Weekly Energy Market Update – 10 February

Gas

Short-term gas contracts, notably the Day-ahead and front-month markets, fell heavily again last week, with losses of around 9%. The driving force in the gas market remains the very healthy fundamentals, lower than expected demand and risk of oversupply. A brief spell of below average temperatures and low winds had no price impact, while declines accelerated again when temperatures climbed at the end of the week and wind output surged to more than 13GW as Storm Ciara arrived in the UK.

Flexibility within the gas supply network is minimising the impact of higher demand across the winter, particularly from LNG sendout, which rose above 100mcm again last week. Nineteen tankers are now booked for February arrival. Record low LNG prices across the global market are contributing to a substantial oversupply. Asian LNG prices have more than halved year-on-year as Chinese demand tumbles amid fears over the spread of the Coronavirus.

Higher heating demand this week is likely to be offset by continued high winds, reducing the use of gas for power generation. March and April gas prices are down to 22p/th while the Summer 20 contract has halved in value since the start of winter, falling from 46p/th to 23p/th. Longer-dated gas contracts moved higher, with gains of 3-4% across the week. This was in line with a rebound in the crude oil market, which bounced off one-year lows amid ongoing speculation over the spread of the Coronavirus. Fears over lower demand from the virus has weighed on commodity prices for the last few weeks.

Power

Day-ahead power prices ended the week below £30/MWh for only the third time in ten years as the UK experienced very high wind levels at times last week. Day-ahead prices started the week higher, rising to £37/MWh as weather conditions were cooler with wind output dropping below 2GW. However, as Storm Ciara reached the UK at the end of the week, wind generation jumped to peaks of more than 13GW. On Saturday wind generation averaged 12GW across the day. The strong renewable availability reduced the share of gas in the fuel mix, with CCGT burn halving from 16GW to 8GW in one day.

Higher levels of embedded generation from the strong winds also affected electricity demand. After peaking at 45GW early in the week, peak demand fell to 42GW by Friday. Wind output is forecast to remain consistent around 12-13GW for the first few days of this week. Power prices for Tuesday have dropped to £28/MWh, testing 13-year lows for the prompt market. The
continued declines in the gas market is reducing the cost of gas-fired generation, and driving the front of the power curve to new lows. March 20 prices fell 5% week-on-week with the Summer 20 market hitting new lows at £33/MWh. The rest of the electricity curve saw little change, drawing some support from gains in longer-dated gas contracts and the oil market.

Weekly Energy Market Update – 20 January

Gas

Gas prices fell heavily again last week with contracts across the curve falling to new lows. Price drivers for the market are unchanged with the extent of oversupply and strength of fundamentals continuing to weaken prices. Balance of Winter and Summer 20 prices fell 7% across the week, with losses continuing today. The Summer 20 contract has dropped nearly 40% in the last three months. The oversupply is being driven by record storage stocks in the UK and Europe. Unseasonably mild temperatures so far this month, coupled with very high wind levels have depressed demand.

Meanwhile record LNG imports have balanced the gas system with minimal use of storage withdrawals or Interconnector imports from Europe. Price falls this winter have been strongest for the Summer 20 contract, which anticipates very limited injection demand and an inability to absorb excess supply during the milder months. The strength of losses in short-term contracts have now brought down the rest of the curve with seasonal 2021 contracts down 5% across the week, breaking below their previous December lows.

Gas demand has risen sharply today with consumption rising around 80mcm from last week, as temperatures briefly drop to below seasonal-normal levels. Lower wind output of under 5GW this week is also increasing gas for power generation. However, the demand is being comfortably met by supply, notably from LNG, which has risen to more than 130mcm to match the higher demand. This underlines the strength of flexibility within the gas supply system. Milder, windier conditions are returning at the end of the week.

Power

In the power market, contracts on the curve are following the gas market lower, reflecting the declining costs of gas for generation. Very high winds pushed Day-ahead power prices to new lows of £32/MWh but the prompt has risen across the week in anticipation of higher demand from lower winds and colder temperatures this week.

Wind generation across the week was consistent at over 8GW, reaching highs of 14GW as Storm Brendan swept across the UK. Power demand is expected to rise this week as temperatures have dropped to below seasonal-normal levels with wind output as low as 2GW. However, the extensive gas supply flexibility offered by record storage stocks, LNG and Interconnector imports is weighing heavily on prices.

