What influences UK gas prices?

To ensure a secure and continuous gas supply in the UK, various sources are utilized, mitigating the risk of running out of gas.

Around 45% of the UK’s gas needs are fulfilled by natural gas extracted from the North and Irish Seas. However, this proportion is gradually declining over the years.

The UK relies on imports of commercial gas from global sources to augment its gas reserves. Pipelines running under the North Sea facilitate the delivery of Liquid Natural Gas (LNG) from countries such as Norway, Holland, and Belgium to refineries along the east coast. Moreover, since 2005, the UK has been importing LNG from distant regions like Asia, the Middle East, the US, and Russia, storing it in designated facilities.

The UK employs two main types of storage facilities for gas: depleted gas fields and salt caverns. During periods of low demand, excess gas is transferred into storage, serving as a backup when there’s a prolonged spell of cold weather, leading to heightened gas network demand. Among these facilities, salt caverns, converted into underground storage, boast the advantage of quicker filling and emptying rates, making them the go-to option during emergencies.

Environmental Costs

Businesses have been subject to the Climate Change Levy (CCL) since 2001, an environmental tax applied to the energy consumption of companies. This levy is charged to various sectors, including industrial, public services, commercial, and agricultural, for heating, lighting, and power usage. The government ensures that energy-intensive industries are not disadvantaged compared to foreign competitors through various measures.

Operating Costs

Gas production involves maintaining equipment, and operating costs include labour expenses for machinery modifications and maintenance. Regular maintenance is crucial to avoid costly production downtime and reduce long-term operating expenses. Although operating costs may rise with the opening of a new field, they tend to decrease over time.

Tax

Like other businesses, gas producers are subject to various tax levies on their profits. The three main forms of tax for gas extraction are Ring Fence Corporation Tax, Supplementary Charge, and Petroleum Revenue Tax. These taxes aim to ensure fair profits for the country’s cheapest business gas prices and tariffs and secure energy supplies for the UK. Suppliers also apply a profit margin on top of wholesale costs and taxes to arrive at the final gas price for end-users.

Regulatory transparency is maintained through Ofgem, which requires the UK’s largest energy suppliers to publish annual financial statements, including their profit margins (EBIT). This promotes openness and accountability within the industry.

Gas supply prices are subject to a multitude of factors beyond the traditional forces of supply and demand. Weather conditions, the cost of alternative energy sources, geopolitical events, and the adoption of renewable energy all play crucial roles in causing gas prices to fluctuate, either spiking or dipping.

Seasonality

The gas serves as the primary fuel for central heating, leading to increased consumption during cold weather. Consequently, wholesale gas prices tend to be higher in winter compared to summer. This implies that the timing of your energy switch can influence annual business gas consumption and the rates you pay.

During winter, competition among countries to procure more gas intensifies, resulting in price hikes. However, recent milder winters have led to reduced heating-related gas demand, contributing to lower prices.

The industrial sector’s declining demand, coupled with commercial gas prices along with improved energy efficiency, has further driven down both demand and prices, benefiting consumers with great business gas rates.

Conversely, the demand from gas-fired power stations is expected to rise, as they generate more electricity than declining coal plants. This increase in demand may lead to higher gas consumption during the summer months, which traditionally experience lower demand.

Currency fluctuations

Changes in currency values can create a ripple effect across multiple markets, influencing the wholesale price of gas. When the sterling strengthens against the euro, traders tend to switch business gas suppliers to purchase relatively cheaper gas from the European market instead business gas suppliers out of the UK. This preference for European gas weakens the demand for UK gas, leading to lower UK gas prices.

Oil and LNG prices

In the past, oil and LNG prices showed a close correlation in their price fluctuations until around 2008. However, since 2009, the two have become less correlated, and this change is attributed to the emergence and expansion of the US Shale Gas extraction industry.

The shale gas boom has played a significant role in this shift, and its ongoing impact continues to influence the decoupling of business gas rates and cheaper oil and LNG prices. Cheaper imports of LNG have contributed to the decline in UK wholesale gas prices. Similarly, oil price drops have led to reductions in continental gas prices, which has been advantageous for the UK as it imported more affordable gas through its interconnections with European gas suppliers there.

Power station disruption

With the government’s ongoing plan to close coal-fired power stations, a viable replacement option is utilizing gas for electricity generation. However, this transition places higher demands on the gas supply network, which could result in elevated gas prices.

The hope is that as renewable energy sources expand their role in supplying power to homes and businesses, the reliance on gas will decrease, making it a more cost-effective alternative in the long run business gas prices. As the energy landscape evolves, the integration of renewables is expected to mitigate the upward pressure on gas prices and lead to a more sustainable and affordable energy mix.

Renewable energy

While achieving 100% renewable energy in the UK would be a commendable goal, it remains a distant prospect. The country is witnessing a gradual increase in renewable energy adoption, but the intermittent nature of wind and solar power presents challenges.

During periods of low wind or lack of sunshine, wind turbines and solar panels cannot generate electricity. As a consequence, the reliance on a more dependable energy source, usually gas, becomes necessary. If the demand for gas exceeds the expected capacity to compensate for the renewable energy shortfall, it will inevitably lead to an increase in average UK gas prices.

As the UK continues its transition to cleaner energy sources, addressing the intermittency issue of renewables becomes imperative. Finding effective ways to balance the energy mix and investing in energy storage technologies will be crucial in minimizing gas dependence and advancing towards a more sustainable and affordable energy landscape.

With the volatile nature of the wholesale market over the past 18 months, it is difficult to provide an exact figure. How much your business gas supplier can expect to pay will also depend on your current business gas supplier amount, contract type and whether you’re eligible to pay the Climate Change Levy (CCL).

We have put together the table below to give you a better idea, based on the average annual gas consumption of similar-sized organisations.