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High energy prices here for years to come, expert warns

Editorial Board by Editorial Board
August 26, 2022
in UK
Reading Time: 4 mins read
0


Fuel costs
Fuel costs

Households and businesses have been warned that “the era of cheap energy is over”, after energy regulator Ofgem increased bills on Friday.

The UK will see gas prices remain high for years to come, even if some of the current extreme costs are eased, said Nathan Piper, oil and gas analyst at Investec.

As Europe cuts ties with Russia, the UK will become increasingly reliant on liquefied natural gas (LNG), which is transported around the world by ship, he said.

This is naturally more expensive than gas across the continents, and will mean prices remain well above historical averages.

In the 10 years before the current gas crisis, prices averaged around 50p per therm, a popular unit of measurement.

It is now closer to £6, a 12-fold increase.

“The crazy thing is that we’re experiencing record gas prices in the UK right now, in the middle of summer, which doesn’t normally happen,” Piper told the PA news agency.

He said if you want to buy your gas in advance by 2025 for now you will still pay several times more than in the past.

Data from the Intercontinental Exchange shows gas prices for winter 2024 and 2025 trading at almost 420p.

“For the UK in particular, we will be increasingly reliant on LNG imports to meet our gas demand.

“And as a result, we’re going to have to get used to higher gas prices over the long term,” Piper said.

“I think we have to accept that we will have to endure much higher gas prices than we have been.

“And the era of cheap energy is over.”

Energy costs
A gas burner in a kitchen appliance (John Stillwell/PA)

>
For households this will mean incredible pain this winter, which is unlikely to abate in the coming years.

The sheer longevity of the surge is perhaps the most unusual part of this crisis.

“From time to time you have gas price spikes. So for a very short duration, because you have a cold pot, Beast from the East, whatever, you have short-lived spikes in gas prices , and everybody’s like, ‘God, look at that,'” Piper said.

But then things used to quickly go back to normal.

That is not what is happening now.

Prices were already rising before Russia invaded Ukraine, but since then the situation has worsened.

Problems at France’s nuclear power plants have also pushed up electricity prices, a hot, dry summer has reduced power output from Norway’s rivers and low water levels in the Rhine have hampered coal transport in Germany

Asked what else could go wrong, Piper said LNG terminals could rupture and Russia could cut off its remaining gas flows to Europe.

“What we are confident is that all the LNG terminals are capable of producing gas,” he said.

“Many of these terminals are operating at near maximum capacity.

“And if you use anything at full capacity, there’s the problem that it could break.

“The other thing is that the Russians could completely shut down the Nord Stream 1 pipeline.”

Gas prices rose earlier this week after Gazprom announced it would shut down the pipeline for three days of maintenance next week.

“The question mark is whether they’ll turn it back on,” Piper said.

It remains to be seen what happens next.

“Blackouts will be prevented by what economists call demand destruction, where businesses and people reduce their use because they can’t afford to keep it going.

“Heavy industry in Germany in Europe is effectively shutting down because they cannot secure gas or electricity prices at a competitive level for the next two to three years,” he said.

“If it was an increase, you’d say ‘oh, that’s terrible, but we can actually set competitive prices for the next two years and still produce fertilizer, cement, glass, whatever, at a cheap price.'”

In comparison, US manufacturers are seeing much higher prices, but still well below what Europe is seeing, making them more competitive than their European counterparts.



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