Energy Outlook
September 2023
September 2023
The winter season has officially begun with some welcome mild weather. The energy markets are positively benign compared to a year ago, but this doesn’t mean we should get complacent – we are only at the beginning of the season, with plenty of scope for things to go wrong!
Most of the indicators are in our favour, with gas storage levels high in the UK and across the continent, and both industrial and household demand still suppressed compared to historical levels. However, a cold snap ahead of Christmas or an incident that restricts Liquefied Natural Gas (LNG) imports could change things dramatically.
We must also keep an eye on oil prices, which have increased by some 30% in the last quarter. So far this has not fed through into gas and power, but if sustained they could start to add significant upward pressure.
Energy Price History
The below chart shows the history of oil, gas, and power prices since 2021. The unprecedented scale of the increases seen last year overshadowed recent market movements. Although it is highly unlikely that prices will return to last year’s levels in the foreseeable future, there is still scope for volatility.
OIL
Oil prices have become decoupled from gas and power in the short term, but they are still important as a long-range driver of prices.
Focus has returned sharply to oil over the last quarter as prices have risen by around 30%, exceeding $90 for the first time since last year as the ‘OPEC+’ cartel has cut production with gusto, led by Saudi Arabia and Russia.
It remains to be seen whether prices will go on to breach $100 with conflicting reports on both US and Chinese economic strength and expectations that US shale oil production will not be increasing in response to the higher prices.
GAS
There was growing concern for gas supply over the summer with over half of Norwegian gas fields out of action for some heavy maintenance and Australian west coast LNG workers going on strike in early August following a pay dispute. Although the maintenance was planned, the scale of the works required gave rise to the risk of over-runs into the Autumn. Thankfully, everything was completed in good time and the pipelines are now back in full flow.
The situation in Australia could have led to a 10% cut in the worldwide supply of LNG – a serious shortfall over the winter period, especially with Asian demand still very high. After talks ran into September, the dispute was finally settled last week.
There is further positive news on gas storage levels, with the UK and Europe now over 95% full as winter begins; the highest levels for five years. Whilst all of this positivity could evaporate if there is an early and prolonged cold snap, the outlook for the season is a great deal more comfortable than a year ago.
ELECTRICITY
As ever, electricity prices will continue to take their lead from gas with some additional factors layered on top, although the outlook for those extra factors is mostly benign at the moment. Carbon prices have dropped following the Government’s announced watering down of the UK’s climate policies (in the short term, at least), and French nuclear output – which has been a concern for several years – has significantly improved, currently running 50% higher than a year ago.
The contribution of renewables to the generation mix continues to increase steadily, with strong wind output expected over the course of the season. The lower prices may encourage businesses and households to increase consumption, but current indications are that most consumers remain very careful about how much they are using. Prices are down, but not to pre-crisis levels.
Non-Commodity Costs
Non-commodity costs (or ‘non-energy’ costs) are charges added to your bill to cover the costs of the National Grid transmission network, local distribution costs, renewable and environmental surcharges, and subsidies to ensure the security of supply by subsidising the availability of capacity. These elements make up over half of a typical bill today. The chart below shows the history and how these are forecast to change for an average customer: 
The market has impacted several non-commodity cost elements, the most significant being as follows:
Contracts for Difference (CFDs): CFD costs for those on passthrough contracts were much lower than anticipated over the last year.This is because the CFD mechanism works by paying generators the difference between the market price and an agreed ‘strike price’. When the market is very high, generators have to pay the difference back. As the market drops back, CFD costs will increase again, but should not return to pre-crisis levels.
Distribution (DUoS): Distribution costs are recovered from actual consumption. This was much lower last year than anticipated, there has been a significant under-recovery which distributors are allowed to recoup through next year’s bills. Customers should expect a one-off jump in charges for this next year.
System Balancing (BSUoS): Historically, BSUoS charges were minimal and predictable, but with a combination of the growth in intermittent generation and extremely volatile wholesale energy prices, the costs have increased five-fold since 2015. The uncertain nature of the costs means that the potential range of prices in the years ahead is very high, although we are not expecting a reduction!
For more information, please get in touch with your UA Account Manager or call us on 0808 1788 170
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