Reports in the media that natural gas prices in the U.K. have more than quadrupled over the last year to highs of 180p per therm from around 40p per therm this time last year are making headlines. This is largely because of the impact on small, startup gas suppliers who have been forced out of business over recent weeks.
However, natural gas — and energy prices, broadly — have been rising strongly. This has been the case, not just in the U.K. but across Europe for much of this year.
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Power prices on the rise
In part, this is weather-related. Exceptionally low winds are failing to generate sufficient renewable energy. However, the situation is also due to the rise of natural gas prices, globally and specifically in Europe.
Demand from China and severe weather in Texas have led to increasing demand and constrained supply. As such, those have created the perfect conditions for speculators to drive prices higher.
Another less talked about contributor is the failure of Russia to supply more than its minimum contractual requirements to the European market for some months. The move is widely seen as the Russian authorities trying to apply pressure on Europe for the approval of the Nord Stream 2 gas pipeline.
According to The Guardian newspaper, around half of the U.K.’s electricity is generated by natural gas-fired power plants.
The situation is exacerbated by unplanned outages of nuclear power plants this year. Furthermore, fire shut down a main power cable importing electricity from France just this month.
Natural gas surge
The U.K. relies heavily on natural gas for both residential and industrial use. The resulting rise in prices has already led to the closure of two major U.K.’s fertilizer plants.
This has had the knock-on effect of crimping CO2 production. Ir is made as a byproduct and is the source of some 80% of the UK’s supply. CO2 is needed for a wide variety of industrial and agricultural applications.
The U.K.’s second-biggest steel producer, British Steel, is quoted by the Financial Times as saying that the U.K.’s power prices are spiraling out of control.
The company is on variable electricity prices. British Steel has warned it could have to close production in the face of unprecedented price increases.
Electricity costs can represent up to 20% of the cost of converting basic raw materials into steel. The company is quoted as saying it is facing a maximum price at peak times of up to £2,500 per MWh.
Meanwhile, it saw an average of £50 per MWh in April.
Spot prices in excess of £1,000 per month MWh are becoming increasingly common this month after wholesale prices in the U.K. rose dramatically.
Nor is the UK well served with reserves of natural gas. It has just 1% of Europe’s total storage after failing to invest in storage facilities over the last 10 years. So, if supplies from Russia do not increase as the winter season approaches, the U.K. is probably the worst-placed of all European markets in having no alternatives to limited supply and rising prices.
While European steel producers are more protected in terms of energy prices by state rules and long-term agreements, producers in Italy are voicing worries. Rising power costs are said to be behind the current price of steel products in southern Europe, which had expected to decrease on falling scrap input costs but were being hampered by record power costs.
With winter approaching, the situation is likely to get much worse before it gets better.
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