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Where Next for UK Energy Prices?

The energy crisis that began in September of last year shows little signs of abating. This has frustrated hopes that we would see some stability return to the energy market in 2022. The Russian invasion of Ukraine has instead provided a significant new bullish impact on global oil and gas markets.

This week’s Spring Statement could be crucial, with hopes that the Chancellor will lay out new measures to support homes and businesses alike through the current crisis. Here we look at some of the issues that could impact on your organisation’s energy costs and what we can expect for the coming months.

Oil Prices

While the UK uses almost no oil directly for energy generation, it is still hugely impactful on both energy prices and wider business costs. Sanctions on Russian oil exports has trimmed supply to an already competitive market, driving up the cost of benchmark Brent Crude from just under $90 a barrel before the invasion to a high of $139 in early March, its highest point for 14 years. The past week has seen some bearish sentiment pull prices back down to around $110 a barrel, including hopes of a ceasefire in Ukraine and a predicted drop in demand in China as COVID cases rapidly mount.

However, the lag between crude oil prices and the price paid at the fuel pump can be significant, and both commuters and businesses alike will continue to contend with record petrol and diesel prices. In the short term the AA expects prices to stabilise, but the Treasury Committee has already been warned that further increases in global oil prices could see petrol rise above £2.40 a litre and diesel approach £3.

Gas Prices

Gas prices in the UK followed the pattern set by oil as they came close to record historic highs during the first week of March, jumping nearly 25% to 454 pence per therm. The loss of Russian gas supplies has so far been felt more significantly in mainland Europe, but the ongoing situation will also impact on UK imports. Workers have also turned away at least two shipments of Russian LNG in Kent, carrying enough liquefied natural gas to keep the lights on in the UK for 12 days. Workers have also refused to unload Russian consignments of LNG and oil in Wales, Merseyside and Orkney, with a tanker arriving at Ellesmere Port likely intended to supply Stanlow Refinery, further impacting on petrol prices.

The UK remains particularly exposed to global gas market increases due to both the lack of our own gas production and our limited amount of storage. The UK currently possesses around 9.7 TWh of gas storage, which is already more than half full. In contrast, the rest of the EU possesses over 1100 TWh of storage, with only around 25% currently in use.

Energy Prices

The domestic price cap is also a useful barometer for business energy as it can provide indications of expected future travel for energy costs. The jump in the energy price cap announced for April, which will take a standard tariff to just under £2,000 a year, was largely baked into prices before the impact of the invasion of Ukraine became clear. Energy UK have warned that prices could reach as high as £3,000 in a further increase to the price cap in October, depending on wider events in the energy sector.

The British Chamber of Commerce has warned of an upcoming ‘cost of doing business crisis’, with many businesses already experiencing a 250% increase in energy prices. Other raw materials have been similarly impacted, with manufacturers particularly badly impacted. One steel manufacturer highlighted an increase in the cost of a tonne of nickel from $10,000 to $86,000. This week’s Spring Statement will be crucial for providing clarity for businesses on how the Chancellor intends to support them through the crisis, with the BCC delivering a five-point plan of requests to support businesses.

Where Next for the price of energy?

While there are some hopes of a successful ceasefire in Ukraine, even if it is successful, it will at best see global energy markets slowly return to a status quo that is already one of the most volatile pictures ever seen. While a ceasefire wouldn’t materially impact on gas and oil supply immediately, markets are driven more by sentiment than actual supply and demand in many cases and it would likely provide important bearish sentiment.

Even without the current energy price crisis, UK businesses still face an increasingly complex energy management challenge. The House of Lords have recently criticised the Government’s lack of a credible plan to deliver net zero, leaving many businesses without a clear pathway towards achieving it. Last winter’s security of supply concerns from National Grid won’t have gone away, with the increased risk of volatile weather in recent years adding to concerns around ability to meet peak demand during periods when renewable energy isn’t generating optimally. Look out for a future article from Powerstar that will lay out in more detail the huge risk of disruption that could be presented by the rapid rollout of EV charging across the UK.

Taking control of your own energy generation and storage is one way for UK businesses to insulate themselves from a volatile energy market, as well as helping to deliver each aspect of the so-called energy trilemma: cost effectiveness, sustainability and security of supply. Transforming your site into a self-reliant microgrid through the use of on-site generation and battery energy storage is one way of achieving that, allowing your site to run independently of the grid.