UK Natural Gas Futures –

Rising Energy Prices

We take a look at the future of natural gas and home heating

It’s being dubbed ‘the perfect storm’. A cold winter, lack of storage capacity and rising global gas demand (in both hot and cold climates) have caused wholesale gas prices to soar to record highs. 

Consumers are right to be worried. Energy bills will soar this winter and much uncertainty lies ahead. In the short to medium term, prices should gradually return to normal levels but as the effects of global warming become more prevalent, greater extremes in temperatures may cause abnormal surges in energy demand to become more common. The prospect of continued volatility will not ease consumers’ anxieties.

The first port of call for homeowners is to know what rates they’re paying their supplier and to monitor their usage. Bill payers can also protect themselves by purchasing energy-efficient appliances and use smart meters or thermostats. Some may be tempted to overhaul their gas boilers entirely. Energy companies are already beginning to make the push to convert homes to electrical sources of heating – primarily Ground and Air Source Heat Pumps – but despite their efforts gas is here to stay. 

87% of UK homes are currently heated by gas and would have to undergo conversion. Not only does this present unique challenges to each home in terms of space and noise considerations, but Air Source Heat Pumps are also less efficient at lower temperatures (i.e. when they’re at highest demand) and don’t produce comparable heat levels to that of gas & oil boilers. In addition, not all homeowners will be able to afford the large upfront costs (around £6k – £10k). One estimate puts the total cost of installing a Heat Pump at £11,500.

Although not ideal in all cases, Heat Pumps will still play a big role in the next decade. The Department for Business, Energy & Industry Strategy (BEIS) forecasts 1 – 1.7 million new installs over the next decade and the domestic manufacturing market for Air Source Heat Pumps is projected to be valued at £3 – £5 billion by 2035. This is by no means a panacea but fortunately, there is another solution gaining traction – Hydrogen.
The idea for Hydrogen fuel is not new. It emits no greenhouse gases when burned with oxygen, the only product being water. The main barrier to Hydrogen as a fuel is that there are no natural reserves and will have to be produced either by electrolysis (which is costly but sustainable) or steam-methane reduction (which is cheap but unsustainable). Storage and transport infrastructure are also lacking. Yet the UK government seems game for Hydrogen. It recently announced a plan to create 9,000 jobs and £4 billion in investment this decade to create a new Hydrogen Economy, the scope of which applies to industries such as transport and the gas network.
In the context of home heating, the idea is to begin by injecting our existing natural gas supply with Hydrogen at low doses and increase the dosage in the coming decades, with the aim to wean off natural gas entirely. Converting the entire gas network to Hydrogen presents many challenges but a recent trial from Keele University and Cadent of 130 homes showed that 20% dosing of Hydrogen has had no effect on existing gas appliances in the short term. This is great news as it means entire districts will be able to convert gradually rather than all being forced to convert at once. The upcoming ban on gas boiler sales into new builds will give a good indication on whether consumers choose Hydrogen gas boilers or take a punt on Heat Pumps.

In terms of production & supply, as there are no reserves of Hydrogen the role of geopolitics in energy should start to decline. If production can be done right and reliably maintained this will lead to more stability – domestically produced Hydrogen has the potential to reduce the UK’s dependency on imports and could mitigate against another winter price spike.

Today, around 53% of Hydrogen is produced from steam-methane reformation as it is the cheapest. Hydrogen produced from electrolysis costs around £55 – 65 / MWh to produce while Green Hydrogen costs £100 – 200 / MWh. In the UK the price cap for Natural Gas is currently at £40 / MWh so much advancement is needed before it can be made viable for the end-user.

With all that said, without protections against demand, surging price spikes will still occur. The UK government has little appetite for expanding its natural gas storage capacity but recently announced a £1.6 billion plan to convert a recently closed offshore storage facility, Rough, to Hydrogen storage. 

The coming green energy transition will involve much experimentation and further energy crises can’t yet be ruled out. Interestingly, this is the first energy transition in history where the metric of success will not be increased efficiency of the fuel source (open fires to boilers increased efficiency from ~20% to ~95%) but the levels of greenhouse gasses produced. This will of course offer little comfort to those struggling through the winter. Whatever the result of the energy crisis this winter, if consumers see red then we need to go green.

Picture of Author: Ryan Duplock
Author: Ryan Duplock