Why has war in Ukraine raised energy prices?!
We’re now weeks into this awful conflict and we’re seeing the full impact the Russian invasion of Ukraine is having on our industry.
We didn’t want to share this update without signposting some ways to support the people of Ukraine, for whom the impact is so much greater. You can find those at the bottom of the post.
This post was last updated 25th March 2022.
This is a fast moving situation. Updates are out of date as soon as they’re published. We’re going to do our best to keep on top of things and share important updates as they come up.
Why do Russia’s actions affect gas and energy prices?
Until quite recently, Russia supplied almost half of Europe’s natural gas. Its supply to most of Europe goes through Ukraine, for a fee.
In response to the invasion of Ukraine by Russia, sanctions were placed on the import of Russian natural gas by many European countries, meaning higher demand for gas from other sources, driving up prices.
Germany was unable to stop buying Russian gas because of its reliance on Russia for its supply. However, they did cancel the licence for an alternate gas pipeline Russia had been building, Nord Stream 2, which created more uncertainty about future European gas supplies and also contributed to higher prices.
Nord Stream 2 would have meant more gas at lower costs for Europe, but without a licence to operate the company building it has gone bust and it’s unlikely to go into operation, certainly not under the current Russian leadership. Speculation over what would happen with Nord Stream 2 has affected gas prices throughout the crisis.
Gas prices are currently reaching record highs, shown in this graph:
Let’s go over the major incidents on the graph:
1. Pre-energy crisis. Prices rise gradually as Russia decreases exports of gas. Energy Crisis speculation begins.
2. Deep into the energy crisis. Gas wholesale prices are three times higher than in May ‘21, affecting customer prices. (We know it doesn’t look like a crisis on this graph.)
Potential low gas supply for winter in Europe and Nord Stream 2 speculation push prices up. Prices settle a little, but are up about 250% year on year.
3. Winter gas storage is at its lowest ever level, causing panic in Europe. Russia keeps decreasing exports. Prices rise further with demand outstripping supply.
A flotilla of LNG ships come from the Americas to take advantage of the high prices of gas. They increase supply to the European market, which decreases prices.
Continued questions over Nord Stream 2 cause price swings, but warmer temperatures ease some short-term supply concerns and bring prices down.
4. Russia announces its military exercises around the Ukrainian border. Concerns about European conflict and the future of Nord Stream 2, as well as Ukrainian pipelines increase prices. Russia continues to reduce its exports to Europe, increasing prices further.
OFGEM also announces the increase in the SVT from April 2022. An increase of 58%.
5. Russia communicates an end to military exercises on the Ukranian border. The markets took this as a de-escalation, increasing Nordsteam 2’s chances of completion, which would increase gas supply and lower prices.
6. Russia invades Ukraine. The sanctions on the Russian economy drive prices up. There’s concern that Russia will stop its gas and oil exports, pushing prices higher still.
7. Nord Stream 2’s licence to operate is not granted. The conflict continues, sanctions ramp up and create an economic scramble to find other sources of natural gas, raising prices from all other sources. At its peak, gas costs 18 times its May ‘21 price, but settles below that.
8. Prices reduce as the market stabilises but are still significantly above the pre conflict level. These peaks will affect analysis for the October ‘22 SVT announcement, causing concern for energy affordability if the energy cap is raised to reflect these prices. This is likely to be a source of political tension later this year.
9. Prices were decreasing daily for a short period, but things are still changeable. Markets are stabilising as countries find new sources of natural gas. But prices are still extremely high and we don’t expect for acquisition tariffs to come below the April 2022 SVT anytime soon.
10. Russia demands that ‘unfriendly’ countries buy Russian gas in its own currency, the rouble. This undermines the economic sanctions against the country, which further increases demand for non-Russian gas sources as countries try to avoid supporting the Russian economy. Gas prices spike 15-20% in Britain and Europe. At the time of writing, it’s not 100% clear whether contractually Russia will can do this But it is clear that Russia intends to continue to use its gas supplies as a political weapon as this awful conflict continues.
We’ll continue to keep you in the loop about key events in the energy market and how they could affect you.
Here are some ways to help Ukranians right now:
🎨Voices of Children is an amazing Ukrainian charity, helping children affected by war in Eastern Ukraine with art, therapy and storytelling.
These international charities have appeals to help Ukrainians right now, as they do with all major conflicts: