Gas Prices

UK business gas prices are determined in a traded market where the price is set by the marginal gas transaction. When the first pipeline between the UK and continental Europe was opened in 1998 a link was established between UK commercial gas prices and the oil indexed prices in continental Europe. The introduction of LNG to the UK adds a more global component to UK gas prices. In the future the UK will be competing with US and Asian markets for LNG cargoes that can, to some extent switch between destinations across the globe. The UK natural gas market therefore faces a paradigm shift both in supplies, a move from domestic gas production to global imports, and in prices, with a growing link to global gas and oil prices. 

As a result, price history provides limited insights to the future. The move to a heavy reliance on imports has also coincided with a paradigm shift in oil prices, recently at record highs of around 140 US$/bbl1. At this level wholesale gas prices in the UK could fluctuate between approximately 70 ppth (pence per therm) in summer and 110 ppth in winter. This is in stark contrast to recent years when prices have been in the 30-50ppth range. With full pass through to retail markets this increase in wholesale prices would in turn lead to an increase in domestic prices from around 90 ppth at present to about 140 ppth. 

Whilst the absolute gas price level has increased materially recently, the rise in gas prices has been in line with changes in oil prices so the parity of gas relative to oil prices is within a historically observed range. The growing reliance on imports means the outlook is for a significant increase in out turn gas prices although it is expected to remain below parity with crude oil prices.

(1 therm = 100,000 Btu (British thermal units), 29.3 kilowatt hours or 25,200 kilocalories)

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