Tuesday 14 February 2023

2022 End of year review and what’s to come in 2023

2022 End of year review and what’s to come in 2023

Following on from our last blog which wrapped up 2022, we delve deeper into events over the past 12 months to provide some thought provoking insight as to what happened, and how this will shape things to come.

The Energy Market in 2022

The wholesale gas and power market in the UK and Europe entered a major energy supply and security crisis after Russia’s invasion of Ukraine which sent energy prices soaring. The supply picture in the UK and the rest of Europe was changed, not only by the reduction to Russian pipeline gas, but also historical lows of French nuclear capacity, an outage at Freeport, a major US LNG (Liquified Natural Gas) facility and record low river levels in Germany. This led to levels of volatility in the market not seen in years.

Russia’s invasion of Ukraine

Russia invaded Ukraine on the 24th February 2022 causing a major energy crisis with wider economic concerns to the global economy, especially rising inflation. Europe was already seeing a tight gas supply picture with storage levels across the continent about 17% lower than its five-year average. Drops in Russian pipeline gas added further concern. For the first nine months of the year flows through the Nord Stream One (NS1) gas pipeline were arguably the main driver within the market. Capacity reduced to 40% in mid-June and flows then further decreased to 20% followed by an indefinite end to any gas flow.

Explosion at Freeport - USA

Coupled with this, in June, there was an explosion at the second largest Liquified Natural Gas (LNG) facility in the US, Freeport. This had a major impact on prices as the continent and UK looked to LNG to replace pipeline gas. This was significant as around 70% of Freeport LNG exports had been supplied to Europe and the UK in the first half of the year. The United States had also provided about half of LNG supplies to Europe and the UK in the same period. The facility is still not fully operational.

French Nuclear Capacity

Nuclear capacity from France was an issue throughout the year, which exacerbated supply issues in Europe, as France became a net importer of electricity for the first time since certain records began. France historically has been heavily reliant on its nuclear fleet, however due to stress corrosion on many dated reactors, this wiped out over half the fleet and deemed them offline. This has lifted both gas and power prices, with gas prices being closely linked to electricity.

Ageing energy infrastructure

In September, large amounts of Norwegian oil and gas fields as well as other infrastructure went into annual maintenance curtailing significant amounts of capacity that was helping to alleviate some pressure on Europe’s gas supply. This was exacerbated by delays and unplanned outages. This led to flows to Europe and the UK being significantly lower than the previous month and the start of the year. Unfortunately, at the same time temperatures were soaring across the UK and Europe increasing demand for cooling and further adding to the upward pressure in the markets.

Liquified Natural Gas (LNG)

Although much of the news in 2022 was negative there have been some positives. Germany has two new floating LNG terminals online to diversify their energy supply and help with security. Good winds speeds in NWE, strong Norwegian exports to the UK and the continent, suppressed demand due to mild temperatures and an abundance of LNG arrivals have all helped the region to fill gas storage facilities and limit withdrawals; leading to prices retracing from huge gains observed in August and September. However, December wasn’t so kind with unseasonably cold temperatures and sporadic wind.

Energy Bill Relief Scheme (EBRS)

Given the scale of the wholesale price rises the government announced the EBRS, which runs from the 1st October until the 31st March. This provided much needed relief to non-domestic customers in providing protection from the increase in prices.

Energy Bills Discount Scheme (EBDS)

EBRS being is replaced by the Energy Bills Discount Scheme (EBDS), albeit with more modest levels of support for customers. A softening of the market means that the discount might not be paid at all on some contracts signed this year as it will fall under the support price level. We welcome the continued support being provided to customers in 2023. For more information, please visit our dedicated EBDS page.

2023 so far & market outlook

The overall supply picture looks promising currently, with healthy storage levels supported by relatively mild temperatures and high wind speeds throughout January. This has curbed the price momentum somewhat and thus far; we’ve seen limited price lifts. High storage levels across Europe and the UK, along with abundant supply from alternative sources to Russian pipeline gas, mainly in the form of LNG cargo, healthy renewable generation volumes, and an increase in French nuclear power have all helped with price stability.

Consumers across Europe have contributed to muted demand as they take demand saving measures to lessen the impact of prices on them, and these efforts will most likely need to be sustained to keep prices lower.

Ongoing works to the French nuclear reactor, and the Freeport LNG facility in the US throughout 2023 are also expected to positively affect prices towards the end of this year as this brings increased capacity to the French/European grid.

Europe is expected to ramp up its capacity to take deliveries of LNG through Floating Storage Regasification units (FSRUs), utilising its existing infrastructure, including taking greater pipeline flow from Norway. Germany is in the process of building further offshore LNG facilities, and the UK continues to make arrangements with other energy producing nations, has reopened the gas storage facility, and the Netherlands is looking to ramp up production.

The outlook for 2023 will focus on where European and UK storage levels sit after exiting the winter heating period, and to what capacity we can fill them for the next winter and beyond without Russian flow. Also, how demand will react to soaring prices and countries in Europe developing infrastructure and making agreements with other nations. Unseasonable weather conditions experienced will also play its part with Market participants wary of either prolonged winter conditions heading into April this year, or an earlier start to the next winter period in the latter half of the year. These are some factors to keep an eye on regarding prices, as the year progresses.

Written by

Bruna Pinhoni

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