UK gas supply risks drive energy price cap higher

Global gas supply constraints are pushing the electricity price cap upwards, a trend the government is currently unable to reverse. As cold weather increases demand, Great Britain is entering a competitive arena for liquefied natural gas supplies against the rest of the world. This shift is occurring despite the government’s stated ambitions to move beyond fossil fuels, highlighting a significant structural vulnerability in the UK’s energy security.

The financial impact on consumers is becoming increasingly pronounced. Prices rose by 13% in July, covering the three-month period leading to the end of September. Ofgem reported today that a further 4% increase will take effect in October. Looking ahead, Cornwall Insight predicts the cap will rise by another 9% in January. Consequently, the price will have increased by nearly 30% from June of this year to January. Wholesale electricity costs currently constitute 28.7% of the total price paid by consumers, meaning fluctuations in global gas markets directly translate into higher household bills.

The underlying drivers of this price escalation are multifaceted. Cornwall Insight acknowledged that recent developments in the Iran conflict have caused gas prices to spike over recent weeks. This geopolitical tension has compounded existing pressures, including higher European demand resulting from high temperatures, supply disruptions in Norway, and strong demand from Asia. The analyst firm noted that even if the conflict were to end immediately, colder weather, displaced global supply, and low stock levels mean that January prices are likely to remain elevated in the short to medium term.

The conflict, which began at the end of February, has removed approximately 3% of global gas supplies from the market. This reduction is predominantly in the form of LNG, which accounts for 20% of this smaller market segment. Great Britain has become increasingly reliant on LNG imports to meet its energy needs. While the Middle East crisis has primarily impacted the supply of oil products thus far, the situation is expected to change as electricity demand rises in the northern hemisphere. More buyers will be seeking a shrinking number of available cargoes, intensifying competition.

Market data underscores the severity of the situation. SEB Research noted this week that European gas prices for December delivery were trading at a premium of more than 50% to Brent crude. In July, this premium was only between 30% and 40%. Bjarne Schieldrop from SEB described the European natural gas market as having experienced a degree of winter panic over the past week. The research also highlighted that the hot summer caused additional problems by reducing hydropower generation in Norway, further straining the European energy mix.

Storage levels present another area of concern. The International Gas Union’s annual report stated that mild weather and renewable energy had reduced pressure on natural gas in the first half of the year, with European demand expected to decline by 4 billion cubic metres this year. However, storage is currently 63% full, which is at the bottom of the five-year average. A year ago, storage levels stood at 76%. Typically, Europe fills gas storage over the summer by buying when prices are cheap to consume during winter. The lower current levels suggest a tighter market ahead.

Germany’s Bundesnetzagentur regulator has attempted to downplay concerns around storage, arguing it should not be considered in isolation but rather in the context of short-term flexibility in interaction with LNG deliveries. Nevertheless, the IGU has warned that competition for LNG is increasing, particularly due to the rise of Asian buyers. Europe may face a more competitive environment for marginal cargoes needed for storage injections, potentially making the achievement of formal storage targets more challenging ahead of winter.

The structural difference between the UK and the European Union exacerbates this risk. While EU states have significant storage capacity, the UK does not. Germany has around 23 billion cubic metres of storage capacity, whereas the UK has only 3 billion cubic metres. Half of this UK capacity is accounted for by the Rough facility, which Centrica expects to shutter by April 2027. The Department for Energy Security and Net Zero has expressed a willingness to ease regulatory barriers to the gas system. In response to a recent consultation, it said it would explore how to retain existing capacity, new imports, and a strategic gas reserve. The consultation noted that UK LNG terminals are less competitive than those in continental Europe due to high entry charges and costs. Building new storage or securing a floating storage and regasification unit would cost billions of pounds over a 25-year timeline.

The government’s position is strained by these competing priorities. Spending on gas infrastructure undercuts its plans to move beyond fossil fuels, yet failing to do so means potentially higher future costs, leaving households more exposed to global markets. Chancellor John Healey must decide at the 28 October budget whether to spend billions subsidising energy bills or investing in gas infrastructure the government claims to be phasing out. Higher energy bills put pressure on support for vulnerable households, creating a difficult fiscal and political dilemma.