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SERIES 22 / Module 07 Energy Purchasing
Annual electricity consumption 1,000,000 kWh 5,000,000 kWh 10,000,000 kWh 60 p/kWh 2022 annual cost Pre-Covid annual cost £600,000 £3,000,000 £6,000,000 8 p/kWh
Jan 25 Spot Year price
Current Costs £80,000 £400,000 £800,000 Figure 2 shows current prices for electricity, which, though not historically high, still create uncertainty among procurement managers
result in a similar bullish precedence. Figure 2 above shows the current prices, however it’s important to recognise that, even though prices are not near historic highs, they continue to hold an uncertainty premium. Many business energy contracts
run from October to September; therefore, businesses who are on deemed out-of-contract rates could once again be at risk to aggressive market premiums and heightened rates, even with short-term driving factors.
Why are prices holding a heightened level and increased volatility? UK energy markets experienced a dynamic and shifting landscape throughout 2024, with conditions evolving from initial confidence to heightened uncertainty. The year began with relative stability, supported by robust gas storage levels and strong renewable generation, which helped to maintain moderate pricing. However, as the year progressed, geopolitical tensions and supply challenges began to weigh heavily on market sentiment. By mid-year, concerns over potential supply disruptions and competitive pressures in the global LNG market introduced renewed volatility. These pressures escalated in the latter half of the year as Europe prepared for the remaining Russian gas flows to come to a halt and braced for an uncertain winter season. In 2024, US and European
sanctions on Russian energy transport tightened further, targeting key infrastructure, shipping routes, and financing. Restrictions on vessel insurance and oil price caps disrupted
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Russian exports, while pipeline agreements faced increasing strain. By year-end, the halt of Russian gas flows through Ukraine underscored the sanctions’ impact, driving Europe to accelerate its shift toward LNG and renewables.
The remaining Russian gas fl ows Historically Russian gas flows amounted to around 300 million cubic meters per day (mcm/d). These were reduced to 40 million cubic meters per day (mcm/d) throughout 2024. There was renewed confidence
of an extension of Russian supplies into Europe throughout June 2024 as Gazprom’s average daily natural gas supplies to Europe in May rose by 7.3% from April. However, by the close of December, Russian gas flows had been muted, resulting in a more tentative market condition.
LNG supply Fundamentally LNG fuel supply continues to be a more competitive market, with Asia and Europe contending for cargoes. Throughout 2024 Egypt has fluctuated from being a net exporter of LNG to also requiring certain cargoes at periods of escalated demand. Geopolitical tensions have
impacted transportation links. Transport of LNG began sailing around Africa to avoid the Red Sea in February 2024. This extended the transport time for cargoes by approximately 10-15 days. This heightened market sentiment as traders assessed potential supply risks.
Chinese Demand Asian demand continues to influence market factors; however,
reduced demand throughout 2024 has dampened potential competition for gas cargoes. China faced weak demand due to weak consumer spending, reduced government expenditure, and ongoing challenges in the real estate sector. China is also increasing its intake
of Russian gas supplies through the ‘Power of Siberia’ pipeline and is looking to build a second pipeline that would add an additional 50 billion cubic meters of gas per year. This could lead to a less competitive LNG market, especially as Russian gas prices remain favourable.
Advancing infrastructure Since 2022 Europe has drifted from the reliance on Russian gas supplies, which has resulted in a surge of importance surrounding improving, extending and building additional infrastructure. Key LNG projects are a prominent
alternative for Europe, as the continent looks to increase LNG import capacity by 42% by 2026. Germany led the initiative by building the Wilhelmshaven LNG terminal in 2022 and in 2024 have added two additional floating LNG storage units (FSRU’s) bolstering injection and storage capabilities. Italy, Poland and Greece also
focused on building floating storage in 2024 (with the expectation of live injection by the spring of 2025). Additionally, Romania is expected to play a crucial role as they become a net gas exporter for the region. Renewable output is set to
become the fundamental fuel source regarding power generation in Europe, as an additional 3,700 GW of additional capacity is projected to be completed by the close of 2025, a prediction by the International
Energy Agency. Europe is also focusing on
extending nuclear power. The energy crisis has resulted in a change of tone in regards to nuclear generation in Western Europe, with several countries considering new nuclear technology for energy security. These projects reflect Europe’s commitment to diversifying its energy mix and enhancing energy security.
European gas storage Colder-than-average temperatures in the final months of 2024 intensified demand across Europe, leading to accelerated withdrawals from gas storage sites. By December, storage levels had fallen below the five-year average, amplifying concerns about supply security as winter deepened. These challenges were compounded by the cessation of the remaining Russian gas supplies via Ukraine at the close of the year, marking the end of decades-long pipeline flows. The halt not only underscored Europe’s increased reliance on LNG and alternative energy sources but also added further strain to an already volatile market, as participants scrambled to secure adequate resources for the colder months ahead.
Weather issues
2024 began with a mild winter, marked by above-average temperatures. Strong wind generation also prompted support, providing over 40% of the generation mix. Spring and early summer brought periods of dry and sunny conditions, supporting renewable energy generation, particularly solar power. However, the late summer and early autumn turned wetter and cooler,
Annual Difference -£520,000 -£2,600,000 -£5,200,000
20
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