A Storm is coming: The challenge with rising Energy Costs

European gas prices hit record heights in December and there is far more to come. Why is it happening and why is nobody talking about it?
Is it a result of the cold winter across Europe, the Covid-19 Pandemic temporarily skewing our demand needs, or is there another reason for the recent hikes?
Energy suppliers buy gas and electricity months ahead of time to ensure they can meet their customers’ demand. Prices at that time are likely to determine the cost at which they are doing this. For example, when they see trends towards prices going up, they will try to purchase more at the current price. This in turn affects the future price as demand increases.

So, when we look at current prices of gas and oil on our bills, we are not really seeing the full true picture of what is happening with the price of gas. Instead, we really need to be looking at the wholesale spot price which shows us what is going to happen a few months down the line.

Let us look at today as an example. The latest SEAI energy prices report shows that typical commercial users of gas in Ireland were paying €30 per MWh for their gas in the final quarter of last year. However, at the same time the wholesale price of gas as growing exponentially. As shown in the diagram below, the peak wholesale price of gas in Q4 2021 was approximately 45 times higher than the low of March 2020 when Covid first hit.

This peak price was approximately €180 per MWh (450 p/therm) which is six times more than the typical commercial gas price in Ireland in 2021. Although this has reduced back down to around €100 per MWh at present, this is still a huge increase from what we have been paying for natural gas over the last decade. Unfortunately, this means gas prices are set to increase significantly for Irish businesses in the coming months.

Fintan Lyons, who is the Managing Director of Kaizen Energy manages the gas purchasing for over 60 apartment complexes in Dublin, so his clients are already feeling the effects.

“Most of our gas contracts were locked in for the full year in Q1 2021 so we have recently started negotiating our 2022 gas contracts with the energy suppliers. Even though it is still early in the year we are seeing wholesale rate increases of 300%+. These are pass through rates so it will have a significant impact on the heating costs for our 7,000 residential customers over the coming 12 months”

There are a range of factors causing this. Europe has had a particularly cold winter, meaning that the stored gas supply became somewhat depleted. Last summer also saw lower levels of wind, meaning wind farms were affected and unable to produce the top-up required for the supply needed.
Countries across Asia have been using a higher amount of energy too, putting more demand on strained gas supplies across the globe. In addition, companies and consumers want more oil and gas more than the market can provide, and so the price of both will increase and energy consumers can expect higher prices going forward.

Meanwhile, tensions between the European Union and Russia, which supplies much of the fuel, contributed to the squeeze on supply. Should tension increase, markets are likely to be hard hit since Europe relies on Russia for around 35% of its natural gas.
In 2020, volumes of gas from Russia to Europe fell after lockdowns decreased overall demand but the volumes did not recover again when consumption surged and the increased demand sent gas prices to record highs.

We are already feeling the affects of this here in Ireland as we watch electricity prices increasing steadily, but we have yet to see the full effect of the hikes in gas prices. But rest assured, they are coming.
David Connolly from Astatine Ltd has seen a massive interest from commercial customers now looking for an alternative solution to gas.

“In the last few months, it has really started to dawn on large energy users that they simply cannot continue to rely on gas and other fossil fuels. Not just because of the uncertainty on price, but because of the hugely detrimental affect that these fuel sources are having on our environment. They realise that the time has come for them to move to cleaner energy.”

So, is there a solution? The answer is yes. There are huge opportunities for high-temperature heat pumps to reduce the reliance on oil and gas for heating in Ireland.
Heat pumps use one unit of electricity to typically produce three or more units of heat, so this huge efficiency gain means that consumers can use less and cheaper energy.

David explains that businesses need to be aware that this is a solution that is available to them today.

“Often, when we talk to businesses about switching to more renewable and cleaner sources of energy, they see it as something that they consider down the road, but they are not ready to disrupt day to day operations to make room for a project that they believe will also cost them a fortune. We have to keep explaining to people that this simply isn’t the case.

At Astatine, we offer this solution without any upfront costs to customers and with a guarantee of zero downtime. As the upsurge in gas prices begins to really bite, we expect demand for Heat Pumps and Electric Heat solutions to surge.”
Astatine are committed to identifying a roadmap to zero carbon for businesses. Together with our customers, we are enabling the renewable transition in Ireland. As a decarbonisation partner, we are moving companies in every sector towards a cleaner, greener, and more independent energy solution.