Domestic energy prices are about to soar

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by Shaun Richards

This summer has had a feature which will be arriving on the doorstep or in the email inboxes of domestic energy consumers soon if it has not already. The situation was described by oilprice.com like this last night.

The era of cheap natural gas might be gone for good.  U.S. natural gas futures climbed to a 31-month high of 4.16/MMBtu on Thursday thanks to forecasts for hotter weather over the next two weeks and soaring global gas prices ensuring that U.S. liquefied natural gas (LNG) exports will remain at record highs.

So there was both domestic and international pressure for higher prices which always feels initially wrong in summer but is the impact of all those air conditioners being turned up.

Refinitiv has projected that average gas demand, including exports, will climb from 90.9 bcfd in the current week to 94.5 bcfd next week as cooling demand keeps rising. Next week’s forecast is actually lower than anticipated because some power generators will be forced to burn coal instead due to increasingly high natural gas prices.

It is hard not to have a wry smile at coal demand rising just as the IPCC tells us this.

“The role of human influence on the climate system is undisputed.”

Actually it is disputed but presumably not in their corridors and crucially is not how science works which is that all things are disputed to find a better explanation. But returning back to coal is not only happening in the US.

Coal-fired power generation in China is bucking global trends and getting ready to get bigger.

The nation’s National Development and Reform Commission last week announced that operations will resume in dozen of coal mines. The reopening is due to surging demand in the past year as China’s economy recovers from the COVID-19 pandemic. ( power-eng.com)

So we have a factor in our equation which is simply higher demand both outright and above what was expected.

Prices have shot up

As oilprice.com continues.

According to a report in the Financial Times, natural gas prices have climbed sharply across Europe and Asia thanks to tighter supplies, lower production volumes in Europe, as well as lower exports from Russia.

Consequently, natural gas prices in Europe have surged to around 40 euros per mWh (~14/MMBtu) for the first time ever, with UK gas prices at the highest levels in 16 yearsThe situation is even direr in Asia where gas prices have hit $15/MMBtu

The Financial Time piece from July 30th brings the price rises home.

In the UK, prices have risen above 100p a therm, the highest level since 2005 and a record for the summer. In Europe, prices have hit €40 per megawatt hour for the first time. A therm measures the amount of energy contained in natural gas and is sometimes used to calculate utility bills.

This morning the FT has pointed out some further consequences of this.

In a country like Spain and in Germany, soaring electricity prices have moved closer to the top of the political agenda.In the UK, energy regulators say they need to raise the so-called price cap on energy prices by £139 later this year, or more than 10 percent. The Bank of England is warning inflation could reach 4% this week by the end of the year. This is mainly due to rising energy costs.

Here is the Bank of England Monetary Policy Report from last week.

That is partly due to energy and commodity price rises feeding through to UK prices.

Indeed this is typical central banker thought.

Retail energy prices are an important driver of UK consumer prices, accounting for over a third of the variance in CPI inflation since 1997, despite only making up 6% of the CPI basket. And retail energy prices tend to reflect changes in wholesale prices relatively quickly. The collapse in oil, gas and electricity prices last spring and their subsequent rebound mean that the contribution of energy prices to the CPI inflation rate increased by almost 1 percentage point between Q1 and Q2.

As you can see they open with a critique of their own behaviour as they ignore something ( energy is non-core for them) which is a third of the inflation moves since they got the job of inflation control. They are also spinning the move by trying to imply priced have fallen and then rebounded when in fact they have gone higher.

Why Gas?

The FT explains.

The reason for this is that natural gas is a fuel that occupies a messy space in the link between energy and climate debates.

It’s much cleaner than coal and produces about half as much CO2 when used to generate electricity, but environmentalists despise it as a fossil fuel that contributes to emissions and climate change.

Although the news we have already noted about coal means that the FT needs a bit of a rethink about this.

As a result, coal is no longer economical to burn for electricity, which is good for the climate. But that also means that renewable energies are often replaced by natural gas, which is still unable to absorb slack.

So as the Rolling Stones put it.

But it’s all right now, in fact, it’s a gas
But it’s all right, I’m Jumpin’ Jack Flash
It’s a gas, gas, gas

The situation has been something of a comedy of errors with a conclusion that is not that funny.

Carbon prices, one of the EU’s and UK’s main tools for combating climate change, have skyrocketed in response to the increasingly ambitious political goal of reducing emissions. ( FT)

So gas is hot but well you couldn’t make it up.

 However, most developed countries have adopted plans to reduce carbon emissions to “net zero” by 2050, reducing their willingness to spend billions of dollars on long-term gas projects. ( FT)

So we want more gas but have been restricting supply.

 LNG imports are skyrocketing in Asia, which has a clear impact on the amount available for voyages to Europe.

Short-term factors

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If we look at the UK then the plan below has a major problem.

Prime Minister Boris Johnson says he wants to make a “big bet” on renewables, turning the UK into the “Saudi Arabia” of wind power. ( BBC)

The latest updates from @UK_WindEnergy show why.

GB Grid: #Wind is generating 1.44GW (4.47%) out of 32.34GW

Not much for a capacity of 22 GW and this is continuing.

Today’s forecasted metered #Wind peak is 3,534MW between 01:00 and 02:00 GMT

Tomorrow’s is 5,932MW between 17:00 and 18:00 GMT

This reminds us of two issues. The first is that the wind may not coincide with when we want more power and the second is that it is in bad run. This has gone on for some months. Hence the UK has been wanting more gas.

Even if we doubled capacity to in theory cover requirements there is the issue that the wind has not blown much recently. Solar has improved in many ways but is even more specific in terms of time as even within the day it takes take to warm up.

GB Grid: Last Week’s #Solar generation. Solar generation: 306.30GWh (6.74%)

If only we could harness the rain for power! We would have had loads yesterday when a deluge caught out yours truly.

Comment

We have allowed ourselves to arrive at something of a perfect storm. Some of the factors here are a result of mismanagement as we have not provided for the variability of renewables some of which is mostly predictable such as the pattern for solar but much of it is not. I have written in the past about the problems with battery technology which are ongoing.

Tesla Megapack fire at the Victorian Big Battery in Southeast Australia was brought under control Monday afternoon, with fire crews remaining on site Tuesday to ensure damaged equipment would not reignite, according to the Country Fire Authority. ( CNBC)

That reminds me of the issue Boeing had with the Dreamliner aircraft.

The factors may ebb and flow but price rises are on their way from what we have seen and perhaps the saddest part is the money which has been wasted. For example billions have been sunk into so-called Smart Meters which have been sold as cutting prices, Best of luck with them helping us now especially as they have to be paid for somehow.

Governments have raised prices via green policies and hoped to get away with the consequences ( ie parking them on the next government). But reality is dawning as to what they real consequences are.

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