“How much higher are energy prices going to go?”

Published on: 1 October 2021

Current questions related to economics, (responsible) investing, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof, about the explosive rise in the price of gas and electricity. “We are not expecting the low price levels from just before and during the covid period to return.”


The current price for gas and the accompanying price for electricity are at a record high. Natural gas tripled in price in 2021. Now that gas production in Groningen has been scaled back, we have become more vulnerable to these kinds of extremes. Where will the rise of the energy price end? According to Martijn Olthof, who is responsible for equity investment in the energy sector at APG, the current prices for gas and electricity are probably at an extreme peak. In the short-term it could go even higher, for example, if Putin and the EU do not reach an agreement about the Russian pipeline Nord Stream 2. But after that, the energy price will lower again, Olthof expects. We are not expecting the low prices from 2020 to return.


The sharp rise in gas prices this year has four causes, Olthof says. The first one is: the relatively cold winter and spring, we just had. “That greatly increased the demand for gas, particularly in Asia, and as a result a lot of liquefied natural gas - LNG - went to that continent. Because the winter and spring were also cold in Europe, that pushed up the price of gas.”


The temporarily lower supply of natural gas from Norway - major maintenance on a number of gas fields caused production interruptions - also had an upward effect on the gas price. Olthof: “Certainly now that gas production in Groningen has been cut back, Norway is the main gas supplier in Europe. Because of the faltering production, Norway has supplied less gas than usual.” The third cause of the gas price explosion in 2021 was the economic recovery, which caused the demand for gas to rebound.


Close the valve

And then there is a geopolitical factor. Olthof: “The amount of natural gas supplied by Russia is the same now as it was a year ago. But then, due to the lockdowns, demand was unusually low and the price was less than a fifth of the current price. Russia’s failure to meet Europe’s greater demand for natural gas has clearly had a driving effect on the price. Most people think Putin is doing this to force approval from the EU for the Nord Stream 2 pipeline, which Russia wants to use to transport more natural gas directly to Germany. Currently, gas already flows through the Nord Stream 1 pipeline directly but a lot is also being transported through the Ukraine. But for Nord Stream 2 to come into operation, the green light is still needed.” The question is, however, how soon more gas will be coming from Russia, even with Nord Stream 2 coming into operation, because Russia will first replenish its own storage stocks.


The price of electricity is partly determined by the price of gas. But there are two more effects on the pricing of electricity, Olthof explains. “Firstly, there was relatively little wind this year, which meant that the supply of wind energy was unusually low. But the high carbon price has also contributed to the rise in the price of electricity. After all, generating electricity becomes more expensive when emitting carbon becomes more expensive.”


Challenging winter

So much for the past. What can we expect in the near future when it comes to energy prices? Olthof: “It seems that the current prices of gas and electricity are outliers, with clearly identifiable causes. A number of them will play a smaller role, or none at all. Intermittent production in Norway will start up again and the supply of wind energy will rebound. And Nord Stream 2 will also be given the green light at some point, increasing capacity from Russia by 55 billion cubic meters per year. It will take some time to replenish the shrunken gas reserves. But these developments will bring energy prices back down, even though I see the high carbon price increasing rather than decreasing in the future, and energy demand will also remain steady for the time being. However, we should not expect the low levels from just before and during the covid period anymore. And if we get a severe winter without a deal with Putin, gas and electricity prices could skyrocket even further in the interim. That could make it a challenging winter for many European countries, but the UK in particular.”