Energy price caps, gas prices and offshore wind

Published 19 August 2021

By Tom Quinn, Analysis and Insight Manager, Offshore Renewable Energy (ORE) Catapult

Ofgem has lifted the price cap for domestic energy bills to help suppliers cover their costs as wholesale prices increased. This will affect 15 million customers on default tariffs, increasing their annual bill by an estimated £139 (a 12% increase).

What is behind this?

Oil and gas prices have been increasing as the world comes out of lockdown post-Covid-19, but there has been a particular spike in gas prices. Global gas supply has been squeezed as production in Europe declines, and last winter’s particularly cold weather meant gas storage was used up (this usually provides a buffer from gas price spikes in Europe). Liquified natural gas (LNG) demand has been high, particularly in Brazil, where droughts mean hydropower has been struggling. Some of this LNG has come to Brazil from the United States, where natural gas prices are low (around $4/vs $14 in Europe), but the US does not have enough spare export capacity to sell large volumes into the European market.

LNG prices in Asia (the biggest LNG market) have hit $16/mmbtu*. Interestingly, that means from an energy point of view that gas is now more expensive than oil ($16/mmbtu is equivalent to around $90/barrel, Brent is currently around $70/bbl). Historically, when gas prices exceeded oil price parity, some consumers in the Asian market switched to burning oil for power – this provided a cap to gas prices. However, this doesn’t happen much anymore because there are fewer active oil-fired power stations, and there are sound environmental reasons to avoid burning oil for power.

What does this mean for the offshore wind/renewables sector?

As energy consumers, we are at the mercy of the global gas market. With offshore wind being price competitive with gas to power (on average), there are good reasons to reduce our dependence on gas imports. One benefit of gas is the ability to store and use later – however, the UK has limited storage since the Rough gas storage facility was closed.

This is where hydrogen could play a role – balancing long-term and seasonal intermittency in wind power to meet demand when required. Combining this with behind-the-meter battery storage for short-term volatility, increasing electrification of heating and transport, and other measures such as energy efficiency would solve many of our problems. This would enable energy self-sufficiency, reduce costs for consumers (in the long run) and would require offshore wind deployments to exceed many forecasters expectations with over 100GW of new capacity by 2050. The UK taking a lead in reducing gas dependency would also enable a healthy export market for electrified goods, hydrogen electrolysers (and molecules) and expertise.

*mmbtu = Million British Thermal Units, equivalent to approximately 1,000 cubic feet of gas, or just under 300 kWh.