US vs UK Wholesale Electricity Market Outlook

Liam Thomas, 17 September 2021

US v UK Wholesale Electricity Markets

2021 has been a volatile year for US and UK electricity, driven largely by shifts in demand as economies recover from the COVID-19 pandemic and concerns over natural gas supply. UK power prices have almost doubled since the beginning of 2021 to reach their highest levels since the wholesale electricity market was established in 1990¹, and US power prices have increased 70%, since this time last year. The UK relies heavily on imported natural gas, making its electricity price environment particularly sensitive to supply chain challenges and variances in global gas demand. The US has abundant domestic natural gas, which has historically kept gas and electricity prices lower and less volatile. Nevertheless, 2021 has been an outlier in terms of market volatility for both regions, but particularly in the UK market. 

Figure 1: US and UK Wholesale Electricity Pricing 2016-2021²

UK Power Prices – Current Trends and Long-Term Outlook

Over the course of the last six months, global gas prices have risen as many economies recovered strongly from the COVID-19 crisis, prompting a surge in demand for energy. In Europe and the UK, this increased gas demand was coupled with supply challenges. A cold winter and spring in Europe put pressure on gas reserves and supply from many key global producers has been constrained.  This sustained market dynamic has resulted in large gas price increases throughout Europe but has disproportionately impacted electricity pricing in the UK due to its relatively greater dependence on natural gas.  In recent weeks, electricity prices have climbed further as lower than expected wind speeds have resulted in reduced wind generation and a large fire at Britain’s main electricity subsea cable has caused concerns around electricity import delays from France.  The average market wholesale electricity price in the UK reached £107/MWh³ in August, a 102% increase relative to £53/MWh⁴ in the beginning of 2021.

Similarly, short to medium term power price forecasts in the UK have experienced upward revisions due to the strengthening of the commodity markets combined with increasing carbon prices. In the long-term, forecasters expect increasing solar and wind penetration to put downward pressure on UK wholesale electricity past 2030⁵. However, until utility-scale battery storage is more prevalent, solar and wind will continue to require gas resource during off-peak periods, which could sustain higher electricity pricing in the UK.

Figure 2: UK Wholesale Electricity Pricing vs UK Natural Gas Futures 2016-2021⁶

US Power Prices – Current Trends and Long-Term Outlook

In the US, gas prices have similarly increased on the back of flat production, some of the hottest summer months on record, a large storage deficit, and record exports under President Biden⁷. While U.S. gas and electricity pricing have historically been less correlated relative to Europe and the UK, the recent increase in gas pricing has influenced US wholesale electricity prices. The average wholesale price in the US has increased 52% from $27/MWh in January 2021 to $41/MWh in July 2021⁸, and is up 70% compared to July 2020.  

In recent years, expectations of increased penetration of low-cost renewables and a sustained low price gas environment have suppressed long-term U.S. electricity prices forecasts.  However, recent forecasts have looked increasingly bullish compared to prior forecasts reflecting a shift in carbon price assumptions related to the Biden Administration’s long-term net zero targets, associated regulatory changes, and heightened global focus on emissions. A leading provider of long-term U.S. power price forecasts has revised their outlook to replace their legacy federal carbon tax with a series of extended tax credits and trading schemes. Most notable is their inclusion of an assumed zero-emission credit (applicable to both renewables and nuclear) that in many geographies, in combination with projected energy prices, is expected to increase the overall value of renewables.⁹