Natural gas: the reasons for the price hike

With gas prices up between 25 and 32%, Luxembourg residential customers could face an increase in their annual gas bill of anything between €300 and €384 in 2021. (Photo: Shutterstock)

With gas prices up between 25 and 32%, Luxembourg residential customers could face an increase in their annual gas bill of anything between €300 and €384 in 2021. (Photo: Shutterstock)

Since the beginning of September, the price of natural gas on the European wholesale markets has been skyrocketing. What’s happening in Luxembourg?

The ministry of energy estimates that between 1 January and 1 October 2021 domestic customers will have experienced a 32% absolute increase in the price of gas, including network usage and various taxes.

Encevo (the parent company of suppliers Enovos and Leo), which enjoys a 60% share of the gas supply market in Luxembourg, estimates the increase to be around 25%, albeit using a different calculation method.

300% increase

But this increase does not reflect the increase in market prices. Compared to last January, some gas products have increased by more than 300%. "Gas is bought on exchanges. The biggest one is in the Netherlands. On the wholesale market, you can buy gas for the next month, but also for the next quarter, for a band covering the whole of next year or even the years 2023 or 2024," says Claude Simon, head of energy sales at Enovos Luxembourg.

"An example? An annual band for the 2022, i.e. the same amount of gas throughout the year, was selling at the beginning of the year at €16 per kilowatt-hour. Last Monday, the same product was priced at €43. For 2023, the kilowatt-hour was also around €16 at the beginning of the year and is currently being priced at €25. By contrast, a quarterly product for supply in Q4 of this year is currently selling for €73 per kilowatt-hour, compared to €18 at the beginning of the year. The same for Q1 of next year, around €73, compared to €18 at the beginning of the year. These are winter products, and there is strong pressure on the markets at the moment," Simon explains.

So, just like traders in any market, energy suppliers must anticipate gas purchases over different time periods in order to build up a portfolio of structured products that will, over the long term, absorb the volatility of prices on the wholesale markets for the end customer.

A long winter and a recovery in Asia

The market is currently under pressure for various reasons, such as the economic recovery in Asia and a longer-than-usual winter. As a result, wholesale prices in Europe are soaring. "I don't have a crystal ball, but the figures on long-term purchases show that this price increase is temporary," Simon says in the hope of reassuring users.

"There are two types of gas supply. The gas that arrives via pipelines, and the gas that arrives by ship, which is called LNG, for 'liquefied natural gas'. With the economic recovery in Asia, which is generally a more expensive market than the European market, LNG ships currently only deliver to the Asian continent. To illustrate the difficulty, last year 13% of the gas consumed in Belgium came from LNG ships," says Simon.

In addition to the Asian demand problem, the long winter has also taken its toll on European stocks. "Gas is mainly used for heating. Last winter was not particularly harsh in terms of temperatures, but it was long with fairly low temperatures until May and June. The demand for gas was therefore prolonged," Claude Simon adds. The ministry of energy has a similar explanation. “Filling of storage facilities did not really start until the end of May, beginning of June. Stock levels in Europe are still some 20% lower than at the same time last year. While stocks need to be filled by the beginning of October--i.e. before the start of the next winter season--the demand for gas has put strong pressure on the markets and generated an unusually high price level on the exchanges for the season."

Similar levels in the past

At Enovos, which has a 30% market share of gas supply in Luxembourg, the situation is somewhat nuanced. According to its data, a standard domestic customer consumes 2,700m3 of gas per year, mainly for heating. On 1 January this year, this consumption cost around €1,500, or €0.53 per cubic metre. At present consumption rates, a cubic metre costs €0.70, an increase of 32%. "However, the customer's bill takes into account the price variation and also the variation in consumption over the course of a year. This weighting makes it possible to further cushion the current price increase. Thus, compared to the 2020 bill, the final 2021 bill should only increase by 25%,” says Enovos.

"It is complex to compare final prices. For example, the final prices, including VAT and taxes, were 8% cheaper in January 2019. But in 2011 or 2013, prices were higher than today with a cubic metre of gas at €0.76 and €0.78 euros [respectively]. It should be noted that the carbon tax was not yet included in the price, as it has only existed since this year. So the prices have already been at similar levels in the past," explains Simon.

Another advantage for customers is that the bill is very often fixed and flat-rate. "Generally speaking, price increases can be read over time. In the past, prices on the market have never changed so quickly and our services calculate the financing plan well enough so that we don't have to radically adjust the bill. However, we will have to keep an eye on price trends," Simon says.

A rising bill all the same

According to the Luxembourg regulator, the ILR, in 2020, an average residential customer paid €39.3/MWh (i.e. €0.0393 /kWh) for the supply of natural gas. Or €1,201 for 30,556kWh of natural gas over one year. With an increase of between 25% and 32%, the bill for a private customer in Luxembourg could be, on average, between €300  and €384 more than last year.

In France, the consumer association UFC-Que Choisir estimates that the annual heating bill for households will increase by €150. In Belgium, L'Echo reckons consumers will see a price increase of around €600 between in 2019 and 2021 for a 'variable' gas supply contract of 23,260kWh . The Commission de régulation de l'électricité et du gaz (Creg), also in Belgium, calculated an increase of €133 compared to 2019 and €181 compared to 2020.

In the UK, media reports indicate that some nine gas suppliers have been bankrupted this year, seven in the last six weeks, affecting about 1.9m homes. The small suppliers have been worst affected because the regulator has moved slowly to increase a cap on energy tariffs, meaning the increase in gas prices cannot be passed on to the customer.

In Luxembourg, around 90,000 households (out of 265,000) consume natural gas for heating, which represents 40% of the imported natural gas. About 15% of natural gas is consumed by businesses such as shops for heating. Industry, which has a linear consumption for production and not for heating, consumes about 40% of the natural gas imported into the country. Finally, 5% of the gas is used to produce electricity via cogeneration processes.

This story was first published in French on Paperjam. It has been translated and edited for Delano.