March 2015 Energy Market Report: 4% Drop In Irish Wholesale Gas Prices

  • 4% drop in Irish wholesale gas prices year-on-year (euro-equivalent)
  • Fall in prices driven by strong supplies from the North Sea and increased LNG shipments
  • March 2015 prices down 18% compared with average March prices for previous 3 years
  • Weakening value of the Euro having a significant impact on Irish gas prices
  • Irish wholesale electricity prices down 10% month-on-month and 13.7% year-on-year

Monday, 30th March 2015: The cost of buying natural gas on the wholesale market has fallen in March with average wholesale prices in Ireland down 4% year on year, according to the latest Wholesale Energy Market Report by Naturgy Energy. The company, which supplies gas to over 20% of Ireland’s industrial and commercial market, states that the drop in prices resulted from increased supplies which have offset higher demand arising from colder weather conditions compared to the same period last year.

The weakening Euro over the last year has had a significant impact on Irish prices and has offset larger falls in prices seen in the UK wholesale gas market, the source from which natural gas in Ireland is purchased. Average day-ahead prices on UK NBP gas market* – the contract for gas delivery for tomorrow – finished trading on Friday 27th March at 47.25p (sterling pence per therm). Average day-ahead prices in sterling for March were down 17% compared with March 2014.

However, despite the currency effect, wholesale gas prices in Ireland remain 18% lower in Euro terms than the average monthly price recorded for March over the previous three years (2012-2014). 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.

On the supply side, North Sea gas output has increased despite a number of recent outages and Norwegian supply alone now accounts for approximately 35-40% of daily demand requirements. LNG (liquefied natural gas) shipments have also seen several consecutive months of year-on-year growth as floating cargoes provide multiple offers from suppliers. Meanwhile gas exports from Russia into Europe have reached their highest levels in close to a year, mainly due to an increase in flows to and through Ukraine – contributing to additional downward pressure on wholesale gas prices.

Gillian Lawler, Senior Energy Analyst at Naturgy states that day-ahead prices are likely to remain relatively flat in the near-term as a result of low storage levels, falling North Sea supply during scheduled maintenance in the second quarter and uncertainty from restrictions on gas production by the Dutch government and at the UK’s largest storage facility Rough. She notes that gas demand is set to fall significantly during the coming summer season but that the downward price pressure is expected to be offset partially by factors relating to supply and storage.

Gas storage facilities are currently 20% full compared to 52% at the same time in 2014. Ms Lawler states that the reduction in inventories is largely due to buyers seeking to free up their storage facilities before prices drop further over the summer. She says: “Buyers have been offloading storage as quickly as possible in preparation for heavily discounted gas that’s about to become available in the form of lower oil-indexed prices from Russia. Storage holders are motivated by the value of selling this cheaply injected storage capacity at average prices for gas next winter.”

“Seasonal gas demand will be heading into a steep decline over the next couple of weeks with the start of the summer season. And this year’s fall will be stronger than last year when temperatures were much milder earlier on in the year. So for the first time since 2010 any demand growth will be driven by low contract gas prices.”

Geopolitical Risks: Russian Gas Supplies

Commenting on the ongoing tensions between Russia and Ukraine, Ms Lawler states that gas supply from Russia this winter has flowed without disruption following an interim deal (at the end of October 2014) to provide Ukraine with access to natural gas supplies up until March on a prepayment basis. During trilateral meetings with the European Commission this month Russia and Ukraine agreed to work on a bridging agreement to secure continued gas flows to Ukraine and Europe from the end of March, when the current winter gas supply contract ends.

Russia is considering selling discounted gas, and Ukraine has agreed to consider buying the gas necessary to fill its storage sites. The two countries have agreed that negotiations for the next winter package have to begin now and that gas flows to Europe will remain unaffected. This is of significant importance given Ukraine is a major transit corridor for Russian gas to European markets, with Russia providing approximately a third of Europe’s gas demand – half of that coming via Ukraine.

The next trilateral meetings are planned for April.

Irish Electricity Update

The average wholesale price of electricity in the Irish market so far in March is 5.49 c/kWh – a decrease of 10% on the average in February and down 13.7% compared with March 2014.  The month-on-month increase in electricity prices is largely due to a slight decrease in demand and lower gas prices, which is significant as generation of electricity in Ireland relies heavily on gas generating plants and is the main fuel used in the generation fuel mix.

Wind energy accounted for 22% of overall electricity generation in Ireland in March. Some 8,879 gigawatts of wind energy have been generated since the start of the year, representing 25% of total electricity demand for the country during this period. Wind generation in March reached a peak of 2,406 MW on the 12th of March when it accounted for 50.3% of demand at the time.