UK energy price cap predicted to fall in autumn – ICIS data

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According to the ICIS Power Index (IPI) Analysis published today there is a real prospect that UK energy bills are likely to fall from 1 October due to the substantial reduction in wholesale energy prices. On 1 April, Ofgem, the body responsible for the regulation of the UK energy market, raised the price cap on default retail gas and power tariffs by 10%, or £117, to £1,254 per year. Similarly, the pre-payment cap rose by £106 to £1,242 per year. This limits the maximum price suppliers can charge energy consumers.

Ofgem calculated the latest price cap back in February, taking into account underlying energy costs. As part of their methodology for calculating the size of the cap, the regulator took a snapshot of wholesale energy prices over the period from 1 August 2018 to 31 January 2019, as well as a 12-month forward view of prices. During this time the IPI values were steadily increasing, averaging at £61.15/MWh. However, wholesale prices have been falling substantially in the period of 1 February to 31 March 2019, with the average IPI now standing at £52.71/MWh.

This has been largely due to the mild winter decreasing the demand for both electricity and gas. Healthy gas supply meant that prices collapsed from the start of the winter, as energy traders hurried to factor in unseasonably mild weather and muted demand.

As Jamie Stewart, Managing Editor at ICIS, said, “Fundamentals suggest that prices can continue to fall going into summer months with more LNG heading towards the UK particularly from the US. The October cap re-assessment will look at wholesale prices based on the period 1 February to 31 July 2019, which should be significantly lower. The new cap should reflect these lower wholesale prices – a move that would be welcomed by UK consumers.”

European coal prices have fallen steadily since October last year with a supply-demand imbalance in the gas market forcing sellers to drop their offers or lose out in the power mix. Oil, following its four-year high at the beginning of Q4 2018, started to fall, but has recovered in 2019 in part due to the OPEC deal to remove 1.2m bbl/day from the market. However, sentiment is still downbeat with the US-China trade war stunting growth. LNG has seen new suppliers entering the market. Imports of LNG in the UK grew year on year to 5.7m tonnes in winter 2018-2019 due to rising supply in the Atlantic and falling global prices.

“The flow of LNG into the UK will remain strong with British terminals expecting to receive up to seven cargoes by the end of April 2019, pushing prices down. And in terms of electricity supply, the Summer ’19 Baseload wholesale electricity contract expired at a value of £43.10/MWh, according to ICIS assessments, with the Summer ’18 equivalent being valued at £47.58/MWh. It would appear that the UK is set for a period of lower energy prices,” added Stewart.

The IPI gives independent insight into wholesale power prices for both households and industrial electricity consumers, based on real market trading. The IPI is updated every working day and is freely available from the ICIS website, along with ICIS’ biannual analysis of price trends and volume.