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Why the UK's tumbling gas price and surplus won't lower energy bills

Daily Mail logo Daily Mail 19/05/2022 Simon Lambert for Thisismoney.co.uk

Inflation has hit 9 per cent - a 40-year high – and energy prices are among the chief villains in the rapidly rising cost of living.

Yet, as a measure of the often-impenetrable world we live in, wholesale gas prices in the UK have collapsed.

The energy price cap has just rocketed 54 per cent and we are repeatedly warned that it and our bills will go up again in autumn, but the main UK wholesale gas price has taken a beating.

ONS-modelled figures that CPI, which was adopted for an official 2% inflation target in 2003, would have last been above the April 2022 level of 9% in March 1982 © Provided by This Is Money ONS-modelled figures that CPI, which was adopted for an official 2% inflation target in 2003, would have last been above the April 2022 level of 9% in March 1982

Curiously, Britain has a glut of gas and what is often referred to as the spot price has tumbled.

This measures day ahead prices, what you'd pay now for gas delivered tomorrow, and the UK benchmark NBP gas wholesale price has fallen way below the European benchmark TTF measure. 

At one point earlier this week, it was at the lowest level for 18 months and cheaper than before energy prices started spiralling. (Sky News' Ed Conway posted some charts on Twitter).

So, will this cut your bills and what is going on here?

To answer the former question, unfortunately not now, but it does provide a glimmer of hope for the next price cap round.

UK wholesale gas prices have tumbled while European prices have remained high, due to the difficulty of shifting gas to where it is needed.

The world and particularly mainland Europe is trying to avoid Russian gas, but that means getting gas shipped in, which is done as liquified natural gas (LNG), and there are a limited number of terminals to receive it from tankers.

As gas prices spiked and Europe got hit by a double whammy of that and trying to sanction Russia for its invasion of Ukraine, energy traders spotted an opportunity to sell to Europeans who no longer wanted to buy Russia’s gas.

Lots of liquified natural gas (LNG) has been redirected to Europe in recent months to take advantage of higher prices.

However, mainland Europe doesn’t have enough terminals where tankers can dock and LNG can be turned back into gas and piped out, whereas the UK has three major ones representing about a fifth of Europe’s total capacity.


Gallery: These are the countries that produce the most oil, ranked (Lovemoney)

The UK has therefore been receiving lots of gas and sending it via pipelines to Europe, but these have been operating at capacity leading to a surplus of gas in the UK.

This has been particularly the case as people are now using less gas to heat their homes due to the arrival of spring.

The laws of supply and demand (aka too much of something that people don’t want enough of) means that the price of gas in the UK has tumbled below the price in Europe, where it can’t get to fast enough.

Electricity prices in the UK have also fallen substantially, as an increase in wind and solar power has combined with the falling cost of gas-fired generation.

Which brings onto the question of why isn’t this lowering our bills?

The prime reason why you aren’t going to pay less money to heat your home or hot water tomorrow, despite gas being cheaper, is that most suppliers buy well in advance.

They can’t take advantage of low day ahead prices and pass them on to you, because they have already agreed a price for the gas and electricity that you will use tomorrow.

Sensible suppliers plan six months to a year, or even longer, ahead. Many of those that didn’t went bust as the energy crisis erupted. The biggest failure, Bulb, for example, was reported to be paying rates much closer to wholesale prices and got caught out when they soared.

LNG storage tanks at Kent's Isle of Grain, one of Britain's liquified natural gas terminals  © Provided by This Is Money LNG storage tanks at Kent's Isle of Grain, one of Britain's liquified natural gas terminals 

But if the UK wholesale gas price fall won’t cut your bills now, surely it could do in the future?

Unfortunately, it’s not that simple. In what seems a quintessential piece of British lack of forward planning and basic competency, we don’t have enough gas storage to take advantage.

A shortage of gas storage means the UK can't hold onto lots of this cheap gas for when we need it next autumn and winter.

Instead, we are exporting as much gas as we can through pipelines to Europe, where there is gas storage. Eventually the surplus effect will ebb away and gas prices between the UK and Europe will find some form of equilibrium.

At which point, it will probably be autumn and we will start importing gas back into the country from European storage facilities, through those same pipelines.

About half of Britain’s gas comes from the North and Irish Seas, a third is imported through pipelines, and remainder comes in as LNG.

Hopefully, if the LNG keeps flowing into the UK and Europe, gas could be cheaper than forecasts have suggested it will be in autumn, but we can’t take advantage of the much cheaper stuff coming in now.

You would like to think that in Britain we would learn a lesson from the energy crunch and this odd tale in the middle of it. Don’t hold your breath.

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