Why don’t the energy rates fluctuate along with the natural gas prices?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Martijn Olthof, equity investor with a specialization in utilities, on why energy rates do not immediately fluctuate with the price of natural gas.

With the sharp drop in the price of natural gas in recent weeks, you would expect to see that drop reflected in the energy rates you pay. Especially since not only the price for short-term supply has dropped, but also that for supply over the next two years. But although the first energy suppliers have already started lowering rates, they are not immediately moving along with a falling - or rising - price of natural gas price. There are several reasons for that.

Notice period
“These things always take some time,” Olthof says. “When prices rose very sharply last year, a number of energy providers tried to raise rates quickly. However, those suppliers did not fare well, because a price increase should always be announced well in advance. That gives customers the opportunity to switch to another provider.” The fact that suppliers must observe the customer's notice period also causes them to be cautious about reducing their rates quickly. “They then run the risk that, in the event of rising gas prices, they will have to wait for the notice period before they are allowed to raise their rates again.”

Opportunism can also play a role, Olthof explains. “There are companies that take advantage of current inflation by raising their prices beyond their own costs because they know they can get away with it. This is also known as greedflation. Inflation causes people to lose their anchor points about what is a reasonable price. They are therefore more likely to accept price increases because everything is getting more expensive. Perhaps that is why some energy companies think: we will leave the high prices as they are for now.” 

China
The fact that natural gas prices are currently at their lowest level since February 2022 does not mean that they will stay that way. “Natural gas prices are currently low for several reasons. It is partly because factories could not afford the earlier higher prices and therefore shut down production - reducing the demand for natural gas. Another reason is that consumers are turning down their thermostat and taking shorter showers to save energy. The mild winter weather also plays an important role.” And then there is China, which has been buying less liquefied gas, better known as LNG, in recent years because of the lockdowns the country has been in. “If the Chinese economy reopens more and more and it still starts to get very cold here in Europe, there could suddenly be a shortage of natural gas in Europe. Therefore, it is premature to say right now: the natural gas shortage problem is gone, the natural gas price has dropped significantly so rates can go down again.” This uncertainty in the energy market also prevents suppliers from reducing their rates quickly. After all, they then run the risk of having to reverse the reduction a month later.

Olthof emphasizes that the energy market is currently in extraordinary circumstances. “That is also why the government intervenes with a price cap. But if there is scarcity of a certain product and more demand than supply, that product simply becomes expensive. That also applies to natural gas, because people don't want to be left out in the cold.” What does not help to keep the price of gas down permanently is that there is no way to create additional supply very quickly. “We can get LNG from Qatar or America, but that is not immediately available. So that additional supply can only contribute to lowering the price of natural gas in the longer term.” 

Sustainable energy
Natural gas reserves are now unprecedentedly high in Europe, which may help it get through next winter. At the same time, it is hoped that renewable energy will get off the ground even faster, Olthof says. “More solar and wind farms are being built every year, but it will be some time before renewable energy can really play a big role. In the longer term, natural gas, and thus the price of natural gas, will no longer be relevant. However, if you look at how much natural gas Europe imported from Russia in recent years, the threat of a shortage will continue to hang over the European market in the coming years. That threat can be reduced by a combination of three measures. Import natural gas from other countries, consume less natural gas and commit even more to renewable energy.” The energy market will remain volatile in the coming period, and it remains to be seen to what extent and especially how fast energy rates will fluctuate along with the price of gas.