Wholesale prices have climbed to record levels
Wholesale gas prices are their highest for three years; electricity prices have reached record peaks
Cold weather here and in Asia has caused a demand for energy, pushing up prices
The global pandemic is also impacting prices
Retail market prices are already on the way up — expect further price rises
As we reported in our previous wholesale price blog last October, energy prices rose between July and September 2020 and we suggested that they were likely to carry on climbing as we closed in on the end of the year. We were right.
Here’s what’s happened to the market and prices since.
Prices have risen to record levels. Electricity reached its highest ever, gas is at a three year high. The prices have climbed much more steeply than earlier in 2020. And it looks like we might not have reached the top yet. But more on that in a moment.
This chart shows the steep rise in wholesale electricity and gas energy prices in the British market since October, and the general upward trend since last July.
Image: Intercontinential Exchange
So what’s behind this price inflation?
As usual, as we entered the beginning of winter, supply uncertainty increased and this was the key factor for gas prices at the start of the colder season. Forward gas prices for the first quarter of 2021 (we, like most suppliers, buy ahead to hedge our costs) increased over 13% in the first three weeks of October.
Regular readers of this quarterly wholesale price blog will know that gas prices are affected by the global market, as well as international economic and political outlooks. It’s not something we in Britain can control alone.
And gas prices in turn influence the wholesale prices of electricity (regardless of how electricity is generated) as gas-generation is such a sizable part of the overall electricity market.
Let’s take a look around the world at the influences which are shaping the wholesale prices we face here at home?
- The COVID-19 pandemic has spread globally and governments have responded with a series of lockdowns, effectively pausing various sectors of their economies. In economically mature nations — such as those throughout Europe — those who can work from home (service/office based workers) have been told to do so. This has pushed up domestic demand — around 10% or so on average. Yet, industrial use, while down slightly, has remained broadly consistent. So demand remains reasonable overall.
Lockdowns around the world. Image: Our World in Data
- In Asia, an unexpectedly cold winter in China, Korea, and Japan and a resurgent economy in the region has driven demand for gas (transported as Liquified Natural Gas). Higher pricing in Asia has meant fewer tanker shipments have been made to Europe. This pushes up prices. For example, UK gas prices in December 2020 on the ‘day ahead market’ traded between 40p and 48p a therm, compared to around 30p in December 2019.
Image: LNG Tanker
Here in the UK cold weather since the last week of December has also sharply increased demand for energy.
Fewer coal power stations in Britain (good for the environment), mean less backup generation capacity for the grid, and spikes in electricity prices have been due to low wind output — which means gas must be used instead, leading to higher costs in both gas and the electricity created.
Elsewhere, energy supply from the Netherlands has been less than normal which, again, puts a little more strain on the system. The BritNed interconnector has been down for maintenance since 8 December 2020.
And if all that wasn’t enough, oil producing countries have been cutting supply to support prices which ultimately leads to higher wholesale energy prices overall.
Prices in 2021
So what does that mean for prices for 2021?
More expense. Our view is that wholesale prices are continuing to climb.
Here are two charts which show the costs of electricity and gas for later this year were we to buy them in advance at different times over the last six months. Just a glance at the graphs shows the obvious: prices are going up.
Baseload Electricity Prices for the coming summer and next winter.
Gas prices for the coming summer and next winter.
Prices have and, in our view, are expected to continue to increase from the lows of last spring. The reasons, as we’ve described, are both short term, such as capacity and weather.
But there’s another long-term factor, which looks like it is adding a twist to this tale. The much lauded and welcome Covid-19 vaccines, which are starting to be given to people around the world, are expected to help with a global economic recovery. The irony is that this will increase demand for energy, which in turn is pushing up long-term prices.
What this means for the British retail energy market and you
Given the wholesale rises through 2020 and the recent surges in the colder winter months, we expect retail prices will rise throughout the early months of 2021.
The cold snap incoming to the UK and Europe has pushed the price of gas for the month ahead up by a fifth to 80p a therm. This is the highest price for nearly three years.
Image: The Guardian
In fact, we’ve already seen the average prices for some of the cheapest fixed tariffs in the market climb from £891 to £958 over the last month, a 7.5% increase.
Variable prices, too, are highly likely to rise. Again, they are up from £968 to £995 across the sector on average over the past month — increasing by 2.7%. As most suppliers were already charging at or very close to the price cap rate last month (£1,042 a year for an average dual-fuel household), this prevented them from lifting their variable price any further. This means the increase in the variable price rises across the market as a percentage is smaller compared to fixed tariff rises.
Ofgem can be expected to announce an increase to the price cap early in February, which will take effect across the market from 1 April, which will likely include a £21 uplift to account for the unpaid bills faced by the industry, due to the economic impacts of the pandemic.
All of this means prices are likely to go up at Pure Planet in the coming months, too. Like all suppliers, we have no choice but to adjust for the wholesale market costs for energy, whether they move up or down. Unfortunately, it looks like things are moving up.