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Why has war in Ukraine raised energy prices?!

We’re now several months into the awful conflict in Ukraine, and its effects on the energy market are as relevant as ever. Here are our latest updates on how and why it’s affecting your energy prices.

This post was last updated: 05.08.22

Why do Russia’s actions affect gas and energy prices?


Until recently, Russia supplied almost half of Europe’s natural gas. Some of its supply to Europe goes through Ukraine, for a fee. 

In response to Russia’s invasion, many European countries placed sanctions on Russia, which included no longer buying, or reducing their purchase, of gas from Russia. This increased demand for gas from other sources, which made it more expensive. 

Germany relies heavily on Russian gas, and couldn’t initially stop buying like other nations. However, they did cancel the license for an alternate gas pipeline Russia had been building, Nord Stream 2, which created more uncertainty about Europe’s future gas supplies, and increased prices again. 

Nord Stream 2 would have meant more gas at lower costs for Europe, but without a licence to operate, the company building it has gone bust and it’s unlikely to go into operation, certainly not under the current Russian leadership. Speculation over what would happen with Nord Stream 2 has affected gas prices throughout the crisis.

 

Gas prices are currently reaching record highs, shown in this graph:

Source

Let’s go over the major incidents on the graph:

1. Pre-energy crisis. Prices rise gradually as Russia decreases exports of gas. Energy Crisis speculation begins.

2. Deep into the energy crisis. Gas wholesale prices are three times higher than in May ‘21, affecting customer prices. (We know it doesn’t look like a crisis on this graph.) 

Potential low gas supply for winter in Europe and Nord Stream 2 speculation push prices up. Prices settle a little, but are up about 250% year on year.

3. Winter gas storage is at its lowest ever level, causing panic in Europe. Russia keeps decreasing exports. Prices rise further with demand outstripping supply. 

A flotilla of LNG ships come from the Americas to take advantage of the high prices of gas. They increase supply to the European market, which decreases prices. 

Continued questions over Nord Stream 2 cause price swings, but warmer temperatures ease some short-term supply concerns and bring prices down.

4. Russia announces its military exercises around the Ukrainian border. Concerns about European conflict and the future of Nord Stream 2, as well as Ukrainian pipelines increase prices. Russia continues to reduce its exports to Europe, increasing prices further. 

Ofgem also announces the increase in the SVT from April 2022. An increase of 58%.

5. Russia communicates an end to military exercises on the Ukranian border. The markets took this as a de-escalation, increasing Nordsteam 2’s chances of completion, which would increase gas supply and lower prices. 

6. Russia invades Ukraine. The sanctions on the Russian economy drive prices up. There’s concern that Russia will stop its gas and oil exports, pushing prices higher still.

7. Nord Stream 2’s licence to operate is not granted. The conflict continues, sanctions ramp up and create an economic scramble to find other sources of natural gas, raising prices from all other sources. At its peak, gas costs 18 times its May ‘21 price, but settles below that.

8. Prices reduce as the market stabilises but are still significantly above the pre conflict level. These peaks will affect analysis for the October ‘22 SVT announcement, causing concern for energy affordability if the energy cap is raised to reflect these prices. This is likely to be a source of political tension later this year.

9. Prices were decreasing daily for a short period, but things are still changeable. Markets are stabilising as countries find new sources of natural gas. But prices are still extremely high and we don’t expect for acquisition tariffs to come below the April 2022 SVT anytime soon.

10. Russia demands that ‘unfriendly’ countries buy Russian gas in its own currency, the rouble. This undermines the economic sanctions against the country, which further increases demand for non-Russian gas sources as countries try to avoid supporting the Russian economy. Gas prices spike 15-20% in Britain and Europe. Some countries, like Latvia, refused to do this and were cut off. Elsewhere, this approach pushed prices even higher.

11. Europe is now more reliant on LNG ships. Some originate in America. An  explosion at an LNG hub means it’s taken offline for the foreseeable future. This reduces the supply of gas to Europe, raising prices.

12. Gas into Europe from Nordstream 1 is reduced to about 40% of capacity, leading to fears that Russia will cut off gas supplies to Europe completely. Winter 2022 energy costs to reach record highs as a result, even higher than the start of the Ukrainian conflict.

13. Scheduled maintenance in Nordstream 1 to fix the turbines that have caused the reduced gas flow. Rumours in the markets are that Nordstream will not come back online.  

14. Nordstream 1 back online at only 20% capacity due to issues with the installation of a new turbine. The Kremlin blame sanctions on Russia for the failure to pump more gas to Europe.


We’ll continue to keep you in the loop about key events in the energy market and how they could affect you.


Here's another blog you might find useful when it comes to the energy crisis: 

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