The prices of natural gas across Europe are expected to continue increasing this year to reach a new record level during winter.
This is according to energy companies and a new report released by research firm Cornwall Insights.
Cornwall Insights states that with gas prices currently sitting at 134.1% above the five-year rolling average, price increases will continue due to a decrease in the supply of natural gas (although short-term) and in storage levels.
The previous winter left the majority of natural gas reserves in Europe empty. Since then, the majority of these reserves have not been filled due to disruptions within the supply chain from the pandemic.
This will be coupled with an increase in demand as COVID-19 restrictions are lifted and many European economies reopen and people return to the office. Moreover, building occupants will increase their usage as they seek to warm themselves.
Russia, the biggest producer of gas to the European market has decreased its supply to cater for local demand.
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Joe Camish, Analyst at Cornwall Insight, said: “We have not seen a typical summer for gas prices with the markets seeing prices that we would expect to see in winter. In fact, 18 August saw the day-ahead gas price reach 117.4p/th, the highest price point for this contact since 1 March 2018, during the Beast from the East extreme weather event.
“These high prices have been caused by historically low gas inventories and efforts to restore stock levels hampered by several factors” including lockdown restrictions.
Carmish, added: “This was compounded by periods of weak wind output, a weaker pipeline from the North Sea gas field due to outages and prolonged maintenance at British and Norwegian sites.” The North Sea gas pipeline transports natural gas from Norway to the United Kingdom.
“Elsewhere, GB and other European nations have struggled to attract LNG cargo with similar conditions occurring in Asian markets. This has led to LNG prices reaching a six-month high, and as a result, many cargoes are heading to more lucrative Asian markets.”
In an interview with Bloomberg, Francesco Starace, the CEO of Italian utility Enel, said: “High gas prices today are a problem for Europe.”
As a result of the continued increase in the prices of gas across Europe, electricity prices also climbed and are expected to continue to increase throughout the winter.
Camish, added: “With gas still at ~40% of the UK power generation mix, increases in the gas market have ultimately fed through to the equivalent power contracts. As a result, we have seen consistent rises since the start of the year, with the day-ahead power contract averaging £108.2/MWh in August, 77.5% higher than the five-year average.”
In Germany, electricity prices have reached their highest level since 2008. Whilst 14 EU member countries saw a decrease in electricity prices in the first half of 2020, Germany recorded the highest increase (EUR 0.30 per kWh) within the household consumer segment, according to the European Commission.
Camish reiterated: “Looking ahead, with storage levels low, LNG spot prices at such high levels and with high Asian demand, prices are expected to remain above the long term average. However, maintenance issues have been resolved in the North Sea, and the anticipated Nord Steam 2 could commence flows in mid-September, helping to alleviate some of the supply pressures.”