Prices across the curve are down 3% week-on-week. However, the losses in the power market are more gradual than the corresponding gas contracts. This is the result of price support from rising carbon prices, protecting the power curve from further losses. Carbon costs pushed above €25/tCO2e last week, to new highs for the year.

 

Weekly Energy Market Update – 13 January

Gas

Gas prices on the curve moved lower week-on-week, with the market close to the record contract lows seen at the end of December. However, price movement was more volatile after gains of as much as 10% in the aftermath of the US air strike in Iran. Those gains had been fully reversed by the middle of last week. Concerns over supply disruption in the region, and possible LNG exports from Qatar eased, with the strength of fundamentals within the market returning to focus as the biggest price driver.

Declines across the gas market seen since October have accelerated in recent weeks as the extent of oversupply in the system became more apparent. After reaching eight-year highs in December, LNG imports continued to flood into the UK in the first half of January. Gas demand levels have been unseasonably low amid above average temperatures and very strong wind levels. The record low levels attracted some buying interest, while reduced LNG sendout and Norwegian imports via Langeled left the system undersupplied on some occasions. This provided some price support with the market bouncing off those lows late last week, with a continued modest recovery today. However, prices remain close to historical lows, with the fundamental outlook for the gas market remaining highly bearish. Losses were strongest on the front of the curve with the February market and Summer 20 prices down 7% week-on-week.

Prolonged above average temperatures are forecast in January while the UK and Europe is set to end winter with record levels of gas in storage which will affect injection demand during the milder summer months. Storage withdrawals and Interconnector imports have been largely untouched throughout winter, but can provide substantial supply flexibility and spare capacity as required.

Power

Power prices have mirrored movements in the gas market. A bounce across the energy mix in the aftermath of the US air strike in Iran has been reversed with contracts pushing back towards the lows seen at the end of December. The very low cost of gas-fired generation, particularly this summer, is weakening electricity contracts.

The February power market fell 5% across the week with seasonal power contracts for 2020 down 4%. Elevated carbon prices, which remain above €24/tCO2e are underpinning the power market, slowing the extent of declines relative to gas. However, the downward pressure on electricity prices continues, with very high renewable availability providing further bearish signals.

Day-ahead power prices rose across the week as demand increased from their holiday lows. However, at £36/MWh, the prompt market remains highly depressed, below the trading range seen during most of the summer season. Furthermore, while electricity consumption rebounded to 45GW last week the outlook for consumption remains very weak because of the near-record levels of wind generation.

Forecasts of up to 14GW of wind generation throughout the coming week is driving down demand. The high levels of on-site embedded generation from wind is reducing demand on the transmission network. Peak power demand this week is forecast at just 43.0GW, a drop of 4GW compared to the same week last year. The high winds are expected to continue until Friday as Storm Brendan sweeps across the UK. Weather conditions are set to shift next week as winds drop and temperatures cool from current above average levels.

 

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Weekly Energy Market Update – 6 January

Gas

Gas prices on the curve rebounded last week, bouncing off contract lows reached between Christmas and New Year.

Prices across Europe pushed to new lows after a new transit supply agreement between Russia and Ukraine was agreed, avoiding supply disruption.

The Summer 20 market dipped below 30p/th, down 10% since Christmas. However, contracts across the curve have rebounded since Friday, following supply risks linked to escalating tensions in the Middle East. A US air strike has killed a top Iranian military general. Tehran has vowed “severe revenge” with the risk of disruption to the region’s vast oil supply providing some price support.

LNG may also be affected by a possible new conflict with the US and Iran previously rowing over access to the Strait of Hormuz, a crucial supply route for tankers. Strong gains in the oil market – which is testing highs of $70/bbl – provided support to longer-dated gas prices, delivering in 2021. While there may be further volatility as the situation develops, fundamentals remain bearish, with oversupply capping prices around their pre-Christmas lows.

LNG imports were at their highest since April 2011 in December, while thirteen tankers are already confirmed for January arrival. Interconnector imports remain untouched and a storage overhang is inevitable as lower demand during the holiday period meant 3TWh of gas was injected into storage.

UK gas reserves are over 95% full and at record highs for the time of year. Demand forecasts for January are also price depressive with above average temperatures expected for at least the next two weeks while wind generation dominated the fuel
mix, providing a third of UK power in the last week after averaging over 10GW a day. With energy demand in the short-term expected to be low the risk of oversupply and an inevitable storage overhang is still weighing on gas markets.

