Electricity and gas will become significantly cheaper. Three tips for households

Already in 2021, energy prices – after ten years of relative stability – began to rise sharply. The main cause can be attributed to European politics led by the German Energiewende. The pressure to reduce emissions raised the prices of emission allowances and thus also the prices of gas and electricity.

In February 2022 came the war in Ukraine, which brought anti-Russian sanctions and the need to cut off from Russian oil and gas. Because of this, energy prices on the stock exchange soared into the stratosphere last year. The European Commission and the governments of individual countries had to cap the prices to calm the market a little.

The situation on the stock market has already calmed down. Energy prices have fallen significantly since the end of summer. Today, they are not only below the ceiling level, but have even reached lower values ​​than before the Russian invasion of Ukraine.

Developments on the stock exchange:

Oil: 15% cheaper than before the war

The price of oil has been hovering around $75 to $80 per barrel lately. European Brent crude is slightly more expensive than US WTI crude. A year ago – the day before the Russian invasion of Ukraine – a barrel of oil cost about 15% more. In August, the price even climbed to 130 dollars per barrel. Compared to the peak from last summer, oil here is currently about 35% cheaper.

Nevertheless: From a longer-term perspective, oil remains more expensive than in previous years. Five years ago, a barrel cost around $65, about 25% less than today.

Fuel prices at gas stations also depend on oil prices. Compared to last year, the price of gasoline and diesel went down significantly. It is one of the key factors that has been suppressing inflation for half a year. But of course we all remember the years when gasoline was much cheaper.

Gas: 45% cheaper than before the war

The price of natural gas on the stock exchange in 2022 has almost tripled. But it has been falling sharply since the end of August. At the end of August, the price of gas in the US was almost close to $10, having already fallen by 70% from the peak.

Currently, the price of gas in the USA is even about 40% lower than before the Russian invasion of Ukraine. US gas at the main hub Henry Hub is now trading at $2.75 per million British thermal units, the calorific unit used in the US.

In Europe’s main TTF hub, the price of gas briefly jumped above 300 euros per megawatt hour last year. Now it costs only around 50 euros, which is even 45% less than before the war. However, in the longer term it is still a relatively high price. Five years ago, gas cost only 35 euros per megawatt hour on the stock exchange.

Electricity: 6% cheaper than before the war

The biggest racket can be seen on the graph of the development of the price of electricity on the stock exchange. Within eight months of last year, it soared eightfold, compared to prices two years ago, even twentyfold. At the end of last August, the price of electricity was close to 1,000 euros per megawatt hour.

Today, the contract for the year 2024 costs less than 150 euros per megawatt-hour, i.e. a bit less than before the outbreak of the war, but still four times more than five years ago. The price of electricity definitely still has a lot of room to keep falling in the future, realistically it should get below 100 euros per megawatt hour over time.

When will energy for households become cheaper?

Unfortunately, it will take some time before the drop in prices on the stock exchange is reflected to a greater extent in the final prices for consumers. Gas and electricity suppliers buy most energy in advance in annual contracts. Now we receive energy purchased on the exchange at last year’s prices – and then they were much higher than today.

Next year, we will already receive energy purchased on the stock exchange gradually during 2023. Therefore, if there are no new price shocks this year, gas and electricity for end consumers should become significantly cheaper next year.

Prices will probably remain much higher than we were used to in the past decade. But they certainly won’t stay as high as this year for a long time. For now, everything indicates that the price of gas and electricity for households could drop by around 30% next year.

In addition, there is little hope that the war in Ukraine will end and Russia will then try to return to the European market, which would, with some exaggeration, flood the market with cheap gas. In such a rosy scenario, both gas and electricity prices could return to the level of the “old days”. Of course, we can’t count on that, for now it seems more like wishful thinking.

On the other hand, there is always the risk that something else will happen and a black or even blacker scenario will occur. No one can predict the future. But it seems that as far as the “energy crisis” is concerned, the worst is behind us and better times are on the way.

What follows from this?

First: I think it makes no sense to fix electricity or gas prices now. I can’t promise anything, but from my point of view – according to the price development on the stock market so far – there is a very high probability that the prices for end consumers will drop significantly in the next two to three years.

Second: If you are thinking about installing solar panels on the roof or other large investments in energy savings, do not follow the current energy prices when calculating the return. Over the lifetime of inverters, batteries, panels and other components, calculate on average half the price of electricity than now.

Third: Don’t be intimidated by inflation anymore. She was, is and will be here. The last year has been extreme. The rise in prices over the past twelve months has been truly devastating. But this year, the increase in prices should fade in the year-on-year statistics. And next year, when energy prices for end consumers fall, the inflation problem will basically be over. On the contrary, we may see deflation for a short time. Prices of consumer goods and services will already remain higher on average than before the war. But there is no need to worry about further sharp price increases.

Jan Traxler

Private investment advisor and CEO of FINEZ Investment Management. He has been actively involved in investment consulting since 2004. He is among the pioneers of paid consulting in the form of remuneration from profits. It focuses on private… More articles by the author.

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