Why is business gas so expensive?
Most British businesses rely on a natural gas supply to heat properties and produce hot water. The majority of companies are supplied gas under a fixed-rate contract where a business energy supplier will provide gas at an agreed unit rate for a period of 1 to 3 years. Those businesses that are now looking to renew their fixed-rate contract are shocked to find that rates have doubled.
Our business gas experts at AquaSwitch are often asked, ‘why is business gas so expensive?’.
Here’s our explainer of the short and long-term factors that have led to the recent soaring natural gas prices.
The short-term factors making business gas expensive
No business energy price cap
The first thing to note with commercial gas contracts is that the British government does not impose price controls. In the consumer gas market, Ofgem regulates the gas suppliers with an energy price cap such that they cannot charge more than a maximum unit rate and standing charge.
There is no such control in the business gas market, so companies will pay for gas at market rates, however high that gets. Consequently, the fixed-rate gas contracts available on our business gas comparison service reflect the prices that business gas suppliers expect to be able to purchase gas from the wholesale market over the length of the contract.
The current state of the wholesale gas market
The wholesale gas market is where business energy suppliers purchase the gas they will supply to their customers. The wholesale gas prices depend on the balance between supply and demand for gas across Britain’s country-wide gas network. Since December 2021, business gas prices have risen through the following specific events:
- The winter of 2020/21 was cold and windless, meaning that the UK used more gas than expected. To fulfil the unexpected demand for gas, the UK used its strategic gas reserves.
- Without gas reserves, the UK now depends on importing natural gas from Europe.
- In Europe, 40% of overall gas used is imported from Russia. In February 2022, Russia invaded Ukraine, causing European nations to impose economic sanctions on Russia.
- In response to the war in Ukraine, Germany cancelled the opening of the Nord Stream 2 gas pipeline.
- Russia demanded payments in Roubles for gas supplied to European countries, a demand that Europe has refused. In response, Russia has shut off gas supplies to Poland and Bulgaria.
- The continued conflict has fostered significant doubts over the future supply of gas to Europe, pushing up wholesale prices.
See AquaSwitch’s latest monthly report on the state of the wholesale energy markets.
Long-term factors making business gas expensive
Although the short-term factors above have led to the recent spike in prices, longer-term trends are working to make the price of gas more expensive.
The UK’s dependence on natural gas imports
Natural gas is a fossil fuel extracted from underground or beneath the sea. The UK has extractable natural gas reserves in the North Sea, but these are in decline and are expected to be completely depleted within the next 15 years.
In 2006 the UK lost its independence in natural gas when natural gas consumption exceeded production for the first time. As North Sea production continues to decline, the gap between consumption and production grows ever wider. Currently, the UK imports c.40% of its natural gas from Europe.
Global warming and natural gas
The two primary uses of natural gas are the production of electricity through gas-fired power plants and the production of heat in localised boilers. Both of these use the energy released when you burn natural gas. Unfortunately, burning natural gas also produces carbon dioxide, a greenhouse gas.
To limit climate change, it will be necessary for all countries to reduce greenhouse gas production and stop using fossil fuels as a source of energy.
The UK is currently pursuing the following strategies to reduce dependence on natural gas:
Reducing direct natural gas consumption by encouraging businesses and households to use alternative heating systems such as heat pumps.
Reduced exploration and production of natural gas
The worldwide effort to limit climate change will reduce future natural gas consumption.
The exploration and extraction of new natural gas reserves require massive investment by global gas companies. A new gas field will require billions in initial investment to yield a steady flow of gas for a period between 15 and 30 years.
Gas companies fear that global gas consumption will fall so significantly within the decade that the price of natural gas will crash. Falling gas prices would mean that investments in new gas fields today may become quickly uneconomic.
Gas field investments that cannot yield a profit because the current price of gas is less than the cost of extracting it from the gas field are known as stranded assets.
The fear of stranded assets means that the major gas companies worldwide are holding back on investing in future gas extraction even though gas prices are at a record high in today’s market.
The lack of investment in gas extraction means that the supply of gas won’t increase to meet the current demand in the market, keeping prices higher for longer.
What should my business do about soaring gas prices?
The business gas market is competitive, with many different suppliers competing to offer the best business gas prices. The easiest step companies can take to protect themselves from the rising cost of gas is to ensure they get the best deal available.
Use the AquaSwitch service to compare business gas prices and get the best rates for your business.
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