Semin Soher Power: Household energy prices are likely to stay hot for some time  

Investment in green energy will help bring prices back in the long term, but rising costs are here to stay for now

It was a little over a year ago when the price of oil fell below zero for the first time in history driven by the sharp fall in demand. Fast forward and things could not be more different in energy markets as the recent acceleration in prices is expected to have wider implications for geopolitics, monetary policy, businesses and consumers alike.

There are a number of factors impacting energy markets right across the globe — but weather disruption is a common theme throughout. In China, floods forced authorities to turn to the global markets and purchase natural gas to replace coal supply lost in the flooding. Closer to home, low wind levels in the UK have adversely affected the energy production by wind farms there, while a cap on prices for customers combined with soaring energy costs has seen a number of suppliers cease trading, which has so far impacted over 2m UK customers.

Climate change is also affecting energy markets. Environmental, social, and governance (ESG) concerns have limited new investment into the fossil fuel industry while governments have already begun to switch from coal and nuclear energy. As economies have recovered from the Covid-19 shock, demand has been increasing but supply has been slower to respond. 

Energy and geopolitics

Energy prices also have important geopolitical implications, as the late US Senator John McCain once said: “Whoever controls oil controls much more than oil.” 

Oil supply is controlled largely by a suppliers group known as Opec+ who, with negative prices still fresh in their memory, have so far resisted international pressure to increase supply beyond the smaller, pre-agreed increments.  

Similarly, Russia has been accused of limiting natural gas supply to Europe to fast-track the necessary approvals for its new Nord Stream 2 pipeline. Forward pricing in energy markets suggests that prices are expected to fall next year but there is no guarantee this will be the case given the variety of uncertain factors that drive prices. 

Higher energy prices will also feed through to inflation numbers, a key metric for central banks, which could in turn have implications for their monetary policies. In the recent weeks interest rate markets have increased their expectation of rate hikes by central banks in most major economies across the world. Current pricing suggests that UK interest rates will rise this year, US interest rates will rise next year and European interest rates will rise in 2023. 

European figures released last week show inflation at a 13-year high — and Irish inflation remains above the EU average. Higher energy prices along with longer-lasting supply bottlenecks, rising housing markets and upward pressures on wages are challenging the central banks’ narrative that inflation pressures will be "temporary".

Prices to rise further

A number of Irish utility suppliers have already increased their prices given the increasing supply costs — and, as demand increases into the colder winter months, consumers are likely to experience higher energy bills. EU governments have begun to act in an effort to offset these expected increases. Spain recently announced cuts to Vat on electricity generation and caps on gas prices, while Italy introduced a €3bn support package. France has introduced a €100 means-tested voucher for energy bills which will reach 5.8m households. 

Here in Ireland, the Government has also announced an increase in means-tested payments to help with the expected higher heating costs. Meanwhile, the EU recently released a toolbox to tackle higher energy prices while the Next Generation EU Fund, the EU-wide fiscal spending package for economic recovery from the pandemic, is also expected to provide further investment in green energy initiatives.

Global investment into green energy along with the expected increase in oil and natural gas supply should bring prices back over time. In the short term, however, energy prices are expected to remain elevated and there may even be a lag in prices feeding through from suppliers to households which could last well into the New Year.

• Semin Soher Power is senior inflation trader at Bank of Ireland