Power

Power prices pushed lower during December led by Day-ahead and balance of winter contracts that reflect the oversupply in the gas market and lower cost of gas-fired generation. Electricity demand fell heavily over the Christmas holiday period, driving Day-ahead power prices to lows of £32/MWh, not seen since early October.

While consumption has picked up as schools and businesses return to full operation, power demand maintains a significant reduction to previous years. Very high wind generation over the last week has reduced the use of fossil fuels, while the gas burn being utilised is at a low cost level.

Wind has provided a third of UK electricity so far this month, leading the fuel mix with average output of 10GW a day. The strong renewable availability is forecast to continue this week as the UK benefits from windy, mild weather conditions, which are providing downward pressure to prices. This is the reverse of the cold, low wind scenarios that risk higher prices
during the winter season.

Across the curve, power prices followed the gas market lower over the holiday period, hitting new lows at the end of December. The market has rebound marginally since Friday following the escalating tensions in the Middle East. However, the scale of movement in power, both lower and in the rebound have been more gradual than in gas. The continued elevation in carbon prices, which are holding above €24/tCO2e are helping to underpin the power market. Week-on-week electricity contracts remain down with the Summer 20 contract under £40/MWh.

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Loose gas creating tight margins in the power market

Gas has led the way, particularly in the balance of winter contracts. These falls have come partly due to the very high levels of storage but also because of all the spare capacity that could be called upon if required. As a result, power prices have fallen due to the lower fuel cost.

LNG has been the main game changer with the deluge of tankers flooding in to Europe over the last year. Increased export capacity in the US and Russia has led to the increase in extra imports to Europe. It is also a symptom of the global oversupply in the worldwide market place. The liquid commodity markets and high import capacity make the UK an ideal location to offload any excess supply. LNG terminals are currently operating at 75% of their capacity, with all the extra gas being sold into the NBP pushing prices lower.

 

LNG imports graph

LNG imports graph

European imports have been virtually non-existent throughout the winter but more gas could be attracted through these pipes. There is a potential capacity of 94 MCM/d to come over the BBL and the Interconnector. To start attracting this gas the premium over TTF would firstly have to rise above the NBP entry charge of 1.56p/th and then cover the cost of using the pipelines. This means that if prices increase their premium over the continent to more than 2p/th additional gas will start coming to Britain.

 

IUK flows with Belgium
IUK flows with Belgium

 

Given the competition between supply sources, storage just cannot make it onto the grid, even on higher demand days, and this capacity overhang is weighing on prices.

 

Gas spare capacity graph

Gas spare capacity graph

However, the falls in prices for power have been less substantial and purely driven by the falling cost of fuel. Fundamentally the UK grid is seeing some of its tightest conditions in years. With nearly 3GW of coal capacity having retired in the last 12 months. The remaining coal units are now running as baseload and all flexibility is coming from gas. There remains spare capacity but this is the least efficient or most costly plant.

On windless, cold days we are seeing some stress on the system. Currently Monday, 18 November, has a negative margin with 300MW still required to meet anticipated demand. This has pushed power prices to their highest since February at £54.50MWh.

 

Power capacity graph
Power capacity graph

 

On Wednesday evening we saw the highest demand of the winter so far, of 45.2 GW. The above chart shows where generation was coming from at the peak on the left, with remaining output available for Monday on the right. While this shows the potential generation that could come on at the current price levels, it isn’t expected to on Monday, hence the negative margin.

So far Monday’s price reaction has been relatively muted, but it has occurred at a time when the gas systems oversupply is weighing heavily on the whole energy market. If it was happening amidst different market conditions the price outlook would be very different.

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How the clock change impacts UK energy demand

The clocks are scheduled to go back one hour this Sunday 27th October. The change will cause an obvious shift in usage of the electricity system as evenings draw in earlier in the day.

It also accelerates the seasonal trend towards higher demand during the colder, darker winter months, placing increased pressure on power margins. This can lead to spikes in electricity prices, should supplies struggle to meet the higher demand.

 

Jump in demand decreases as overall downward trend continues

As forecasts currently stand, the average peak demand for the week following the clock change will be 4.4% higher than the week before. Consumption is expected to rise by almost 2GW as lighting usage increases during the traditionally higher post-work demand period.

