The energy crisis: how did we get here?

If you are concerned about the rising prices, you are not alone.

As the world reels from the biggest price rise in electricity and gas in over a decade, our expert analysts take a look at some of the reasons behind the sudden surge and what the future could hold in store.

European storage inventories are well below average

Graph showing European storage levels
European storage

 

There were strong withdrawals in Q1 2021, as colder temperatures settled over Europe. At the same time, Asia was experiencing similar conditions. Japan had a very cold January along with several outages, which led to an immediate need for LNG to boost gas power generation.

As a result, LNG deliveries to Europe slowed down and the region had to rely on more stored gas. The early part of Q2 2021 saw persistent colder temperatures, low wind and maintenance, leaving little surplus to make its way into storage.

By the time injections started there was already a shortfall and the pace of injections has not been enough to shut down this deficit.

European storage is vital to ensure some security of supply over winter, especially if there are supply issues from other sources. Storage is also needed to top-up supply, when demand is high.

Reduced gas supplies this summer

UK LNG imports
UK LNG imports

 

Part of the reason for the lacklustre injections is the heavy maintenance in many gas-producing regions during this summer. Covid restrictions hampered maintenance schedules last summer and many sites were running strong through the colder winter that followed.

In addition to the shortfall in supply, LNG deliveries to the UK and Europe were drastically reduced, particularly during this quarter. This fall in import volume is due to a marked increase in demand for LNG in Asia this year. This demand growth is largely due to China ramping up its economy post-Covid, as well as other regions replenishing their depleted stock levels.

 

Weak renewable generation this summer

Wind & gas output comparison table
Power output comparison table

 

In recent years, the UK has increased its wind capacity to about 25% of the generation capacity. This summer has seen some of the lowest wind speeds, with the likes of Orsted – who have invested heavily in wind generation – reporting lacklustre returns this summer.

The graph above highlights the drop in wind output, especially in Q3 2021, and the increased need for gas generation. As a result, the need for gas to generate power has been elevated at a time of tighter gas supply.

Supply margins in the UK were extremely tight last week, and as a result, we saw some unprecedented price levels – as shown below in the UK day-ahead power price. System prices were as high as £4,000/MWh at peak times.

Day ahead forecast
UK day-ahead power price forecast

Increased cost of substitute sources of power generation

In parts of Europe, there has been an increased reliance on coal and lignite power generation. On the back of various policy moves, the price of carbon allowances in Europe has also surged. This year alone, prices have doubled. As a consequence, it has become increasingly expensive for fossil-fuelled power generation. Gas prices have risen so strongly that it has become more profitable for coal and lignite power generation in Europe (which are more polluting) instead of gas.

The UK and European governments manage the supply of carbon allowances. With a current policy of zero carbon, it is difficult to see governments increasing the availability of allowances.

Carbon
Carbon allowances

Russian gas supply

Despite the surge in gas prices across Europe, Russian supply volumes have not responded to demand. In July and August, there was maintenance on both Nordstream 1 and Yamal pipelines that saw substantial declines in Russian volumes, exacerbating the tight gas market.

The domestic Russian gas market is also under relatively tight conditions. Russian domestic storage was heavily drawn last winter and there has been some delay in replenishing them, due to heavy summer maintenance.

There has also been a reluctance to increase flows across the Ukrainian and Polish routes. In the meantime, with the completion of Nordstream 2, a preferred alternative route is ready. But there are some legal hurdles that need to be overcome, denting market hopes for the start of the fourth quarter.

 

What’s next?

There is a substantial risk premium priced into this winter, given all these factors so far. There is also an underlying uncertainty of how and when these will resolve, in the face of an unknown winter demand.

A mild and windy winter will allow for more wind generation and reduce some of the demand for heating. However, periods of cold and still conditions will see supply margins drop and system prices record high prices once more.

Gas could start to flow through Nordstream 2 this winter. But will this merely displace gas that is currently moving through one of the other routes to Europe? Or will supply increase significantly, once domestic reserves are met?

It is likely that this winter will see an increase in price volatility, with price swings in either direction.

For advice on how your business can respond to changing energy prices, contact EIC today.

This article was written by the Market Intelligence Team

Extra year of Triads following further Ofgem delay

With winter quickly approaching, the Triad season is soon to begin. This is an important time for many large UK consumers, as they seek to lower transmission costs by reducing demand during potential Triad periods.

