Wholesale gas prices will continue to fall in 2016: analysts

Wholesale gas prices will continue to fall in 2016, according to analysts at ICIS, piling further pressure on suppliers to cut tariffs.

Reduced demand for liquefied natural gas (LNG) in places such as South Korea and Japan led to oversupply last year, according to the ‘ICIS Power Index Analysis 2015’. It says the trend looks likely to continue this year, with increased worldwide production, most notably from shale gas in the US, set to add to the global glut.

Ben Wetherall, the head of Gas at ICIS, said: “With a deep liquid gas market and plenty of capacity to regasify LNG imports, Britain is anticipated to be a key beneficiary of the global LNG oversupply.”

British gas prices were also brought down in 2015 by the continuing fall in the price of oil, which is often used as an index in gas contracts on continental Europe. Brent crude lost more than a third of its value, finishing the year on $36.17/bbl. The reports foresees a similarly bearish oil market in 2016, as tensions between OPEC kingpins Saudi Arabia and Iran make cutbacks to production unlikely.

The report comes as political pressure mounts on energy companies to cut their tariffs in response to falling wholesale costs. Speaking during Prime Minister’s Questions yesterday David Cameron said: “We’ve also got in this country now falling energy prices because of the falling oil price, I agree that they’re not falling as fast as I would like.”

The report also revealed the extent to which prices of both gas and electricity fell during 2015. Power prices dropped by 23 per cent, reaching a five year low of almost £37/MWh. Gas prices fell by 34 per cent, hitting 32p/th, the lowest price in six years.

The falling price of power was mainly caused by the knock-on effect of falling gas prices. The link between the two has become stronger in recent times because of the growing prominence of gas in the UK’s generation mix. Increased generation from renewables, with their low operating costs, also helped to push prices down.   

However, power prices were kept from falling by as much as gas prices by the closer match between supply and demand. Supply margins were tight over the winter and National Grid issued a Notification of Inadequate System Margin for the first time in three years in November.

The report predicts that margins will remain small over the next few years, as a number of unprofitable plants are expected to close and the capacity market won’t start paying out until the winter of 2018/19.