UK Energy Market Analysis - December 2025

European power grids have come under significant pressure lately, as weather-driven demand surged across the region. Prices climbed to an 11-month high in the UK for Thursday delivery (£121.39/MWh for baseload on N2EX) and cleared at €154.12/MWh in Germany. However, despite these supportive fundamentals, long-dated gas contracts are trading slightly below pre-holiday levels. This divergence highlights the scale of the expected increase in global LNG supply and reflects market confidence that storage sites will be comfortably replenished over the spring and summer. This outlook should hold, barring any geopolitical disruptions or unexpected supply outages.

Economic Environment

• UK retail sales rose by a modest 1.4% year-on-year in November, marking the slowest pace of growth since May, as Budget uncertainty weighed on consumer confidence and Black Friday sales disappointed.
• Meanwhile, the UK labour market showed further signs of cooling, with the unemployment rate rising to 5.1%, its highest level since early 2021, while private-sector wage growth slowed sharply in the three months to October, reaching its weakest pace in almost five years.
• Together with inflation falling far more than expected to 3.2% in November, these developments strengthened the case for monetary easing, prompting the Bank of England to cut interest rates by 0.25% to 3.75%.

Oil

• Throughout December, prices have fallen on renewed hopes of a peace agreement between Ukraine and Russia, only to rebound when it became clear that such an outcome is unlikely in the near term.
• Developments in Venezuela, ongoing Ukrainian strikes on Russian oil infrastructure, and proposed additional US sanctions on Russian oil have also offered some support lately. Nevertheless, underlying bearish fundamentals continue to dominate, with the Brent front-month contract ending the month near $62/bbl, down 1%.
• As expected, OPEC+ agreed to keep oil output unchanged in Q1 26, slowing its push to regain market share amid weakening demand, signs of global oversupply, and ongoing uncertainty over Russian sanctions.
• The IEA slightly reduced its 2026 oil surplus forecast to 3.84 million barrels per day from 4.09 million, citing stronger demand and lower supply from Russia and Venezuela amid ongoing sanctions.

Gas

• The European Parliament and the Council reached an agreement in December to permanently end imports of Russian gas and to move toward phasing out Russian oil. Under the deal, LNG imports will be phased out by 31 December 2026, and pipeline imports will end by 30 September 2027. Member States may extend the pipeline deadline to 31 October 2027 only if their gas storage levels fall below the required filling thresholds.
• Egypt’s gas supply–demand balance has strengthened in recent weeks, allowing the country to maintain LNG exports from the Idku terminal: according to the Ministry of Petroleum and Mineral Resources, a new cargo has been dispatched to Turkey. The shipment follows increased export activity in October, when Egypt sent a similar 150,000 m³ cargo to Turkey, along with two deliveries to Italy and Greece.
• Despite generally mild and windy conditions throughout the month, alongside steady LNG imports, gas withdrawals from European storage facilities continued at a robust pace. Storage levels ended the year at 62.2%, down 12.6 percentage points month-on-month and nearly 10 percentage points below the level recorded at the same time last year.

Power

• Great British Energy unveiled a five-year strategic plan to accelerate the UK’s transition to renewable power. The plan targets 15 GW of clean energy generation and storage capacity by 2030, with priorities including community energy projects, onshore energy development, and offshore wind expansion. In parallel, Ofgem has approved a £28 billion energy system upgrade over the next five years to strengthen the safety and reliability of the national grid.
• Drax Group said it could repurpose part of its Yorkshire power station into a data centre as early as 2027, using land, cooling infrastructure and transformers previously dedicated to coal generation. The company is preparing a planning application for an initial 100-megawatt facility, with plans to expand capacity to more than 1 gigawatt after 2031.
• UK companies may face costs under the EU’s Carbon Border Adjustment Mechanism from 1st January 2026, as no exemption will apply when the scheme enters its definitive phase, despite ongoing talks to link the EU and UK emissions trading systems. EU climate chief Wopke Hoekstra said such a linkage would likely remove the need for UK compliance in future but ruled out any waiver before implementation.
• Despite stable gas prices, long-term power prices have risen due to higher carbon prices, with Summer 26 ending the month up around 5%.

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