Are energy prices set to rise further?
Wondering if energy rates will rise or come down in the next year? Knowing this can help someone decide if they should lock in a fixed tariff, or stick to variable.
To get an idea of where energy prices are headed, the NimbleFins energy experts have looked at natural gas futures prices. Futures prices indicate where the market is pricing something in the future.
Why did we look at futures prices for natural gas, specifically? Electricity generation in the UK comes from many sources, such as natural gas, coal and renewables. Natural gas is the largest contributor to UK electricity generation, so natural gas prices have a big impact on electricity prices, in addition to gas prices.
For example, we could look at the January 2025 natural gas futures to get an idea of what prices are expected to be in winter—e.g. if they're expected to rise or fall from here.
The chart below shows futures prices as of October 2024 in purple and the historical close prices in gold (these are essentially the actual, historical wholesale costs at a given time). As you can see, the futures prices indicate that natural gas prices increased dramatically in August 2022, but have dropped significantly since.
The result? The market appears to expect that wholesale prices are stabilising and will not rise significantly in the next few years. In fact, wholesale prices seem to be near levels seen at various points in the 2010s. That said, a worldwide shock like war could change the picture at any moment, causing energy prices to rise quickly.
Note: one reason that energy prices still feel very high right now is that we'd gotten used to lower electricity bills during the pandemic (as you can see via the futures price drop in 2020 in the chart above). With demand lower, prices dropped. Now, the rising prices feel even more shocking coming off of such low rates.
How do futures contracts work?
Futures contracts can be confusing, so here's a quick overview. A futures contract is an agreement to buy or sell something (e.g. a commodity or stock) at a predetermined price at a specified time in the future. A futures contract will be for a certain month and year (e.g. March 2025) and the price of that contract indicates what the market thinks the underlying will be trading at in that future month. For example, there'll be a contract for March 2025, one for April 2025, one for May 2025, and so on. The market trades each of these up until the last trading day of the month before, when the contract expires. So, for example, the March 2025 contract will be traded until the end of February 2025.
If you pick a far-out contract, the price for that contract today tells you where the market anticipates the price will be during the month of that contract. If you pick a nearby contract, the futures price essentially gives you more of a current market price. The futures price converges towards the current price, the closer you get to the contract month—this is because there's less guess work and uncertainty the closer you get.
And we can use historical futures prices (as in, where the contracts closed in the month they expired) to see what energy prices have been doing up until the current date. For example, we can look back to July 2024 futures prices to see what natural gas was essentially trading at in July 2024. (Futures prices essentially become current prices once you pass the expiration date of the contract.) This is useful for seeing, for instance, how much prices popped up in November/December 2021 compared to prices over the past couple of years.
Note: The ICE UK natural gas futures contracts used in this article reflect the GBP contract price for 1,000 therms of natural gas per day (1 therm = 29.3071 kilowatt hours) per delivery period (e.g. month).