Energy bills are driven by both the price of
energy on the wholesale market and Third Party Costs (TPCs). TPCs include
non-energy costs set by the government, network, policy and system costs and
electricity transmission/distribution costs.
The biggest single cost on a bill is the price of the energy.
The wholesale cost of the energy makes up approximately 45% of an electricity
bill and 65% of a gas bill, with the remaining being TPCs, which have been
continuously rising in recent years and can be volatile.
This pricing report focusses on the energy element of a bill
to help you keep track and understand the wholesale energy market and the
factors affecting the price of your contracts.
A perfect storm of opportunity … as many of you will be aware the prices of wholesale energy had fallen back significantly in 2019, hitting a 3-year low of £35MW in the last week of December.
Following the assassination of a top Iranian official, General Qasem Soleimani, by the US on Iraq soil has exacerbated tensions in the Middle East and has already had a profound impact on oil prices, pushing them up to a seven-month high.
The massive uncertainty around the prospect of war is likely to significantly drive prices up even further in 2020, so our advice is to fix a renewal contract now while prices still remain favourable.
Bullish Factors (upwards pressure):
- Fallout in the Middle East between US and Iran
- The increasing rise in the price of oil
- Reduction of Russian gas flows into Europe since the beginning of the Russia/Ukraine transit deal
- Uncertainty around leaving the EU with a deal, Brexit is set for 31st January
Bearish Factors (downwards pressure):
- Milder weather causing lower demand
- LNG vessels arriving in the UK, to an already oversupplied system
Gas and Power
Last week gas contract prices traded lower, pressured by bearish weather which led volumes of storage to build and a busy LNG schedule. This resulted in there being an excess of supply in the gas system, which helped to keep contract prices low. The windy weather helped to keep electricity contract prices low. Wind generation picked up and renewables helped to supply a larger share of the system and allowed it to be less reliant on gas and oil to generate power.
Following the trend across the board, the
decrease in prices we had seen since last month was reversed after the
US-Iran air strike. Electricity contracts increased in price, tracking the
gains within the gas and oil market. The increase in gas prices was also fuelled
by the reduction of Russian gas flows into Europe since the beginning of the Russian/Ukraine
Brent crude increased last Thursday,
bolstered by the US air strikes against Iranian backed Hezbollah which attacked
an Iraqi military base, killing a US personnel.
Since then, Brent crude has continued
to climb even higher in price, stoked by fears of a wider conflict within
the Middle East following further US air strikes which killed General Qasem
Soleimani, head of the Iranian Revolutionary Guards’ elite Quds Force.
This morning, Brent crude briefly touched
$70.00/bbl with events in the Middle East being closely watched. Compared to
the start of December, WTI has increased in price by 13.9% and Brent by 14.2%,
with it expected to increase even further, with Iran vowing revenge for
the killing of General Qasem Soleimani.
Current price standings:
Brent Crude = $69.67/bbl
WTI Crude = $63.87/bbl
Iran’s most powerful military commander,
General Qasem Soleimani, was killed at Baghdad airport, along with other
Iran-backed militia figures, early last Friday in a strike ordered by US
President Donald Trump. He was the head of the Quds force of the Revolutionary
Guard and often likened to a shadow minister.
President Donald Trump’s claim that the drone strike made Americans safer is being challenged by cascading events that have appeared to leave the US more vulnerable and isolated. Mr Trump said the general was “directly and indirectly responsible for the deaths of millions of people”. America’s top military officer said he is “100 percent” confident Qassem Soleimani approved the attack on an Iraqi military base at the end of last month that killed an American.
Soleimani’s killing marks a major escalation in
tensions between Washington and Tehran and has set off fears of escalating
retaliatory actions by Iran and the United States, and of a broader regional
conflict. Iran promised “severe retaliation,” and many analysts fear a
broader regional war. At a minimum, attacks on U.S. military installations in
the Middle East are expected.
Effect on Uranium Enrichment
Iran also said on Sunday that it no longer will comply with limits on
uranium enrichment (which is used to make reactor fuel but also nuclear
weapons) under its 2015 nuclear pact.
The agreement, known as the JCPOA, constrained Iran’s nuclear programme
for a set period in a largely verifiable way. But its greatest significance –
even more so given the current crisis – is that it helped to avert an imminent
Donald Trump abandoned it in 2018 and Iran were expected to announce
their latest stance on the agreement last weekend. If they up their level of
uranium enrichment it would significantly reduce the time it would take to
obtain suitable material for a bomb.
Effect on Oil Prices
Oil prices surged and stock markets in Asia fell on Monday morning, as
the impact of General Suleimani’s death ricocheted around the world.
The sudden escalation in tensions in a region that supplies much of the
world’s petroleum has roiled oil markets. The price of Brent oil, the
international benchmark, jumped above $70 in futures trading as markets
digested a steady flow of news over the weekend.
Analysts at Capital Economics have warned that the price of oil could
spike to $150 a barrel if the bellicose rhetoric between the two countries
turned into action.
“The price of oil would soar in the event of full-blown military
conflict in the Middle East,” said Alexander Kozul-Wright, a commodities
economist at Capital Economics.
The potential disruption to the global oil market from the conflict in the Gulf is severe. To ensure you aren’t affected by any potential surges in oil prices over the next coming weeks, lock in a price to secure your future contract now.