Energy prices in the UK are soaring; it’s largely due to lack of supply and increasing demand, but there’s more to it.
Despite the push for renewables, gas-fired power still accounts for nearly half of the country’s electricity generation, according to National Grid data.
READ: Why have energy prices increased during the pandemic?
Europe is facing a gas shortage as China and Russia are keeping feedstock locally as economies reopen after COVID-19.
Moreover, the UK is struggling as some gas-fired plants have closed, a power cable connected to France is running at lower capacity and the mild weather is affecting wind generation.
This combination of factors, plus an outage caused by a fire at a plant connecting the UK to France, has pushed UK gas futures almost 12% higher to a record 184.6p per therm.
They were already trading at all-time highs of 100p per therm on Tuesday morning, according to Refinitiv data.
???????? BREAKING ???????? UK natural gas wholesale prices are ***jumping ~20% today*** to fresh record high as trades brace for more UK gas-fired power station demand after the loss of a key electricity interconnector between UK and France (among other issues) pic.twitter.com/jMpuC9g1S3
— Javier Blas (@JavierBlas) September 15, 2021
Next month, the North Sea Link connecting Norway to Blyth in northern England will become operative, which should relieve some pressure.
Plus, the winds should pick up from 1.5GW to 8GW on Friday, according to media report, although the market shouldn’t rely too heavily on it forecasts can often be inaccurate.
When prices skyrocket, as it’s happening now, prices can be balanced in a system called the balancing mechanism.
“You've got your day ahead auction, then you go into the within-day spot market and then, an hour before the market closes, National Grid takes over as the transmission system operator. Generators and suppliers submit flexibility offers through a procedure called policy mechanism and the transfer system operator can then choose whether or not to activate those offers, based on their expectation of what they think they need,” Tom Edwards, senior modeller at Cornwall Insight, told Proactive.
“What's happening at the moment is that the generators are setting tariffs at very high prices because they know there's a lot of money to be made… If National Grid wants to turn any of those generators on, it has to pay those prices that they've asked for.”
That’s because since the rules on price caps were changed in 2018, prices are set by the most expensive auction rather than an average of the auctions, making price swings more volatile.
According to Edwards, the fact that Ofgem didn’t step in during the current situation means it won’t do so in the future, and it’s generally “happy to see prices rise”.
“[The spike] would be good for investors and generators because they can say ‘well, okay, my business model is reliant on high prices and I know that the British energy regulator is willing to willing to let those happen’,” he commented.
In all this, gas and coal generators are the clear winners, while battery operators are also doing well if they managed to buy electricity at a lower price than now.
The consumers
Looking at the consumers, companies that have secured hedges last summer or even last winter are likely to spend much less than those businesses that are buying on the spot market now.
Usually, Edwards noted, smaller firms tend to hedge energy prices to protect themselves from the risks.
Another solution to the volatility of the energy market is to build an in-house power generator, or even reducing consumption as much as possible or outside of the most expensive hours.
“For example, if you're a factory or a bakery, that has a lot of electricity demand and if you try to close the line or move your shifts around, so that you're not operating over the peak price periods, which are between about 6pm and 8pm, then you could avoid a lot of the extreme volatility in wholesale prices,” he added.
“But if you're not capable of doing that then your only option is either to hedge your exposures. For example, a water company, a lot of their pumps and equipment will be operating at peak times because that's when people are using water. They don't really have the opportunity to use less.”