Why are household gas bills stubbornly high as wholesale prices plunge?

Barring winter peaks in demand, natural gas and electricity prices have mostly fallen over the past eight months. Natural gas prices slid to 58.58 pence a-therm, their lowest since September 23rd, 2021, in London on Friday, following a steady fall since hitting a record £7.25 last August.

Forward contracts for supplies of the fuel next winter were £1.11 a-therm, the unit in which the fuel trades in London, a key market for this country as we import gas through Britain.

Meanwhile, the Central Statistics Office (CSO) reported this week that Irish wholesale electricity prices tumbled 13.5 per cent last month.

While those prices change every hour they now translate to not much more than 20 cent a kilowatt hour (KW/h), the unit in which households buy electricity. That is less than half the 44 cent that the average consumer has been paying since last autumn.

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But industry figures say prices will remain high into next year, with “no chance” of them retreating even close to pre-crisis levels, when charges were around 18 cent KW/h. That is because, as one observer puts it bluntly, “wholesale prices have no relevance” to what we pay.

Hedging, which involves buying quantities of gas and electricity months in advance of selling it on to consumers, is the reason for this break between wholesale prices and what suppliers charge households.

Natural gas sets electricity prices as it is the backup fuel for renewables, while generators burn it to produce around half our power.

Figures obtained by The Irish Times show that Irish suppliers could be locked into contracts for natural gas for next winter at an average approaching £2.54 a-therm, higher than the £2.10 they paid last winter.

“At those levels, it’s very hard to see prices coming down,” says Daragh Cassidy, spokesman for price comparison website Bonkers.ie.

That average hides a more complicated picture. Last summer, as Russian state company Gazprom closed the gas taps, contracts for winter 2023 supplies surged. In July they were £4.76 a-therm, in August £4.53 and in September they were £3.75.

This month two years ago, before the energy crisis or the Ukraine war began, winter 2023 gas was 52p a-therm. In March 2022, as the first wave of energy price rises hit consumers, those contracts hit £1.80.

Companies do not hedge all at once, typically they buy 80 per cent of their needs for a season over the 18 months leading up to its beginning. So suppliers began buying for next winter in June 2021, when the price was just shy of 52p a-therm, and continued hedging through periods when the cost was multiples of that.

While winter contracts track wholesale price movements, they factor in elements such as the risk of costs rising with demand.

In general, Europe has too much gas at this time of year, hence this week’s lows, but a cold winter can leave supplies on a knife edge as stocks run down, so forward contracts take this into account.

While the bottom line is that Irish households face high energy bills into next year irrespective of wholesale trends – suppliers argue that without the insurance that hedging gives things could have been far worse over the past 18 months.

John FitzGerald, an economist and a columnist with The Irish Times, noted this week that European wholesale gas prices rose 740 per cent from 2019 to 2022, but the Irish import price increased 320 per cent, which he argued was a “significant benefit” to consumers here.