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Why Gas Prices Could Rise

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Last week, we reviewed the four potential reasons global gas prices could decline. However there is a strong counter argument as to why UK gas prices could rise.

Although there will be ample supply of global gas, the power is then placed in the hands of the producers who have the option to choose who to sell their gas too.

The UK can soon find itself in the same position as Japan post Fukushima. A heavy reliance on imports caused Japan to pay record high prices for spot Liquid Natural Gas. As pictured above in 2010, for electricity generation alone, the UK is reliant on 43.1% on imports. High volumes of dependency leaves the UK exposed to the markets where a focus on foreign policy will play an increasing role for energy security.

LNG already makes up around a quarter of the UK gas supply mix. This is unlikely to decrease with a contract signed between Centrica and Cheniere Energy for 20 years starting in 2015. The structure of the deal allows Centrica to sell the LNG on the global spot market, therefore there is no requirement for that gas to be used within the UK unless it is profitable.

The gas crisis is compounded with the continued closure of coal powered stations. As more become decommissioned, renewables are struggling to pick up the slack. As such gas may be forced to fill the void, Head of Ofgem Alastair Buchanan wrote in the Telegraph that “the amount of UK power generation from gas may have to go up around 30 per cent by 2020”.

Earlier this year we saw how UK storage facilities depleted due to increase in demand and an unseasonal time and length of winter. As a result, prices breached 100p/therm. Currently UK storage facilities are still not at full capacity, although there is ample time for them to be replenished. This does not conceal the fact that additional capacity is required to mitigate future price hikes.


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