Year-ahead gas and power prices have risen sharply in the last week, with the weather the main factor. A cold snap from the end of this week and deepening further into January has contributed to the rise in energy prices. Concerns over the ability of the gas and electricity supply system to meet the expected increase in demand have pulled prices back beyond their Christmas highs. Indeed, gas prices for delivery close to the present have risen to two year highs on the cold weather.
The expectations of cold weather for this period had been there since the end of the year. However, as the expected cold snap approached, forecasts indicated it could be deeper and longer than earlier thought. Furthermore, the conditions are expected to be even colder in Continental Europe. The resulting higher UK energy demand is price supportive in itself. However, colder weather in Europe also increases the cost for UK to import gas or electricity as Britain competes with Europe over the available supplies.
With UK storage stocks down sharply year-on-year due to the much-publicised problems at the Rough site, the UK has less flexibility to deal with cold snaps. This increases the dependency on imports. This is also being impacted by weak LNG deliveries. There remains only one cargo for delivery this month, with higher Asian energy prices encouraging LNG supplies to go East rather than towards Europe.
The higher gas prices are supporting the electricity market, but concerns over supply and demand are adding to this pressure. The cold weather is forecast to pull peak power demand up sharply towards highs for the season. At the same time, wind generation levels are expected to drop next week and National Grid are currently forecasting negative supply margins.