Energy prices to rise by year end, warns Bord Gáis

ENERGY PRICES will rise later this year, Bord Gáis Energy has warned, with the higher costs cancelling out the dampening effect of last month’s sell-off in commodity markets.

The latest Bord Gáis Energy Index notes that the anticipated rise in natural gas prices in the final quarter of 2011 will also push up electricity prices. The wholesale price of gas increased in May, although the wholesale price of oil, coal and electricity all fell.

Overall wholesale energy prices fell 5 per cent last month, according to the index, but remain 27 per cent higher than a year ago.

The price increases may put pressure on consumer prices later this year.

Bord Gáis Energy trading analyst Michael Kelleher said the decline in the index was the result of the broad-based sell-off in commodity markets, which occurred on the back of weak economic data in the US and fears surrounding inflation in China. “Futures markets are predicting relatively stable prices for the remainder of the summer, but a return to higher prices in the fourth quarter of this year. This is primarily due to expected higher natural gas prices,” he said.

The majority of gas prices in Europe are linked to the oil prices that had prevailed six months earlier. As a result, with oil prices exceeding $100 per barrel in the first and second quarters of 2011, gas prices in Europe will advance in the second half of the year. “These higher gas prices could also result in higher electricity prices, as gas is one of the main fuels used in power generation in Ireland,” Mr Kelleher said.

The natural gas element of the index rose 2 per cent last month. Gas prices fell to 52p per therm in the first week of May because of a higher level of imports via the Norwegian Langeled pipeline and lower exports to the continent. But by the middle of May, prices had rebounded to over 58p as maintenance at various UK and Norwegian terminals reduced deliveries.

The oil element of the index fell 4 per cent, following a plunge in crude oil prices in the first week of May. After ending April at $126 per barrel, Brent crude oil fell to trade at a low of $105. Prices recovered to trade in a $109 to $117 range for the remainder of May.

With the civil war in Libya appearing to reach a stalemate, some of the upward pressure on oil prices caused by short-term geopolitical volatility eased.

The electricity element fell 9 per cent, as electricity prices dropped to €62.20/megawatt-hours in May. The drop can be attributed to good availability of thermal generation and significant output from wind generation. In April, several of the large, efficient power generation plants were not available but this was not the case in May, Bord Gáis said. Wind generation saw peak levels of 1,318 megawatts in May due to the unsettled weather.

The coal element fell 2 per cent, as the fuel traded at about $128 per tonne in the first week of May, only for prices to fall $6. An oversupply of Colombian coal to the European market resulted in the commodity finishing the month at $122 per tonne.

The report follows recent comments by the International Energy Agency, which said the world was likely to enter a “golden age of gas”, in which the importance of gas was boosted by environmental regulations on coal and uncertainty over nuclear power.

If certain conditions are met, the IEA expects gas demand will overtake demand for coal before 2030 and come close to demand for oil by 2035. By this point, at least a quarter of energy demands will be covered by gas. In this scenario, gas demand will grow by an average of 2 per cent a year, compared with a 1.2 per cent growth in annual total energy demand.