Energy bills are driven by both the price of energy on the wholesale market and Third-Party Costs (TPCs). TPCs include non-energy costs set by the government, network (the National Grid), policy and system costs and electricity transmission/distribution costs.
The biggest single cost on a bill is the price of the energy. Before the energy crisis the wholesale cost of energy made up approximately 40% of an electricity bill and 70% of a gas bill, with the remaining being TPCs, which have been continuously rising in recent years and can be volatile. Currently, with the rise in wholesale costs they are around 78% of a gas bill and 72% of an electricity bill.
This pricing report will focus on the energy element of a bill to help you keep track and understand the wholesale energy market and the factors affecting the price of your contracts.
Overview:
Temperatures in the UK have been above average for over a month, with good wind speeds and demand 28% below seasonal norms helping to keep contract prices relatively steady when compared to this year. However, the market is still extremely volatile and prices are subject to change at short notice.
The Energy Bill Relief Scheme kicks in for UK businesses this month but has also been slightly amended to support businesses even further against spiralling energy prices. The original cut-off for eligible fixed contracts was for those signed from 1st April 2022. It has now been extended to include those signed from the 1st of December 2021, to enable even more businesses to benefit from the discounted rates.
The government are now publishing the reference rate for the wholesale element of pricing which is seeing discounts published for the date that the contract has been secured. These discounts are then automatically applied to customer bills by the suppliers from November onwards. Discounts for out-of-contract customers are significantly lower, so there is no incentive to remain on default rates and customers should look to agree on a contract to maximise the best market prices for supplies and maximise the discount available between October 2022 and April 2023.
Bullish Factors (upward pressure on markets):
- Norwegian outages restricting flows
- Potential sanctions on Russia
- Short system, due to injections into Rough Storage, coupled with low flows into UK
- Concerns over increasing Asian demand following the relaxation of China’s COVID restriction
Bearish Factors (downward pressure on markets):
- UK demand 28% below seasonal norms
- Milder temperatures forecasted until December
- Increased wind output
- French electricity link back online
- 15 LNG cargoes expected by the end of November
MARKET REPORT
Prices fell this week, despite an undersupplied system and further Norwegian outages. These falls were supported by increased wind output, milder temperatures and further predictions of increased LNG supply.
Gas contracts starting now (spot) are lower than those starting within the next season (S+1) and those that start within the month head (M+1). Power contracts starting within the month ahead are higher due to the expected drop in temperatures and increase in demand towards the end of the year.
A season in the business energy market is a 6-month spread and these are from April to September for “Summer” and October to March for “Winter”.
Crude Oil
Brent crude prices started higher at the beginning of the week supported by reports of potential sanctions on Russia and continued concerns over Asian demand.
Prices fell on Wednesday due to reports of increasing supply and increased COVID measures in Asia.
Current price standings:
Brent Crude = $92.65/bbl
Rough Gas Storage Facility Reopening
ENERGY NEWS
Centrica has been given the green light to reopen the only large seasonal gas storage facility in the UK, Rough, which closed in 2017.
Centrica’s storage licence was renewed late last month, and on the 3rd of August, Ofgem granted Centrica an exemption from the Third Party Access Regime for Rough, allowing them to operate at a given capacity of 0.8 bcm for winter 2022/23 and 1.6 bcm for winter 2023/24. When it was operating, the 3.3 bcm capacity was around 70% of all the gas storage capacity across the UK market.
There are some concerns with re-opening the facility which closed in 2017 after a testing programme identified problems with a number of the 30 wells used to inject and withdraw gas from the Rough gas field and the company concluded it was no longer commercially viable to operate it safely.
Even at a quarter of capacity, re-opening Rough would increase Britain’s gas storage capacity by just over 1.5 times. However, the North Sea Transition Authority must also determine that it can operate safely.
Winter Power Cuts in UK Unlikely
National Gris experts expect that there will now be enough supply to avoid the previously predicted worst-case scenario of rolling blackouts this winter.
This is due to the milder weather and the return of the crucial electricity link from Kent to France (IFA Interconnector) that was hit by a fire in September 2021 and has been under repair for over a year.
Chief Executive, John Pettigrew, said on Thursday that the outlook had not changed, and the mild weather so far this winter was a positive for the energy picture. “What we have seen is pretty mild weather, which has led the Europeans to probably put more gas into storage than they originally anticipated. My understanding is the storage in Europe now is pretty much full,” he said.
Last year the converter station in Kent was forced to shut down a high-voltage cable that brings electricity from France after a huge fire. Half of its 2,000 gigawatt (GW) capacity was knocked out by the fire. Pettigrew said “so by the time we get to the peak of the winter, the full 2GW will be available from the French interconnector, which I’m delighted about.”
Russian Sanctions
Russia’s crude oil exports by sea spiked to a five-month high last week ahead of the sanctions that go into effect next month, according to Bloomberg.
The exports increased to 3.6 million barrels per day, Bloomberg said on Monday, which is the highest level since early June. Their export revenues subsequently rose by $16 million to $149 million in the week to November which is Russia’s highest export revenue in five weeks.
On the 5th of December, a ban on insuring and servicing ships carrying Russia’s seaborne crude oil will go into effect unless it is purchased at a price that falls below the designated price cap, to be set by the G7 nations and Australia, although the UK will issue waivers for Russian oil contracts if they were signed prior to the 5th of December and delivered prior to the 19th of January.
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