Why Coal and Oil Prices No Longer Matter

A customer recently called us to ask: “Why don’t you include coal and oil prices on your market report?”

Last week highlighted why both are decreasingly relevant to UK energy prices.

Despite Brent crude falling over $2.00 last week on the back of lower demand expected from India due to coronavirus, UK gas prices continued to rise. This marks another sign that gas prices are no longer correlated with oil prices. 

When UK gas supplies were entirely derived from the North Sea, they were linked to Brent Oil prices; the correlation was direct due to both coming from the same geographical area.

Over time, North Sea gas reserves have dwindled. The UK now has to import more gas from abroad. The Norwegian mainland, as well as ships in the form of LNG, and around 8 different nations have been providing gas supplies to the UK for over a year.

In the last few weeks, we have seen how LNG shipments have made over 40% of the UK gas supply mix. Therefore, it is now more prudent to be aware of prices of LNG markets rather than that of oil prices in UK energy market reports.

On news terminals, oil and related commodities no longer includes coal, which has been replaced with Bitcoin. It’s a sign of the times when the market holds this instrument of greater value than a raw material that we have used for centuries.

Coal will eventually be phased out of UK supply generation by 1st October 2024. Over the last ten years, we have seen the steady decline of coal in the generation mix, which has been overtaken by the rise of renewables in the form of biomass, solar PV, on and off-shore wind generation.

The rise of power from European interconnectors to the UK has also seen a strong rise in the UK supply mix, too. Links to France have increased; Ireland and Denmark are also connected to help Europe balance out the intermittent supply of energy from off-shore wind. 

Since July 2020, Carbon prices have started to increasingly make a difference in the UK and across Europe, as governments start to tighten their emission targets. The price of Carbon was just below €16/tonne in the midst of the pandemic: this week it nearly reached €48.

Prices have been driven by both financial speculators and tighter government legislation. Last week, we saw a raft of nations provide their carbon commitment for the next few decades in the run up to COP 26 this November. Carbon is now seen as an excellent taxable revenue source for governments. The only way to get businesses to think twice about carbon, is to use it as a financial penalty. 

Carbon prices have caused a significant surge in energy prices across Europe. Power and gas prices have risen to pre-pandemic levels and are unjustifiably high. The premium is unwarranted, as prices further out (two or three years out) are significantly cheaper than those over the next eight months.

Regardless of the inflation, it highlights the influence that carbon prices have attained for themselves and how it’s now an integral part in the pricing of energy going forward. 

 

By Latif Faiyaz

Latif is our Head of Flexible Purchasing & Energy Strategy. Latif has a wealth of experience from within the energy industry, with experience in developing carbon projects and trading carbon internationally at Alfa Energy. Latif has also worked at Engie and Orsted, implementing the integration of energy service offerings into supply contracts. His experience is varied too. He’s worked ‘on the other side of the fence’ as an Energy Manager for the NHS, before returning back to energy trading for LG Energy and Yorkshire Energy.

With Northern Gas and Power, Latif heads our Flexible Purchasing department of Energy Traders, Analysts and Bid Managers, converting some of our 31 TWhs of energy under management into flexible purchases.

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