Why Have Power and Gas Prices Collapsed?


Power and gas prices in the UK are at their lowest level in over three and a half years. The decline is almost reminiscent of the reaction to the 2008 financial crisis. The collapse can be attributed to several reasons.

A milder winter across Europe has meant a significant reduction in demand. Coupled with above seasonal normal temperatures for spring, demand has hit record lows. “Not only are we back to pre-2000 levels of demand, but we now see no chance of the 500 billion cubic metres (bcm) level being attained even in the case of an extremely cold winter,” Societe Generale analysts said.

Storage facilities have been at their highest in over 5 years. Due to the milder winter, there was little need to call upon gas reserves. With prices as low as they are, facilities continue to inject and take advantage of historical lows.

LNG shipments into the UK are unusually high, with three shipments expected this week alone. According to Gazprom Energy, LNG output currently makes up around 24% of the UK gas supply mix; two weeks ago it was hovering around 30% of the supply mix.

Day Ahead gas prices are down 44% this year, starting at 65.9 pence per therm in January and today at 36.75ppt. The cheaper prices have allowed for additional generation from gas fired power plants.

Coal prices continue to tumble with a global over-supply and reduction in demand. The recent US policy to shut down coal power plants has added further woes to demand picking up in the next few years.

Renewable energy projects have also contributed to a decline in power prices, with some 23 gigawatts of wind power alone added in 2012/2013 according to the European Wind Energy Association.

Will utilities lower their prices? Unlikely, however, those on flexible contracts will have seen, and continue to see, benefits from the market collapse.

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