Triads are three half-hour periods with the highest electricity demand between the start of November and the end of February. Each Triad must be separated by at least 10 clear days. This means consecutive days of high demand won’t result in multiple Triads.

If your electricity contract allows it, reducing your demand at these specific points will result in lower transmission charges. However, knowing when Triads occur is a complex business. To help our clients, EIC provides a Triad Alert service. We have successfully forecast each of the three Triad periods for the last 9 years. By predicting Triads each winter, EIC has saved customers millions of pounds in transmission charges.

Triads granted an extra year

In May 2021, Ofgem launched a consultation on the Transmission Demand Residual (TDR) part of the Targeted Charging Review (TCR). While the results of the consultation are yet to be published, the minded-to decision is to delay the implementation until April 2023. This would create an extra opportunity for consumers to benefit from Triad avoidance over the 2021/22 and 2022/23 Triad periods.

The TCR aims to introduce a charge that Ofgem considers to be fair to all consumers and not just those that are able to reduce consumption during peak periods. From April 2023, the residual part of transmission costs will be levied in the form of fixed charges for all households and businesses, with the latest forecast figures below. For the majority of consumers, these changes will lead to a reduction in transmission costs. However, for those who are currently taking Triad avoidance action, it is likely that their future costs will rise.

TCR fixed charging bands
Table 1. TCR Fixed Charging Bands with latest TNUoS forecast (National Grid, May 2021)

Uncertain winter ahead

Gas and power prices have increased significantly throughout the summer due to maintenance issues, a global gas market surge and low renewable output. As temperatures fall leading into winter, gas and power demand will inevitably increase and put more pressure on prices. There are particular concerns around extended periods of cold weather with low wind, which will create tight margins and cause day-ahead power prices to spike. It is during these periods that Triads are more likely to occur.

Last winter saw the first increase in peak demand since 2014/15 and the largest year-on-year increase since 2007/08. There were a number of factors which contributed to this, including lower temperatures, a reduction in demand-side response (DSR) and an increase in domestic consumption. An increase in Covid-19 cases over the winter may lead to a return to working from home, which could again lead to an increase in peak demand. However, if Covid-19 cases remain stable then there could be an increase in DSR as more businesses look to avoid Triads while they still can.

EIC track record of success

EIC has an in-house model which has successfully forecast every triad period for the last nine years. We issue clients with comprehensive alerts advising them when a Triad is forecast, so they can reduce consumption accordingly.

Our Triad Alert Service forecasts the likelihood of any particular day being a Triad and sends alerts before 10am. This gives businesses time to take informed action to avoid high usage during these half-hour periods, while minimising disruption to their everyday activity. In addition, we monitor the market throughout the day and in the event of a significant change we will send out another alert in the afternoon. The daily report can also help you plan ahead with an overview of the next 14 days, alongside a long-term winter outlook.

Calling an alert every weekday would generate a 100% success rate, however EIC recognises the negative impact this could potentially have on our clients. Organisations would incur major damage to revenues if required to turn down their production each day for four months, ‘just in case’. At EIC, our aim is to provide as few alerts as possible. Over the 2020/21 Triad period we called just 14 red alerts, comparing favourably against a supplier average of 20 alerts.

Trad record for 2020/21
Table 2. Triad record for 2020/21 – EIC vs. suppliers

How we can help

We have helped hundreds of clients to avoid these transmission costs by providing them with the tools they need, giving EIC an enviable track record in Triad prediction. Our analysis has found that clients who take direct action to avoid Triads based on our alerts save an average of 20%, which represents an annual saving of £26,000. The Triad season begins on 1 November. Find out more information about our Triad Alert service .

EIC can also help you to accurately budget and forecast your energy prices with confidence, with our Long-Term Forecast Report. Our team of specialists work hard identifying trends, examining historical figures and forecasting for the future. The Long-Term Forecast Report is a valuable tool which illustrates the annual projected increases to your energy bills and calculates your energy spend over the next 5, 10, 15 or 20 years. This allows you to confidently forward budget and avoid any nasty surprises. Whilst we can’t prevent the rise of non-commodity charges, we can ensure that you are fully prepared for any increases.

To find out more about our Long Term Forecast Report or to discuss your Triad concerns, contact us today.