The eurozone crisis and political instability in the Middle East caused a lot of volatility in wholesale energy prices this year. Expect more of the same in 2013, says Magali Hodgson

This year has seen the UK economy go into double dip recession and bounce back to growth in the third quarter. Pricing in commodity markets has been similarly volatile, due to a number of conflicting influences.

Demand for gas has turned out significantly below historical levels this year, with mild weather, reduced gas generation and a decline in industrial demand all playing a part. In fact, the lowest gas demand recorded over the year was 122 million cubic metres (mcm). Not only was this 60mcm lower than the previous year, it was also the lowest value seen so far this century.

Shale gas has significantly reduced US domestic demand for coal, and the associated drop in price has driven strong US exports of the commodity. This has resulted in large oversupply in the international coal market, which, coupled with reduced demand from the BRIC countries (Brazil, Russia, India and China), has weighed heavily on coal prices. However, UK coal plants ran at almost full capacity for most of the year.

With coal regularly meeting half the UK’s electricity demand, gas generation has been significantly squeezed – to the extent that sometimes it has contributed less than nuclear to the generation mix.

In the UK itself, fears that outages might result from a shortage of water available for cooling power stations after months of below average rainfall were allayed by the wettest summer on record. However, this caused reduced temperatures and light levels, which in turn boosted power demand.

Nor did concerns about coping with the demand presented by the Olympics come to anything. Power margins remained comfortable throughout the period. In fact, the key issue that was created by the Olympics was reduced liquidity in the wholesale market, because many participants took time off to enjoy the festivities.

On a worldwide scale, energy prices have also been affected strongly by Norwegian and North Sea gas outages, which were the result of maintenance on infrastructure. This, coupled with the threat of strike action in Norway, and low UK liquefied natural gas supply due to Qatari maintenance and high Asian demand, helped support energy prices.

The continuing eurozone crisis also affected prices, primarily by creating volatility and putting a downward pressure on costs. The situation stabilised somewhat in September when the European Central Bank committed to “do everything in its power to prevent the eurozone from failing”.

Energy prices are being supported too by political tensions in the Middle East, such as the conflict in Syria. Trading sanctions against Iran have effectively cut off 5 per cent of the world’s oil supply, giving prices a boost. Iran’s repeated threats to block the Strait of Hormuz have also helped to keep prices high.

Looking forward, the two main factors that have created volatility in 2012 – the eurozone crisis pushing prices one way and the political situation in the Middle East pushing them the other – are likely to continue to play a big role in 2013.

Magali Hodgson is Npower’s optimisation desk manager

This article first appeared in Utility Week’s print edition of 14th December 2012.

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