How gas supply issues are driving energy prices to new highs
High energy prices are set to remain for some time yet. Here we provide more context on the international influences on the price of gas and electricity here in the UK.
July saw energy prices spike to new highs, with the effects of above average temperatures and low rainfall across Europe and USA hitting the power market hard. Since the start of the year, many parts of central and north-west Europe have seen below average rainfall and wind.
The UK has seen out of the ordinary weather too, and both international and domestic climate conditions are exacerbating the energy crisis. The UK’s energy market is inextricably linked to the global market, primarily Europe, so to understand the current crisis we have to look at what is happening in other countries.
These are the major factors in driving the new record high energy prices.
How drought affects electricity supplies
The Iberian Peninsula and Scandinavia are two areas of Europe that rely heavily on hydroelectric dams to provide power. However, due to dry conditions, reservoir levels are currently at 10-year lows. This has left Spain more dependent on importing electricity from France and neighbouring countries during times of high demand.
Scandinavia has a lot of its own gas supplies, so the reduction in hydroelectricity generation isn’t having as big of a direct impact on the region. Nevertheless, to preserve gas for winter and maintain current reservoir levels, Norway is restricting the amount of power it exports to other countries via interconnector.
This is a blow to the UK, as a new interconnector between us and Norway was expected to provide electricity during the cold winter months. This has had a direct impact on increasing UK energy costs.
Russian restrictions
Russia has continued to be the biggest influence on driving rising prices. The country is currently exporting gas to Europe at 20% capacity. The state-owned gas exporter, Gazprom, has said this supply reduction is due to delays in the return of a gas turbine for the Nord Stream 1 Pipeline that was being repaired in Canada, due to the sanctions imposed on Russia for invading Ukraine. However, some suspect the country is also using gas supplies to put pressure on Europe.
Either way, the lack of supply is keeping the wholesale energy market volatile, conditions which are expected to continue for some time.
As we head towards the end of the summer, unless Russia increases its gas flows to Europe, market prices will continue to rise. This is a similar position to when the gas crisis kicked off in October 2021, when tight winter supplies forced prices to rise until demand dropped instead.
Gas prices impacting renewables
We have talked a lot about gas here. As a Good Energy customer, you may be thinking ‘but I buy renewable electricity, why does this affect me?’
How the price of gas drives the whole energy market is something we have written about on this blog before. Effectively, the market price is set by the last generator on the system, and in the UK that is usually gas.
The blog also explains why despite matching all of our customer’s usage with power bought directly from renewable generators, we are not immune to these market dynamics. A couple of new factors have exacerbated this.
The first is the contracts we agree with renewable generators. We are constantly renewing these, and as the market stays high, we are competing to renew at increasingly high prices. This does not mean renewable generators are ‘profiteering’ — our generators are largely small businesses or community schemes who reinvest their profits. Learn more about them here.
The other is related to gas. Green gas. A significant portion of the electricity we supply comes from anaerobic digestion — the process of turning organic matter and waste into energy. It’s a useful portion of a renewable mix as it is not dependent on the weather. These digestors are commonly run by farmers, and another knock-on effect of the conflict in Ukraine is the scarcity of fertiliser. Which means many farmers are having to use the waste they would otherwise have used to generate energy on their fields. This in turn is introducing further volatility and higher prices.
Looking ahead
The ongoing issues with the energy market continue to highlight the need to diversify the mix of renewable infrastructure. Not just to keep prices more stable and affordable, but to tackle the climate crisis.
Good Energy remains committed to supporting our customers and renewable generators at this extremely challenging time. If you’re looking for energy saving advice, we have published a number of articles about saving energy at home, and in the workplace.
If you are a Good Energy customer and are finding it difficult to afford your energy, please do get in touch. You can also get free, independent advice about your energy bills from organisations including Citizens Advice, National Debtline and National Energy Action.
