Despite the UK’s recent and prolonged heatwave, where July saw average temperatures around two degrees higher than the seasonal average, we have seen the price of gas and power continue to rise throughout the summer period. When the temperatures peak, you would rightly expect to see a decline in the price of energy, as homeowners and businesses use less power for heating their premises in response.

So what is behind the converse upward price trend?

The heatwave itself both here and on the continent has driven up the price of gas and power as the result of a simple supply and demand equation. The effects of the heatwave on supply have been three-fold.

Firstly, the lack of rainfall has reduced the level of European hydropower.

Secondly, the reduced water levels have made nuclear power unviable, due to the inability to use water for cooling the power plants.

Thirdly, we’ve seen low wind generation – the lowest level, in fact, since July 2016.

Together, the reduced nuclear, hydro and wind power output has increased demand for gas for power by 14%, compared to this time last year.

The significantly higher demand for gas for power has been compounded by strikes by workers on the North Sea gas platforms, which has reduced the supply of gas to the system.

And the final factor contributing to the high prices is the significantly lower levels of LNG imports. This has been caused by high demand for LNG in Asia and supported by a higher price in the Asian market, which is having the effect of keeping shipments away from other markets.

Short term outlook

Although the high prices we are seeing are mainly being driven by short term issues, higher temperatures than the seasonal average look set to continue even through to October. Along with planned maintenance on the UK continental gas shelf, and the closure of the Rough storage facility last year, sustained limited gas supply, compounded by higher demand as a result of continued low wind output, will continue to drive up prices.

Longer term outlook

When we priced for our August buying basket, we recommended our customers opted in, in most cases. Unless customers were joining us for the first time we could not realise savings against their current prices, and many customers saw significant increases, this is despite the reduced prices offered through the basket purchasing mechanism.

We would love to tell you that we think the prices will fall – but the combination of non-commodity costs and the energy costs themselves means that this seems unlikely in the near future.

You may be wondering how much impact the supplier you select can have on the cost of your energy. The truth is only between 5 and 10% of your energy bill is accounted for by the supplier’s costs. In order to achieve the best prices possible for our customers in the tendering process, we always procure prices from a range of suppliers and we work hard to reduce the margin suppliers charge. For more information on the factors that comprise your energy bill, see our new infographic.

For an informal discussion about your business’s energy supply please speak to one of our experienced energy consultants on 0333 1234 313, or email us at info@powerdirectltd.com.

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