gas than we usually do in the spring months. April 2021 was the coldest April since 2003, creating a greater demand for gas and reducing our supply. Gas prices largely influence electric prices due to us needing the gas to create electric. This increased demand for gas is another factor into energy prices rising.
Inflation in the UK is also having a direct effect on energy prices, causing them to soar. Both energy prices and inflation are interlinked. When energy prices skyrocket, they bring inflation up with them. When inflation rises, energy prices do too. UK inflation sits at around 10%, causing the third-party gas costs to go up as well as the wholesale these third-party costs account for.
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