Sky high gas prices and energy suppliers going out of business have been key headlines in the news over recent weeks, but what is actually happening?
Through the COVID-19 pandemic we saw much lower gas prices, which have been surging upwards since the spring and risen rapidly through the summer, a time when we would normally expect prices to be lower. As electricity prices track wholesale gas prices, they too have been rising. Day-ahead gas prices in August were 459% higher than August 2020, and are showing little abatement going forward. So why are prices so high?
There are many factors contributing to and supporting the high price of gas. There is strong competition for LNG deliveries between Europe and Asia, which means that LNG prices are very high. A tightening of EU carbon market rules has incentivised power generators to switch from coal to gas, despite the acceleration of wholesale gas prices. There have been many outages including in the Norwegian gas supply, British nuclear and gas power stations being offline longer than expected and a fire shutting down a French interconnector. Low gas supplies from Russia and low gas storage levels ahead of winter across Europe are also factors at play.
The default tariff cap is also adding to supplier’s woes as the amount a supplier can charge customers is not currently covering the costs of supplying their energy. Although the cap is set to rise come 1 October by £139 to £1,277 for an average dual fuel customer, we estimate this to still be over £200 below the cost to supply energy.
With surging prices suppliers are feeling the pinch and are finding themselves vulnerable to these rising prices. In the last two weeks four smaller suppliers (MoneyPlus Energy, PFP Energy, People’s Energy and Utility Point) have exited through Ofgem’s Supplier of Last Resort (SoLR) mechanism and there is high expectation that more suppliers will, unfortunately, follow. When prices are so volatile even the best supplier hedging strategies will come under strain. Many trading counterparties are withdrawing and reducing liquidity further, whilst some smaller suppliers have had their trading deals withdrawn or even pulled, further exposing vulnerabilities to market changes. We are also observing suppliers begin to suspend sales activity and taking on new customers as well as withdrawing tariffs from price comparison websites.
Suppliers have called on the government to offer support amid these unprecedented high prices. However, it has said that, because there is no issue of security of supply and no risk for consumers, it will not be bailing out any failing suppliers and that the default tariff cap will remain. The inevitable, and unfortunate, outcome will mean further supplier exits and consolidation in the domestic energy market. It will also certainly be adding pressure to supplier’s ability to meet their annual Renewables Obligation payments by the late deadline of 31 October.
Our recent report with UK law firm Shoosmiths, Consolidation in the domestic energy market, explores further the patterns in consolidation across the retail sector. You can read the report here.
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