What is happening in the UK energy market?
Below is a brief overview of the energy market as of 3 February 2012, key downward and upward drivers and the future outlook which will affect the energy costs of every business in UK.
Energy market fundamentals
Global market for both electricity and gas:
- Electricity and gas interconnectors between UK and continental Europe
- Competition for LNG cargoes, especially from Far East and other emerging markets (Brazil, Pakistan, Middle East)
Energy is a traded commodity, so price vulnerable to:
- Genuine supply and demand trends
- Perception and sentiment
- Market speculators
Continental Europe heavily reliant on Russian gas – price indexed to oil price, so can fluctuate wildly, impacting on UK prices.
UK disproportionately reliant on gas for power generation (45% of power mix - European average of 24%) Gas price movements consequently have an exaggerated impact on UK power prices.
Current downward drivers
- Gas storage levels very high
- Weak demand from continental Europe
- Slowdown in Chinese economic growth, although export levels still strong
- Plentiful availability of LNG, especially from Qatar
- Resolution of Libyan crisis
- USA now self-sufficient in gas due to shale gas, other significant discoveries elsewhere e.g. Poland, Algeria. However, export capacity unlikely until 2015 earliest.
Future upward drivers – global
- 28% increase in global energy demand 2000 to 2010 – expected to continue to rise
- Increased global competition for gas supplies, particularly from Far East
- China’s gas demand forecast to grow by 25% p.a. to 2015
- Increase in Japanese gas and coal imports post Fukushima
- Wholesale gas price in Japan / Korea 70% higher than in UK
- Shortage of LNG transporters – shipping costs up 150% between 2009 and 2011.
Future upward drivers – domestic
- North Sea gas production in steady decline, affecting both domestic production and supply from Norway and Netherlands
- UK gas storage capacity for winter demand
- European competition for gas and power, particularly from Germany following withdrawal from nuclear power
- Carbon Floor Price introduced from April 2013 – estimated impact 0.5p/kWh
Huge investment required in infrastructure – estimated at £250bn for UK:
- Replacement of ageing generation assets
- Carbon capture technology for power stations
- Upgrade of grids to reflect movement towards renewables
Supply side shocks
Market prices highly vulnerable to supply side shocks, which can cause very significant and rapid increases in prices:
- Gulf crisis of 2008 - oil prices spiked to $147/bbl
- Japanese tsunami in March 2011- catastrophic effect on that country’s nuclear generation capability
- Unrest in Middle East and North Africa, particularly in Libya and Bahrain, disrupting oil and gas supplies
Biggest current threat is the ongoing Iran crisis – possible EU embargo and risk of blockade of Straits of Hormuz, threatening oil and gas supplies from Iran, Saudi Arabia, Kuwait, Bahrain, Qatar and Abu Dhabi (40% of all world tanker oil passes through this area).
Outlook
- Longer-term drivers will continue to put upward pressure on prices
- Current steady trends could be bucked by supply side shocks, especially if there is an escalation of the Iran crisis.
To understand how these issues could affect your business or if you would like to be added to the distribution list for our regular industry updates, please email info@uesenergy.co.uk.
