“Wholesale gas prices in Europe are less expensive"
Falling wholesale gas prices have provided a glimmer of hope for UK households and the cost of living crisis.
The 2023 outlook indicated it would be a gloomy year for the economy, with strikes, the cost of living crisis and a potential global recession just some of the factors.
But wholesale gas prices have offered some optimism, with a sharp fall in recent days.
But why are they tumbling and what does it mean for consumers?
European prices for delivery in February 2023 fell by 4.3% to €73.7 a megawatt hour, far lower than prices in excess of €300 a megawatt hour in autumn 2022.
This is also lower than levels seen before Russia’s invasion of Ukraine, which pushed already expensive prices even higher.
Wholesale gas prices are falling mainly due to the recent mild weather in the UK and Europe.
These milder conditions have reduced demand for heating and complemented efforts by households and businesses to cut their energy usage – and bills.
Energy market traders have also been encouraged by the efforts of European nations to fill gas storage facilities – notably with liquefied natural gas sourced from around the world – to reduce their dependence on Russian gas.
This eases concerns about shortages this winter and increases optimism about replacing Russian supplies for next winter.
The fall in wholesale gas prices could eventually result in lower household bills if the falls are sustained and other factors do not send prices increasing.
But energy suppliers usually buy their gas and electricity in advance, allowing them to fix some of their costs.
This means that wholesale price falls are not immediately passed through to consumers.
There are several prices for gas depending on when it is due to be delivered and prices for later in 2023 are now higher than near-term costs.
Tom Marzec-Manser, the head of gas analytics at energy consultancy ICIS, said:
“Wholesale gas prices in Europe are less expensive than they were before the start of the war but Russia began reducing levels to Europe in the second half of 2021.
“We should be cautious of talk about gas prices reducing to normal levels because they are still exceptionally expensive.”
If the easing of wholesale gas prices is sustained, it could benefit consumers in a few months.
In 2022, Ofgem moved the change in its price cap from biannual to quarterly to more quickly reflect changes to volatile wholesale prices in bills.
In April 2023, it could top £4,000 but a reduction in wholesale prices could cut this number.
Effectively, the government’s energy price guarantee overrides the cap, cutting average annual bills to about £2,500 until April and £3,000 for a further year after that.
However, consumers are still paying more if they use more energy than normal, so if suppliers pass through falling wholesale costs then their bills should come down.
The government has intervened to cover wholesale energy costs for suppliers so if those costs decrease, so does the Treasury’s bill for this measure to protect consumers and businesses.
In November 2022, the government said it expected its energy price initiative to cut domestic bills to cost £25 billion this financial year and a further £13 billion in 2023-24.
The other positive from falling gas prices is the lower likelihood of power cuts this winter.
In October 2022, National Grid warned there was a small possibility of three-hour rolling power cuts if cold weather combined with shortages.
However, Britain averted power losses in December during a subzero cold snap without tapping several emergency measures, albeit at a cost.
As gas storage has increased, the threat of blackouts during the rest of the winter has appeared to be receding.