There has recently been extensive media coverage of wholesale gas prices, and the effect this may have on household energy bills. The impact on certain sectors of the industry, and its ability to continue production, has also attracted attention.
This explicator provides the background to the problem and the measures taken by the government to protect the UK energy supply, industry and consumers.
The prices of natural gas have steadily increased across the world this year for a number of reasons. It affected Europe, including the UK, as well as other countries around the world.
We have a diverse range of gas supply sources, with sufficient capacity to more than meet demand. The UK gas system continues to operate reliably and we do not anticipate any increased risk of supply emergencies this winter.
Why are global gas prices high?
The currently visible prices reflect the high value placed on gas today, with prices determined by global supply and demand. They are not necessarily representative of pre-existing contracts and therefore do not apply to all gas consumed in the UK this winter.
Current prices reflect a number of factors, including:
- As the world emerges from COVID-19 lockdowns and economies reopen, we are seeing an increase in global demand for gas this year. * combined with a cold winter (which impacts gas demand as gas is often used to heat homes) this has led to a much tighter gas market with less available capacity
- in particular, the strong demand in Asia for liquefied natural gas (LNG), the natural gas transported around the world by ship, means that less LNG than expected has reached Europe the weather events in the United States have negatively affected their LNG exports to Europe
What is the impact of high gas prices on the UK?
The gas market is crucial for the UK’s energy supply due to its importance in heating, industry and power generation.
Over 22 million homes are connected to the gas grid and in 2020 38% of UK gas demand was used for home heating, 29% for power generation and 11% for industrial use and commercial.
High wholesale gas prices subsequently led to an increase in wholesale electricity prices this year.
In recent weeks, this trend has been exacerbated by weather conditions and the planned maintenance of some plants. This has resulted in unusually low margins for this time of year. These factors combined to cause spikes in wholesale electricity prices, with a number of short-term markets trading at or near record highs.
While we’re not complacent, we don’t expect supply emergencies this winter.
Is our gas supply threatened?
The Great Britain (GB) gas system has delivered safely to this day and is expected to continue to operate efficiently, with a diverse range of supply sources and sufficient delivery capacity to more than meet demand.
Although our largest source of gas supply continues to be the UK Continental Shelf (around 48% of total supply in 2020), the maturity of this source means we need to supplement supply to international markets.
While the diversity of these international sources promotes our energy security, by reducing dependence on a particular source, the UK – like other countries – is exposed to global trends in supply and demand. demand that affect the price of gas traded on the UK market hub (the national equilibrium point).
We have a wide range of supply sources including direct pipelines across the North Sea from Norway to the UK, our largest source of imports. We are also investing millions in developing strong renewable energy capacity and reducing the demand for fossil fuels.
GB also has a number of gas storage facilities which act as a source of system flexibility to respond to short term changes in supply and demand.
What is the government doing about it?
Energy security is a top priority for this government. The government works closely with the regulator and gas supply operators to monitor supply and demand.
While wholesale gas prices have increased internationally this year, the market continues to balance supply and demand by adjusting the prices at which energy trading takes place. We have no reason to suggest that this will not continue, but we will be monitoring the market.
National Grid Gas has a number of tools to mitigate the risk of gas supply emergencies, including requesting that additional gas supplies be delivered to the national transmission grid. In collaboration with the Ministry of Business, Energy and Industrial Strategy (BEIS), National Grid Gas has put in place solid contingency plans in the unlikely event that the risk materializes. Read plans for gas supply emergencies from the network.
Will it affect energy bills?
Currently visible high wholesale gas prices may not correspond to the actual prices paid by all consumers.
This is because major energy suppliers buy much of their wholesale supplies several months in advance, which protects them and their customers from short-term price spikes.
Energy price caps are also in place to protect millions of customers from sudden increases in global gas prices this winter. Despite rising wholesale energy costs, the cap still saves 15 million homes of up to Â£ 100 per year.
The current global gas wholesale price situation, as described above, could have an effect on businesses.
Companies without long-term contracts may face higher costs, but we would expect companies with long-term contracts in place to have little exposure to today’s high wholesale prices. In the event of a supplier default, Ofgem would ensure that customers are transferred to a new supplier, so that they are not without energy.
How does the government help the poorest households?
Our energy price cap will protect millions of customers from sudden increases in global gas prices this winter.
We are also supporting low income households and supplying poor households with their energy bills in several ways, which demonstrates the government’s commitment.
This includes through:
- the Warm Home Discount which offers eligible households a reduction of Â£ 140
- Plus, winter fuel payments and cold weather payments will help those most vulnerable to heat their homes better during the colder months.
Vulnerable people and anyone in financial difficulty during this time should speak to their energy supplier, who will be able to discuss their personal situation and consider options to help them, including reassessment, reduction or suspension. payments. Emergency measures have been agreed between the government and energy providers to support those who need it most during the disruption caused by COVID-19, and that agreement remains in place this winter. Read the details of the agreement.
As noted in the Energy White Paper, we plan to extend the Warm Homes rebate until 2026, increase it to Â£ 150 and help an additional 780,000 retirees and low-income families with their energy bills. ‘energy. With a total of 2.7 million to get help, the vast majority of which to receive the money automatically, without having to apply as currently.
Cold Weather Payments provide vulnerable households receiving eligible benefits with financial support when the weather has been, or is expected to be, exceptionally cold. Â£ 25 is available to qualifying households for each 7 day period of very cold weather between November 1 and March 31.