UK gas prices to remain elevated this winter, prone to spikes

12th October 2017 | Residential Energy

British wholesale winter gas prices this winter should remain at the elevated levels seen so far this year due to high coal prices, uncertainty about French nuclear outages and low storage inventories.

Early this year, winter 2017 gas prices rose to levels not seen since 2015. The winter 2018 contract is currently trading at around 49 pence per therm and analysts expect it to average around 48p/ therm. Price spikes in the wholesale gas market, if prolonged, can have a knock-on effect on retail gas prices for households. There is pressure on utilities to lower consumer prices. The government set out draft legislation on Thursday for a price cap which would last until 2020.

National Grid said in its winter 2017/18 outlook earlier on Thursday that Britain can meet electricity demand this winter. However, analysts say that the gas market is not as relaxed about this winter as the grid operator. This is due to lower-than-expected nuclear output in France which has raised demand for gas there, high coal prices of around $90 a tonne, low gas storage levels and uncertainty about liquefied natural gas (LNG) deliveries.

“North-west Europe may struggle to balance if the winter sees an early cold snap or infrastructure outages and concerns over French nuclear outages continue to spook the market,” said Simon Wood, gas analyst at S&P Global Platts.

“The reality is the risks this winter are greater than ever. The loss of Rough (gas storage site), low stocks across the Continent and Chinese LNG spot buying driving JKM, the global LNG benchmark, to record levels,” he added.

European physical coal prices are around 20 per cent higher than in October last year. When coal is expensive, its main substitute natural gas becomes more competitive for power plants to burn for electricity. However, then demand for gas increases, thus raising wholesale prices.

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