The combination of high demand and tight supply conditions has led to an increase in wholesale energy prices in order to help balance the market
Over the past week or so the UK and NW European gas markets experienced a series of events that led to higher gas demand and disruptions to gas flows. This resulted in energy price volatility.
So what happened?
Temperatures have been lower than seasonal normal levels which increased gas demand. This was followed by the closure of the Forties Pipeline due to a crack, shutting in c25 million cubic meters of gas production (c.10% of UK demand at this time of the year). Later on, the massive Norwegian Troll field, which feeds Norway’s gas exports was shut down due to a gas leak and power problems, reducing output by c.80 million cubic meters per day. Finally, an explosion at the Baumgarten Hub in Austria, in which someone tragically died and many were injured, disrupted gas flows. Baumgarten is a key centre connecting the European pipeline network with Russian gas exports and the disruption led to a declaration of emergency in Italy, which was experiencing severely cold weather. Lower than average gas storage levels in N.W. Europe and unavailability of Rough Storage in the UK meant that more supplies had to come from pipelines and LNG.
The combination of high demand and tight supply conditions led to an increase in wholesale energy prices in order to help balance the market. In the UK, wholesale gas price futures for January-18 increased from c57p/th in the beginning of the month to c67p/th this week, before retreating to c60p/th. Prices in the prompt were much more volatile as within-day coming close to 100p/th on the 12th of December.
UK wholesale power prices were also impacted as gas prices drive cost of power generation. Day ahead power prices rose from c£55/MWh late last week to c.£70/MWh before falling back towards £57/MWh. Prices have retreated as cold weather and supply disruptions have gradually eased, although repairing the Forties Pipeline may take several weeks.
Although some commentators raised security of supply concerns for the UK, we have seen enough flexibility in the market to balance demand and supply. This is likely to be the case in the coming weeks, provided that there are no further critical infrastructure outages and extreme weather conditions. Although there appears to be no serious security of supply issue at this time, these events are a reminder that demand and supply conditions can change rapidly, underlining the need for well-functioning markets without distortions to maximise security of supply to serve demand.