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Will falling gas prices and UK surplus lower energy bills?

SIMON LAMBERT: The UK’s weird gas surplus has pushed market prices down… but we can’t take advantage of it to lower our energy bills

Inflation has hit 9 percent, a 40-year high, and energy prices are among the main villains in the rapidly rising cost of living.

However, as a measure of the often impenetrable world we live in, UK wholesale petrol prices have collapsed.

The energy price cap has just shot up 54 per cent and we are repeatedly warned that both it and our bills will go up again in the autumn, but the UK’s main wholesale gas price has taken a beating.

Figures modeled by the ONS that the CPI, which was adopted for an official inflation target of 2% in 2003, would have last been above the April 2022 level of 9% in March 1982

Figures modeled by the ONS that the CPI, which was adopted for an official inflation target of 2% in 2003, would have last been above the April 2022 level of 9% in March 1982

Interestingly, Britain has a glut of petrol and what is often referred to as the spot price has crashed.

This measures daily prices, what you would pay now for gas delivered tomorrow, and the UK benchmark NBP wholesale gas price has fallen well below the European benchmark TTF measure.

So will it lower your bills and what’s going on here?

To answer the question above, unfortunately not now, but it does provide a glimmer of hope for the next round of price caps.

Wholesale gas prices in the UK have plummeted, while European prices have remained high, due to the difficulty of moving gas to where it is needed.

The world, and continental Europe in particular, is trying to avoid Russian gas, but that means shipping gas, which is done as liquefied natural gas (LNG), and there are a limited number of terminals to receive it from tankers.

As gas prices skyrocketed and Europe was hit with a double whammy and tried to sanction Russia for its invasion of Ukraine, energy traders saw an opportunity to sell to Europeans who no longer wanted to buy gas from Russia.

Large amounts of liquefied natural gas (LNG) have been redirected to Europe in recent months to take advantage of higher prices.

However, continental Europe does not have enough terminals where tankers can dock and where LNG can be converted back to gas and piped, while the UK has three main terminals accounting for around a fifth of Europe’s total capacity.

Therefore, the UK has been receiving a lot of gas and sending it through pipelines to Europe, but these have been operating at full capacity, which has led to a surplus of gas in the UK.

This has been particularly the case as people now use less gas to heat their homes due to the arrival of spring.

The laws of supply and demand (also known as too much of something people don’t want enough of) mean that the price of gas in the UK has fallen below the price in Europe, where it can’t get there fast enough.

UK electricity prices have also fallen substantially, as a rise in wind and solar power has combined with the falling cost of gas-fired generation.

Which brings us to the question why this doesn’t reduce our bills.

The main reason you won’t pay less money for home heating or hot water tomorrow, even though gas is cheaper, is that most providers buy well in advance.

They can’t take the next day’s low prices and pass them on to you, because they’ve already agreed on a price for the gas and electricity you’ll use tomorrow.

Wise providers plan six months to a year, or even more, in advance. Many of those who did not go bankrupt when the energy crisis hit. The biggest flop, Bulb, for example, was reported to be paying rates much closer to wholesale prices and got caught when they spiked.

LNG storage tanks on Kent's Isle of Grain, one of Britain's liquefied natural gas terminals

LNG storage tanks on Kent’s Isle of Grain, one of Britain’s liquefied natural gas terminals

But if the drop in the UK wholesale gas price doesn’t cut your bills now, it surely could in the future.

Unfortunately, it’s not that simple. In what seems like a quintessential piece of Britain’s lack of forward planning and core competency, we don’t have enough gas storage to tap into.

Shortage of gas storage means the UK cannot hold onto large quantities of this cheap gas for when we need it next autumn and winter.

Instead, we are exporting as much gas as we can through pipelines to Europe, where there is gas storage. Eventually the spillover effect will wear off and gas prices between the UK and Europe will find some sort of equilibrium.

At that time, it will probably be autumn and we will start importing gas into the country from European storage facilities, through those same pipelines.

About half of Britain’s gas comes from the North and Irish Seas, a third is imported through pipelines and the rest arrives as LNG.

Hopefully, if LNG keeps flowing into the UK and Europe, gas could be cheaper than forecasts suggest in the autumn, but we can’t take advantage of the much cheaper stuff coming now.

You would like to think that we in Britain would learn a lesson from the energy crisis and this strange story in between. Don’t hold your breath.

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