Economic Report 2018

ECONOMIC REPORT 2018

Gas Market Throughout the first half of 2018 the National Balancing Point (NBP) day-ahead gas price has averaged 56 pence per therm (p/th), up 29 per cent on the first half of 2017 (43.3 p/th) and 81 per cent higher than the first half of 2016 (30.9 p/th). This has largely been driven by a colder-than-average 2017-18 winter, with the so-called ‘Beast from the East’ storm bringing exceptionally low temperatures. On 1 March the National Grid issued a gas deficit warning for the first time in eight years. This period of increased gas demand coincided with supply disruption in continental Europe, resulting in reduced import availability. The combination of these factors led to in-day gas prices spiking at more than 300 p/th – the highest figure in 12 years.

Figure 3: Day-Ahead NBP Price

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60 )mrehT rep ( ecirP saG ylhtnoM lanimoN PBN Pence 70 80

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2018

Source: ICIS

Gas Market Performance Gas markets are, by their nature, more localised than oil markets, as consumption occurs predominantly in or near the area of production. Within the UK, all gas is delivered to the UK onshore network – the National Transmission System – where the majority is consumed domestically (with the exception of a few southern North Sea fields which deliver direct to the Netherlands). During summer months when domestic demand is low, some gas is exported through interconnectors to the European market, where it is re-sold. While there is generally a close correlation between oil and gas prices, the gas market is often affected by factors unrelated to the oil market such as weather/seasonal demand, storage capacity utilisation and the activity level of the global market for liquefied natural gas (LNG). This results in the gas market being more volatile than the oil market on a day-to-day basis. Environmental and cost pressures have driven the increased use of gas in power generation, making it a more economic and attractive alternative to sources such as coal. However, more recently, the displacement of gas for electricity generation by renewable sources has affected demand, as the support provided by contracts for difference (CFDs) has provided a route to large-scale investments in capacity.

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