Energy Outlook

January 2024






January 2024

As we find ourselves at the beginning of a New Year, we can look back at the last quarter for indications of what might lie ahead. Although the markets seem relatively benign compared to a year ago, there is still a lot happening with the escalating conflict in the Middle East and the ongoing war in Ukraine. As we move beyond the mid-point of the winter season, the next few months will be crucial to determine the direction for the year ahead: will a late winter cold snap test the seemingly comfortable gas supply? Will the Middle East situation worsen? In this update, we explore recent price movements and what has driven them to help inform your energy-buying decisions for 2024.


Energy Price History

The chart below illustrates the history of wholesale oil, gas, and power prices in the UK since the beginning of 2022. The unprecedented prices of two years ago dominate the picture; however, this doesn’t mean that the markets are now quiet. Although a return to these extreme highs is very unlikely in the foreseeable future, it remains important to keep a close eye on the market to take advantage of potential opportunities.




OIL

The chart below illustrates the history of wholesale oil, gas, and power prices in the UK since the beginning of 2022. The unprecedented prices of two years ago dominate the picture; however, this doesn’t mean that the markets are now quiet. Although a return to these extreme highs is very unlikely in the foreseeable future, it remains important to keep a close eye on the market to take advantage of potential opportunities.

GAS

There was growing concern for gas Gas storage stood at 98% at the beginning of the season, actually rising to 99.2% by the end of October thanks largely to very mild weather and what appears to be a permanent step-change in industrial demand across the continent. Although some cold patches have eroded this, it still stands at a very comfortable 90%, which inspires a lot of confidence with only a few cold months left to come. With that said, the biggest saviour has been Liquefied Natural Gas (LNG) which has been available in abundance, attracted by the prospect of good prices in the UK and European markets and unexpectedly low demand in Asia. Of course, whilst this also means that prices are unlikely to fall back to pre-crisis levels, it should drastically reduce the risk of the big spikes and volatility we saw last winter.

ELECTRICITY

As ever, electricity prices Electricity markets continue to be primarily driven by gas, although there are additional factors which also have an impact. Fortunately for buyers everywhere, these elements have almost exclusively helped to push prices down. One of these drivers is UK Carbon prices (which apply to all fossil- based generation, including gas), which have become de-linked from EU prices and are now trading at a significant discount. This flows straight through into wholesale power prices. A big concern over the last few years has been the availability of the ageing French nuclear fleet. I am pleased to report that this has steadily improved over the last year, with 51GW online at the end of December – the highest for several years. This means that more power can flow back through the interconnectors to the UK, helping to keep the market stable.


Non-Commodity Costs

Non-commodity costs (or ‘non-energy’ costs) are charges added to your bill to cover the costs of the National Grid transmission network, local distribution costs, renewable and environmental surcharges, and taxes to ensure the security of supply by subsidising the availability of capacity. These elements make up over half of a typical bill today. The chart below shows the history and how these are forecast to change for an average customer:

The market has impacted several non-commodity cost elements, the most significant being as follows:

Contracts for Difference (CFDs): Cfd costs for those on passthrough contracts were much lower than anticipated over the last year. This is because the CFD mechanism works by paying generators the difference between the market price and an agreed ‘strike price’. When the market is very high, generators have to pay the difference back. As the market drops back, CFD costs will increase again, but should not return to pre-crisis levels.

Distribution (DUoS): Distribution costs are recovered from actual consumption. This was much lower last year than anticipated, there has been a significant under-recovery which distributors are allowed to recoup through next year’s bills. Customers should expect a one-off jump in charges for this next year.

System Balancing (BSUoS): Historically, BSUoS charges were minimal and predictable, but with a combination of the growth in intermittent generation and extremely volatile wholesale energy prices, the costs have increased five-fold since 2015. The uncertain nature of the costs means that the potential range of prices in the years ahead is very high, although we are not expecting a reduction!


For more information, please get in touch with your Utility Aid Account Manager or call us on 0808 1788 170


DISCLAIMER – This Outlook Paper is provided for information purposes only and may include opinions expressed by Utility Aid Ltd (“UA”) which are not guaranteed in any way. UA does not represent or warrant that the information provided to you is comprehensive, up to date, complete or verified, and shall have no liability whatsoever for the accuracy of the information or any reliance placed on the information or use made of it by any person or entity for any purpose. Nothing in this Outlook Paper constitutes or shall be deemed to constitute advice or a recommendation to engage in specific activity or enter into any transaction.

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