Energy bills driven up by battle for gas

A LNG tanker The Japan nuclear disaster caused some LNG ships to be re-routed

In March 2011, an explosion at the Fukushima nuclear plant in Japan pushed up gas prices in the UK.

As nuclear power plants were taken offline, Japan chose to generate more of its electricity from imported gas.

Traders worried that cargoes of Liquefied Natural Gas (LNG) headed for Europe would be diverted to Japan - where higher prices were being offered.

This pushed up the price that energy firms had to pay to buy gas in the UK, a cost that may have driven up bills this winter.

Gas and bills

The main thing that currently drives UK bills is the changing price of gas.

Increases in the wholesale price of natural gas will not only drive up the cost of a household's heating, it will also increase the cost of its electricity.

That is because the price of electricity generated from gas power-stations tends to set the wholesale cost of power paid to all generators.

The more expensive the gas bought by power companies, the more expensive the electricity they produce and the more we pay in our bills.

What pushes up annual bills?
  • 1 Annualised household bill Wholesale energy accounts for 45% of household bills which also include tax, company profit, transmission costs and rising clean energy investment.
  • 2 Wholesale energy cost The wholesale energy cost for a dual fuel bill includes the cost of gas and the cost of generating electricity.
  • 3 Wholesale cost of gas The wholesale, on the day, cost of the gas or gas equivalent consumed by the average household over a year.
  • 4 Fukushima nuclear accident The Fukushima accident and subsequent conflict in Libya both helped to push up the cost of gas to UK consumers

The link isn't that exact though.

Like airlines with fuel, energy companies buy much of their gas in advance.

If they buy a lot when the price is cheap, then they won't necessarily need to push up the price to us when it becomes more expensive.

"It's quite misleading when gas companies say we see the wholesale price is increasing so we're going to have put up our prices. It's quite a convenient justification for something far more complicated," says James Allpress from ICIS Heren, which monitors the gas market.

However, over the longer term, even buying in advance can't prevent higher prices feeding through into bills.

Gas rises with oil

The biggest thing that drives the cost of imported gas is the cost of oil.

Many countries buy their gas on long-term contracts from one or two major suppliers.

Germany, for example, buys much of its gas from Russia and recently completed a new pipeline, the Nordstream, to make more available.

And many suppliers, especially countries that also produce oil, such as Russia, tend to tie the price they charge for these contracts to the oil price.

Start Quote

It is the oil price that has propped up the spot price [of gas]”

End Quote Professor Jonathan Stern Oxford Institute for Energy Studies

The UK has few long term contracts, but because so much gas is tied into them, the UK price tends to change with the oil price.

So when oil spiked in 2008, so did the cost of gas in the UK, and so did consumer bills.

Most recently, the conflict in Libya reduced exports of Libyan oil and gas.

Not only did this put up the price of gas in regions that bought from Libya, it also increased the oil and gas price worldwide, potentially driving price rises in the UK over the summer.

"It is the oil price that has propped up the spot price and very strong demand for LNG in Asia, post Fukushima," says Professor Stern from the Oxford Institute for Energy Studies.

The spot price refers to the price paid for gas bought immediately.

Nuclear fallout

But, unlike oil, gas is also heavily influenced by local supply and demand.

During the 2009 recession, gas prices were broadly the same around the world, at around $4-5 per million British thermal units (MMBTU), according to figures from Platts.

But by 26 October this year, gas in the US was down to $3.6, in the UK it had reached $9.9 and in Asia it reached $17.5 - more than three times its 2009 price.

In Asia, rising demand from fast-growing economies, such as China, has driven up the price dramatically.

Start Quote

As the earthquake hit, the UK gas price was trending down, and then it started trending up”

End Quote James Allpress ICIS Heren

The March Fukushima disaster, which increased demand from Japan, only made the situation worse.

In the US, by contrast, the discovery of vast shale gas deposits (gas trapped in rocks) has driven the price down.

New technology allowed gas to be extracted, where before it would remain underground.

The UK is somewhere in-between. It does need to import gas from global markets, including Qatar, which means global demand pushes up local prices.

"Just as the earthquake hit, the UK gas price was trending down, and then it started trending up, purely on trader sentiment," says Mr Allpress.

The UK and Northern Europe have local gas supplies and relatively slow economic growth, so they seem to be holding back prices compared with Asia.

Future uncertainty

The International Energy Agency (IEA) has predicted a golden age for gas in the next decade, driven by new supply from unconventional shale gas around the world and rising demand in Asia.

German President Angela Merkel and Russian President Dmitry Medvedev start the Nordstream pipeline New pipelines such as the Russia-Germany Nordstream could keep prices in check

But what that means for the price in the UK is uncertain.

The IEA's world energy outlook predicted that UK gas production from the North Sea would fall by over 50% during the next 25 years.

This means the UK will be more dependent than ever on imported gas, and competing for it with Asia and the rest of Europe.

In the wake of Fukushima, Germany has abandoned its nuclear programme, potentially increasing its demand for gas in Europe.

Norwegian firm Statoil, which provides much of the gas to the UK, says this means we should make a long term deal or risk higher prices.

They say the government's current policy relies on gas as a backup to new wind and nuclear generation.

"The likelihood is that much of the gas will go elsewhere, or that the price tag of having that gas as backup fuel is going to be extremely expensive," warns Rune Bjornson, senior vice president for natural gas at Statoil.

There are also concerns about shale gas outside the US.

France has already banned shale exploration and it is suspended in the UK due to tremors linked to drilling.

"If unconventional gas does get produced in Europe, it will cost a lot more than it does in the States," says Mr Allpress.

But there is a chance the price could stabilise, or even fall.

Gas from the US could be exported - BG group recently signed a deal with US firm Cheniere energy to do just that.

That would help bring global prices more into line with each other.

And UK energy bills may come to be more reliant on the cost of building nuclear power stations and wind turbines than the gas price.

Ultimately though, events, such as earthquakes, wars, technological breakthroughs and changes in economic fortunes will continue to have a bigger impact on the changing cost of power than anything else.

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