Dramatic drop in gas prices due to overwhelming supply and weak demand
- 39% decrease in Irish wholesale electricity prices for February year-on-year
- 31% of total electricity demand in Ireland met by wind energy so far this month
Monday, 22nd February 2016: Irish wholesale gas prices have plummeted over the last twelve months, with large business users seeing significant benefits according to the latest Wholesale Energy Market Report published by Naturgy Energy. Wholesale prices so far in February are 44% lower on average compared with February 2015 and 10% lower compared with last month. Naturgy Energy, which supplies gas to over 20% of Ireland’s industrial and commercial market, states that the collapse in prices is due to an overwhelming supply of gas in Europe and a very robust storage position for this time of year.
The average day-ahead price for gas – the contract for gas delivery for tomorrow – is 1.30 c/kWh (cents per kilowatt hour) so far in February. This compares with an average price of 2.34 c/kWh in February 2015. Irish wholesale gas prices have now almost halved in euro terms (down 48%) compared with the average monthly price recorded for February over the previous three years (2013-2015). This has had a significant impact on the energy costs of many Irish businesses purchasing gas on the wholesale market, particularly in the industrial and commercial segment.
Gillian Lawler, Senior Energy Analyst at Naturgy states that gas prices continue to experience significant downward pressure due to strong supplies from Norway and a surge in LNG (liquefied natural gas) from the Middle East which has reached saturation levels. An increase in gas exports from Russia is also having an impact on prices with speculation mounting that Russia may engage in a ‘price war’ in order to remain competitive with LNG supplies into Europe from the US. This is in response to the US becoming a net exporter of gas this year with the first shipments of LNG due in the coming weeks.
“Abundant supplies and weak demand mean Europe is coming out of the winter season with stock levels well above normal for this time of year. This will put additional pressure on prices combined with an expected increase in LNG send-out,” says Ms Lawler. “Seasonal demand should fall from here on. So barring any unplanned outages or a sustained period of cold weather, there appears only to be more downward price pressure on the horizon. This will be welcomed in particular by energy users in the commercial and industrial sector. Many of these businesses purchase gas on the wholesale markets and have been significant beneficiaries of the collapse in energy prices to date.”
Commenting on the impact of an ongoing build up in gas inventories across Europe, Ms Lawler says: “A significant fall-off in withdrawals from storage has led to a 50% increase in inventories at medium range storage sites compared with the same time last year. If withdrawals continue at current rates, the market will be entering the summer season, traditionally when injections take place, with reserves above the five year average. This means there will be less capacity to inject, potentially suppressing Q3 prices further.”
Ms Lawler notes that an almost unprecedented drop in oil prices is resulting in significantly weaker gas contracts for next summer and further out. With US oil inventories now at an 86-year high, very low prices will continue to suppress longer-dated gas contracts indexed to oil. Additional production from Iran is also coming online, which will add further to the glut in global supply. Coupled with the beginning of a global slowdown in oil demand, this means the outlook remains bearish.
Ms Lawler notes that the majority of natural gas consumed in Ireland is currently sourced from the UK wholesale gas market*. With the Corrib gas field recently becoming operational, Ireland’s dependence on imported gas will reduce significantly with the field expected to meet approximately 56% of forecasted demand this year. During days of low demand, such as the summer months, Corrib is projected to meet the full gas requirements of the country. On days of greater demand, additional gas supplies will continue to be available from the UK via the Moffat Interconnection point.
Electricity and Wind Energy Update
The average wholesale price of electricity in the Irish market so far during February is 3.66 c/kWh – a decrease of 39% compared with February 2015 and down 9% compared with last month. The drop in prices is attributed mainly to lower prices for wholesale gas combined with a strong contribution of renewable sources such as wind.
Increased wind energy is playing an ever more important role in meeting Ireland’s electricity demand, helping to drive down prices and reduce the country’s dependence on more expensive sources of energy. Total wind generation capacity in Ireland now stands at 3,042 MW. Wind energy has accounted for 31% of overall electricity generation so far during February, reaching a peak of 2,662 MW on the 16th of February when it met 49% of demand at the time.
As part of EU Renewable Energy Directive (2009/28/EC), Ireland’s target is for 16% of total energy consumption to come from renewable sources by 2020. Electricity generation from renewable sources has a sub-target of 40% in order to meet that 16%, and renewable transport and renewable heat have their own sub targets. In order to meet these, a sizable amount of renewable energy needs to be added to the fuel mix.