 

Average Weekday Peak Demand Weekly average before Clock Change (GW) Weekly average after Clock Change (GW) Difference (GW) Increase (%)
October 2019 (Forecast) 38.9 40.6 1.7 4.4%
October 2018 40.0 43.6 3.6 9.0%
October 2017 40.7 43.7 3 7.4%
October 2016 42.2 44.8 2.6 6.2%
October 2015 43.9 45.2 1.3 3.0%
October 2014 43.0 44.0 1 2.3%

 

However, the forecasted rise in average peak demand in 2019 is lower than in recent years. Notably 2018 which saw the highest percentage change, as consumption rose by almost 4GW week-on-week.

Overall peak power demand has been dampened marginally this year, with consumption after the clock change peaking at 40.6GW on average, 3GW lower than last year. This reduction can be attributed partly to half-term school holidays, which fall on the week either side of the clock change depending on school catchments. Higher renewable levels have also contributed to reductions in demand.

The ongoing trend in reduced energy consumption year-on-year continues, meaning that demand is rising from a far lower base. Improvements in energy efficiency have been helping to reduce electricity use over the last ten years. A large part of the reduction in peak demand has been the use of new technology, resulting in smart and more efficient appliances, able to do more with less.

Expected demand before this month’s clock change is 5GW lower than the highest peak in 2015. Furthermore, the forecasted post-clock change peak is the lowest on record.

 

Graph displaying electricity demand during the clock change

The role of renewables

The increase in wind and solar capacity in recent years has contributed to the overall demand reductions. Higher volumes of on-site renewable capacity allow more generation to be provided off-grid as homes and businesses generate their own electricity supply during windy or sunny spells. This reduces demand on the national transmission system. The high levels of solar availability during the summer season were a particularly strong influence on demand levels this year as on-site solar panels increased embedded generation. This reduced demand requirements for the transmission network.

Wind power continues to deliver a growing percentage of the UK electricity mix. By the end of September 2019, the UK’s fleet consists of over 10,000 wind turbines with a total installed capacity of over 21.5GW. Overall wind generation in the UK has so far been 33% higher through 2019 than over the same time period last year.

 

Graph showing monthly wind generation

What happens when there’s no wind?

While high winds have the capability of cutting power demand, one of the biggest dangers to the National Grid electricity network is a high demand scenario, at a time when wind output is very low.

Lighting has a bigger impact on electricity demand than heating, as the majority of home heating is gas-fired. However, during severe cold snaps, electricity demand does spike as additional heating is needed to cope with the very low temperatures. This scenario occurred during the Beast from the East cold snap in February last year. However, robust winds provided high levels of low cost electricity to the grid.

A lack of wind would see supply margins placed under significantly more stress during a similar cold snap this winter. This would require additional supply being provided by gas and coal plant or imports to make up for the increased demand. Such a scenario is likely to require significant price rises in the Within-day and Day-ahead markets.

The National Grid’s Winter Outlook for 2019/20 expects that there will be a sufficient supply margin to accommodate a wide range of security of supply scenarios. However, the organisation’s statistical 1-in-20 peak demand forecast predicts a demand of 499mcm/d, greater than the highest recorded gas demand. This is an unlikely scenario, but demonstrates how a period of high demand and low renewable availability could coincide to increase short-term prices.

An end to the clock change?

There have been proposals dating back to 2015, from members of the European Parliament, to end summer time observance. In September 2018 the European Commission proposed an end to seasonal clock changes, asking that member countries decide by March 2019 which time they would observe year round. The proposal was approved in March 2019, by 23 votes to 11. However, the start date has been postponed until 2021 to allow a smooth transition.

The United Kingdom is due to leave the EU before the reform becomes effective, meaning that it would be left to the government to make their own decision on observing summer/winter time. If continued, Northern Ireland would have a one-hour time difference for half the year with either the Republic of Ireland or the rest of the UK. The House of Lords launched an inquiry in July 2019 to consider the implications of this, with a call for evidence ongoing.

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Climate Emergencies and Net Zero – what you need to know

Global scientific data supports action

The action follows a highly critical 33 page report publicised in 2018 by the Intergovernmental Panel on Climate Change (IPCC). The IPCC is the United Nations body for assessing the science related to climate change.

The report focused on the impact of limiting global warming to 1.5°C. Limiting warming to 1.5°C rather than 2°C significantly reduces the climate change risks according to Professor Jim Skea, who co-chairs the IPCC.

