• Dr. Russell Layberry

What's going on with energy prices?

All energy prices have increased recently but the focus has been on gas, the UK and Europe.


Gas


Prices for gas have risen from 50 p/therm in January 2021 to 234 p/therm on October 20th in the UK and Europe. Intra-day trading had the price over 400 In early October showing extreme volatility. (divide by 29.3 to get p/kWh). Rises have been less extreme in the US where they have doubled.

Electricity


System balancing prices have risen from 9 p/kWh in January to 20 p/kWh in October 2021 in the UK. System prices are only a part of the final bill.

Oil


Crude oil prices have risen from $55/barrel in January to $85/barrel in October (about half June 2008 peak).

Coal


US coal prices have risen 4 times from January until October 2021, from 66 to 236 $/ton.

Tariffs

Due to government interventions such as price capping and that many people (commercial and domestic) pay a fixed tariff — these price rises have not made their way into bills yet. Some UK electricity tariffs are based on real time prices (Octopus Agile) and large companies tend to pay a real-time price for their energy. For many, however, the prices rises will be reflected in their bills when their current contract expires.


As a result of suppliers charging consumers less for energy than they themselves are paying for it, suppliers are going bankrupt — especially the smaller ones who offered great tariffs but had no plan to deal with wholesale energy price rises. The larger companies will take investment in order to retain customers (who they will get their money back from in future). The largest will absorb the costs for now but will lobby the government either for subsidies (to retain the price cap) or an end to the price cap.


Ultimately consumers will pay.

Historical context

These kind of extreme price rises have been seen before — notably in the Summer of 2008. Due to the banking sector collapse, a lot of speculative money and other investments moved into commodities. The prices collapsed shortly afterwards as the economic depression led to lower energy demand. The oil price for example hit 140 $/barrel in June 2008 from a long term average of between 20 and 40 $/barrel. The price had collapsed down to the long term average by December.


There were sustained high oil prices from February 2011 to August 2014. Many at the time said this was the ‘new normal’ — but prices dropped again to their log term average and have fluctuated between 30 and 85 $/barrel since.

Reasons

The following is a selection of reasons given in the media for high gas prices:


  • A cold winter in Europe last year put pressure on supplies and, as a result, stored gas levels are much lower than normal

  • There's been increased demand from Asia — especially China — for liquefied natural gas

  • Refineries in the US being shut down by Category 4 Hurricane Ida

  • A drop in supplies from Russia

  • A blaze at the electricity interconnector at Sellindge shut down the undersea power link with France

  • Economies emerging from the pandemic

  • Low wind speeds

  • Production falling in parts of the world, including in the British sections of the North Sea, because of disruption caused by the pandemic

  • More people working from home

Some of the above reasons are more likely than others and it's not clear how much the prices are driven by speculation. Many issues above are the sorts of things that happen without drastic prices rises. Either this is a ‘perfect storm’ of reasons coming at the same time — or more likely it can be put down to the pandemic response. A huge drop in demand followed by a surge — with some essential works being delayed due to pandemic restrictions or staff absences.


When will this end?

It is likely this will continue for the Winter 2021/2022. By Spring prices will either remain high if we had a cold winter or drop if we have a mild one. Longer term prices will be driven longer term supply and demand rather than shocks and speculation. When we return to long term prices — no one knows.


What does this mean for energy efficiency?

Simple Payback measurements of the value of energy efficiency projects are calculated by the initial investment divided by the annual energy savings. This gives a number of years over which the project pays for itself. Some companies use 3 years as a rule of thumb, others 7 years. There is little that pays back in 3 years (perhaps insulation) and companies with a 3 year rule just replace broken equipment with more efficient new models. LED replacement programs come in at around 4 years and solar panels 6 years. Doubled electricity prices would put payback times at 2 years and 3 years respectively.

Boilers have lifetimes of 20 years and up and it is rarely worth ripping them out to take a few % increase in efficiency. Quadrupled gas prices would make it worth replacing boilers ‘when they are at the end of their natural life’ rather than struggling on with them for another 20 years. Smaller interventions such as replacing burners would be worth looking at.


Summary

High energy prices may stay for 6 months or several years. They make all energy efficiency projects worth looking at. You can start by having your building energy audited by a specialist. See Pilio's services for more information.

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