UK Q2 energy price cap falls quarterly, year on year

Additional reporting by Hector Falconer

• Q2 energy price cap falls to £1,690, in line with lower wholesale gas and power prices
• The Q2 cap is £238 lower than the Q1 cap and has also fallen year on year
• The Q3 price cap is likely to fall further if gas and power prices continue their bearish trajectory, however bullish drivers could limit losses

LONDON (ICIS)–The UK energy price cap for April-June has decreased quarter on quarter and year on year in line with lower wholesale gas and power prices, energy regulator Ofgem said on 23 February.

The cap was introduced in January 2019 and sets the maximum price that gas and electricity suppliers can charge end-users for each unit of energy consumed.

Ofgem sets the cap through a methodology that considers a range of supplier operating costs, including ICIS wholesale energy price assessments, as well as network costs and VAT.

The price cap is likely to fall further for the third quarter of 2024 if prices continue their bearish trajectory, however any bullish driver such as a hot summer could limit losses.

FALLING PRICES

ICIS assessed the NBP gas Q2 ’24 contract at an average 84.338p/th between 16 November and 15 February – the period used by Ofgem to calculate wholesale energy costs.

This was much lower than the previous year when the equivalent contract averaged 228.967p/th between 16 November 2022 and 15 February 2023.

Prices have declined steadily from their peak after Russia’s invasion of Ukraine, although NBP products are still well-above seasonal average levels seen before the energy supply crisis.

As gas is a key price driver for the UK power market, UK power prices have tracked a similar bearish trend, with UK power Q2 ’24 prices significantly below Q2 ’23 prices.

ICIS assessed the UK power Baseload Q2 ’24 contract at an average £76.02/MWh between 16 November and 15 February, 65% lower than the Q2 ’23 over equivalent dates.

The Q2 ’24 contract has maintained a premium to its European counterparts, which indicates that the UK is likely to import power from neighbouring countries, including France, through the front-quarter.

Data from French nuclear fleet operator EDF shows that nuclear output is set to remain strong through the second quarter of 2024, averaging 46.5GW in the period 1 April to 30 June, 9.5GW above the 2019-23 average.

CAP OUTLOOK

Both gas and power Q3 ’24 prices are currently at a premium to Q2 ’24 price however, both contracts have continued to shed ground through the first quarter of 2024.

Barring any shift in the underlying fundamentals, Q3 ’24 gas and power prices are likely to continue to fall, which could results in the Q3 price cap being lower than the Q2 cap.

According to ICIS price assessments on 22 February, the NBP Q3 ’24 contract was 2.225p/th above the Q2 ’24 contract and the UK power Baseload Q3 ’24 contract was £2.65/MWh above the Q2 equivalent.

From January to March 2018-2023 the NBP Q2 contract averaged 89.971p/th and the 2018-2023 average of Q3 when it was the front quarter was 85.072p/th – indicating that Q3 ’24 may dip below the Q2 ’24 price level nearing delivery.

European gas storage sites currently sit at 65%, which is 22% above the 2017-21 average, according to data from Gas Infrastructure Europe.

This, mixed with low levels of historical gas demand could continue to pressure Q3 prices – especially if the UK has a windy summer period which would mute gas-fired power demand.

On the power side, heatwaves remain a risk factor in the third quarter, as this would support air condition demand in the UK and on the continent, therefore supporting power prices.

High river water temperatures can also lead to reduced output at French nuclear plants, as reactors cannot be cooled effectively. This could also be a potentially bullish driver for UK power prices.

Furthermore, low wind generation would also be a risk factor supporting UK power prices and increase gas-for-power demand.