Are energy prices on the increase this summer?

What Influences UK Energy Prices?

What influences UK energy prices?

  • Global energy markets
    • Brent crude oil
    • Coal costs
    • Carbon markets
    • Liquid natural gas
  • The world economy
  • Environmental factors

Read on to find out more about each contributing factor…

UK energy market fundamentals

UK energy prices are derived from a number of drivers that either directly influence prices through cost, or indirectly through sentiment.

  • Cost effect is predominately the outturn of supply and demand on a worldwide basis.
  • Sentiment is the evaluation of a risk associated with short and long term predictions that may influence all elements of the supply chain.

Factors that influence the UK energy market include:

  • UK power generation
  • North Sea exploration
  • UK gas storage
  • Worldwide exports

Energy markets

When looking at the raw cost of energy, the main driver of price direction is the cost of oil in US dollars. When the price changes for a barrel of oil, this, in turn, changes the cost of gas.

Gas in the UK is still consistently the largest used fuel in the generation of electricity, hence the correlation in pricing.

Of course, that is not the only factor that determines the price for the UK as gas is also supplied from multiple sources, such as, LNG tanker deliveries, North Sea exploration, European supplies and UK storage which will have been stored at a previous time and at a different price to current markets prices.

Energy is traded in several centres, such as TTF in the Netherlands, which trades gas.

The effect of the world economy on UK energy prices

At a local level, the impact of activities across world markets will impact pricing. The strength of Sterling in comparison to the US dollar and the Euro has a direct effect on pricing.

Indirect influence comes from sentiment driven by geopolitical situations where future price risks may be envisaged such as conflicts in the Middle East or North Africa where large supplies of oil and LNG derive. Production constraints suggested or agreed from OPEC may not have any effect on deliveries but still will have an impact on market pricing.

No doubt the change in disposition of the US administration away from climate change measures will make a significant difference to future energy markets.

Environmental factors that affect energy prices

Within the UK we have committed to the Kyoto agreement to reduce carbon emissions by 2020 and in so doing the government has legislated across different levels of the energy infrastructure. The majority of coal-fired electricity generation has been closed in recent years pushing reliance on more renewable and less carbon emitting but arguably more costly forms of supply. In addition to this,  greater levies have been imposed on the cost of each tonne of carbon produced which in turn is passed on to the end user.

Recently, with unusually windy weather, we have had more energy generated from renewable sources (wind turbines, solar panels and tides) than from conventional sources. Indeed, with climate change, we have seen a slow but consistent alteration to the energy demands, in particular with electricity and so the transportation and distribution charging has been amended to reflect this through legislation which impacts the price businesses pay, especially for electricity used between 4.00pm and 7.00pm on weekdays.

UK energy price breakdown

Raw commodity cost60%
National grid delivery30%
Govt. taxes and supplier margins10%

Use the infographic below to find out what contributes to energy prices in the UK:

 

What impacts energy prices