Why Has The Market Been Rising?

UK energy prices are up due to increased carbon prices, a lack of supply from LNG imports, a prolonged winter, lack of wind in April, maintenance on Norwegian pipelines and our nuclear generation. UK and European storage levels are at record lows and we have been unable to meet replenish stocks for some time.

There are four key drivers behind energy prices rising:

Carbon Prices

The single most important driver of higher European gas & power prices in 2021 is rising carbon prices.  Governments across the globe are tightening up their emissions targets for the next few decades. A reluctance to sell by participants currently holding the market’s historical surplus have driven up emissions prices.

Reforms to the EU ETS aimed at cutting carbon emissions by at least 55% by 2030 compared with 1990 levels has galvanised the bull run. Participants holding the historic surplus will likely to be more willing to bring supply to the market once details of EU ETS reform emerge in mid-July.

Russian & Norwegian Supply

Russian flows via Ukraine have fallen sharply and a recent tender to allow for additional flows to Europe was blocked by Russia causing prices to rise dramatically. Over the last few years, Russia and Ukraine have had their issues with gas being sent to Europe. This is entirely political; Russia want gas to go through their other pipeline called Nord Stream 2 which is a direct pipeline from Russia to Germany. However, it is not yet complete due to Americans wanting Europe to buy their gas via LNG (Liquid Natural Gas) tankers instead of Russian gas.

Long term, Europe is dramatically increasing gas consumption, removing coal fired power plants and replacing them with gas fired power plants. For now, the lack of supply does not make it possible to start pumping gas into storage facilities to prepare for this winter.

Asian Demand for LNG

China’s LNG demand has been driven by a strong economic recovery and higher winter demand this year. Strong Asian LNG demand is important for European gas & power markets, as it results in the diversion of LNG supply from Europe to China. The UK has received half the LNG imports in May than it did last year because of this. Qatar is one of the major exporters of LNG and UK is a major market. However, Qatar has recently expressed its desire to reduce its exports to Europe and send more to the far east instead.

UK & European Low Storage

European gas storage levels are low coming into the summer injection season.  Cold weather in April has seen storage inventories fall to around 30% full, versus 60% last year and a 40% 5-year average. Low Norwegian supply due to early maintenance has also contributed to strong storage withdrawals.

Low storage inventory levels will support strong summer gas demand for injections to replenish stocks, another factor lifting the energy curves.

Our view

The next few weeks shall remain difficult. Phase 1 of Norwegian maintenance will have been complete in mid-May, phase two will be complete by June 3rd. Carbon markets have already begun to cool down having reached €55/ton in mid-May. Power and gas markets have begun to follow suit. Warmer weather will now allow us to replenish gas storage and wind generation is slowly picking up, but still lower than average.

The market is in backwardation, meaning prices further out are significantly cheaper such as 2023, 2024 and 2025 compared to those over the next 12 months. This highlights how the current rally is highly overinflated.

By Latif Faiyaz

Latif is our Head of Flexible Purchasing & Energy Strategy. Latif has a wealth of experience from within the energy industry, with experience in developing carbon projects and trading carbon internationally at Alfa Energy. Latif has also worked at Engie and Orsted, implementing the integration of energy service offerings into supply contracts. His experience is varied too. He’s worked ‘on the other side of the fence’ as an Energy Manager for the NHS, before returning back to energy trading for LG Energy and Yorkshire Energy.

With Northern Gas and Power, Latif heads our Flexible Purchasing department of Energy Traders, Analysts and Bid Managers, converting some of our 31 TWhs of energy under management into flexible purchases.