Forward contracts for UK wholesale gas and electricity across 12, 24, and 36 month terms have risen steeply over the past week. This marks a significant shift in market sentiment, driven by increasing geopolitical risk, long-term supply concerns, and rising generation costs.
Despite stable short-term fundamentals, the forward market is now pricing in a risk premium for the months and years ahead.
Market Report – Wholesale Electricity
Electricity prices for 12 – 36 month terms have risen sharply, particularly
the 12-month strip which is now at its highest level since January. Forward
electricity markets are increasingly focused on fuel and policy risks rather
than current system conditions. The main drivers are:
- Rising forward gas prices: As gas sets the marginal cost of power, electricity prices across the curve are climbing in parallel.
- Carbon price rebound: Both UK and EU ETS carbon allowances have edged up, increasing the cost base for fossil generation in future periods.
- Geopolitical risk premium: Market sentiment has turned more cautious amid growing global instability, with traders hedging long-term exposure.
- Concerns from Europe: Reduced French nuclear availability and potential interconnector constraints this winter are adding to forward pricing risk.
Market Report – Wholesale Gas
12-month gas prices are now nearing levels last seen in early February
2025, with 24-month and 36-month contracts also up sharply. The market is
increasingly pricing in future disruption risk rather than reacting to current
physical tightness. The main drivers are:
- Geopolitical instability in the Middle East: Escalating conflict involving Iran has heightened fears over oil and LNG shipping disruption, particularly through the Strait of Hormuz, a key global transit route.
- Oil price strength: Rising oil prices, fueled by war-risk premium, are influencing long-term gas sentiment despite weaker current demand.
- Slow EU storage refill rates: While UK storage is healthy, broader European refill progress is lagging, raising concerns for winter 2025/26.
- Thin summer liquidity: Fewer market participants during summer increases volatility, exaggerating bullish movements on the curve.