Q3 2022: Power prices ease going into winter
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Dr Iain Staffell, Professor Richard Green, Professor Tim Green and Dr Malte Jansen – Imperial College London
After unrelenting bad news about energy prices spiralling upwards, they have been in freefall since hitting a peak in August. Wholesale electricity prices fell by 70% between August and November on the back of much lower natural gas prices. This fall is saving the country £7 billion per month – or £10 million every single hour – in terms of natural gas and electricity consumption.[1]
Pressure on the European gas market has temporarily eased thanks to an exceptionally mild Autumn and concerted efforts to stockpile gas over the summer. Imports of liquified natural gas (LNG) reached an all-time high, with several LNG tankers idling off the coast waiting to unload when gas demand, and thus prices, are higher again. Wholesale gas prices collapsed from a peak of £194/MWh in August to a low of just £8/MWh in October.
This translates into a sizable fall in the cost of generating electricity from gas. The figure below estimates this cost for an average gas-fired station in Britain, based on the fuel it burns and the carbon emissions it produces. Although the cost of carbon emissions has quadrupled since 2020 to a peak of £87 per tonne in August 2022, this is only having a minor impact on generation costs compared to the wild volatility in fuel prices.
The recent fall in power prices is welcome news as it will translate into a lower price cap from Ofgem in the coming months. This will give a much-needed respite for consumers or less pressure on the public purse, depending on where that price cap sits relative to the level of the ‘price freeze’ set by government. Either way, the sums of money involved are staggering. In October and November, British homes and businesses consumed 70 TWh of natural gas and 47 TWh of electricity. The national bill for this energy was £4 billion per month, compared to £11 billion in the two previous months.
This is only just the start of winter though, and gas prices started heading back upwards at the end of November. Where prices end up through the winter months will have a significant impact on household and national finances alike.
Monthly-average wholesale cost of electricity at day-ahead prices, with the underlying cost of the fuel burnt and the carbon emissions produced in generating electricity from natural gas.
[1] Note that many generators and retailers hedge their prices in advance, so this fall will not be reflected until their contracts are renewed