What has driven such (massive) increases in the wholesale market.?..and don't just say Russia. (Which apparently we only have 5% exposure to. Is there a scramble?)
It's been a year now of volatile prices.
The 2021 increase was the same post-COVID issue that has affected many commodities. Production slowed (and in many cases, stopped) during COVID, when demand suddenly increased - especially from China - there was a mismatch between supply and demand. The same happened with both aluminium and steel too.
Across Europe and the UK we haven't exactly helped ourselves either. Germany has shut (nearly) all of their nuclear power stations, France have got many of theirs stopped for repair - meaning they weren't ready to increase supply of electricity. This had a knock-on effect for gas as many countries use gas to create electricity. Our government has prematurely put a near end to North Sea exploration and fracking, before we are ready to produce non-fossil fuel alternatives. We've also not got nearly enough gas storage capacity so we're far more exposed to fluctuations.
All of this left the West heavily exposed to any supply side issues with gas and oil. Putin saw this as the perfect opportunity to attack Ukraine, at a time when Western governments would not be able to put proper sanctions in place. Supplies were low or empty and prices were at the peak of what the market deemed acceptable. Had Germany and the rest of the EU imposed sanctions properly and stopped buying Russian gas, this war would have been over long ago.
Although we only get 5% of our gas from Russia, all that we buy from elsewhere is subject to the same global pricing. There's less gas globally (amongst those countries trading openly) but the same demand.
Equally, the gas we produce here is subject to market rates. If we don't pay those rates in the UK, then those companies will sell it globally for more than we're offering.
We're also talking about 1, 2 or 3 year fixed rates. Those selling to us need to be sure that there's still a profit for them at the end of that contract. Until Ukraine, energy companies could fairly confidently predict future raw prices - even with the post-COVID bumps, now they can't. Russia threatening not to turn the gas back on to Germany was a big scare, already priced in when they didn't. That means they have to overprice now in order to avoid being stuck in contracts they have to fulfill at a loss.
We're a large energy user and when we tender the bids are very competitive. If we're paying prices like this then it's no surprise consumers are. If we fix now, our combined gas and electric increase for Q3/4 this year will be £250k. Next year, with a full year's increase, it will be £500k.