What’s alarming is the scale of the challenge ahead of us to ensure we achieve these targets and do not allow the situation to escalate further.

Five steps to achieving the 1.5°C have been announced:

  1. Global emissions of CO2 need to decline by 45% from 2010 levels by 2030
  2. Renewables are estimated to provide up to 85% of global electricity by 2050
  3. Coal is expected to reduce to close to zero
  4. Up to seven million sq km of land will be needed for energy crops (a bit less than the size of Australia)
  5. Global net zero emissions by 2050.

Paris Agreement

The Paris Agreement brings together nations towards a common cause to undertake ambitious efforts to combat climate change. It was originally signed by 196 countries back in 2016.

In line with the IPCC report its core aim is to keep the global temperature increase this century well below 2°C above pre-industrial levels. In particular, to pursue efforts to limit the temperature increase even further to 1.5°C.

2019 – a watershed year for climate change?

Together with the impact of Greta Thunberg – the 16 year old Swedish activist – there have been a number of key factors driving the climate change movement this year. At Glastonbury festival in June 2019, 2,000 festival goers joined protestors to stage a procession across the site.

At the United Nations Climate Action Summit in late September you may have missed the news that Russia, the world’s fourth largest polluter will finally join the agreement. This announcement was overshadowed by the stirring “You have stolen my dreams” headlines surrounding Greta Thunberg’s appearance. Hailed as “the voice of the planet” she’s already been nominated for the Nobel Peace Prize.

Despite the raised awareness there are real fears that most of the world’s biggest firms are ‘unlikely’ to meet the targets set. Only a fifth of companies remain on track according to fresh analysis by investment data provider Arabesque S-Ray. Of 3,000 listed business only 18% have disclosed their plans.

UK reaction

In reaction to the IPCC report, UN Paris Agreement and other related research findings and movements, the UK public sector is taking positive, proactive steps to mitigate climate change risks.

Councillor Carla Danyer led the charge in Bristol by first declaring a climate emergency and this has sparked a wave of similar responses.

In June 2019, the UK became the first major economy to pass a net zero emissions law. The new target will require the UK to bring all greenhouse gas emissions to net zero by 2050. Net zero means any emissions would be balanced by schemes to offset an equivalent amount of greenhouse gases from the atmosphere, such as planting trees or using technology like carbon capture and storage. Other countries setting similar targets include Ireland, Denmark, Sweden and France as well as the US state of California.

Many UK councils, NHS Trusts and universities have publically declared their long term targets. Some aiming for speedier action by declaring net zero 2030 targets. These include Ipswich Borough, Vale of Glamorgan and Telford & Wrekin councils.

Unsurprisingly, Bristol University is one of the leading educational facilities leading the way. To date they’ve cut carbon emissions by 27% and are well on their way to achieving their target to become carbon neutral by 2030. The University of Cambridge, along with others, has set a net zero target of 2038 and has announced it is adopting science-based targets. On one website – climateemergency.uk – 228 councils are listed as having signed up to the targets.

In Boris Johnson’s first speech as Prime Minister, he affirmed the UKs commitment to a net zero future. Johnson proclaimed “Our Kingdom in 2050… will no longer make any contribution whatsoever to the destruction of our precious planet brought about by carbon emissions,” he said. “Because we will have led the world in delivering that net zero target.”

Steps towards a better future

According to the Centre for Alternative Technology (CATs) Zero Carbon Britain research a modern, zero emissions society is possible using technology available today.

Below we’ve outlined some key initiatives that can help the UK achieve its net zero ambitions:

  • Businesses implementing science-based targets.
  • Improving built environment efficiencies. Upgrading old buildings and ensuring new buildings must meet higher energy efficiency standards.
  • A shift to electric vehicles and the continued battery storage revolution.
  • Decentralised energy. Home and local energy generation.
  • Shift to renewable energy sources.
  • New policy.

The Aldersgate Group issued a green policy manifesto to Boris Johnson on 1 August 2019. They are a politically impartial, multi-stakeholder alliance championing a competitive and environmentally sustainable economy. Members of the group include Friends of the Earth, BT, M&S, Tesco, National Grid and Sky. Their green manifesto focuses on 4 key areas for the government to take decisive action and provide greater policy detail:

  • Delivering a Clean Growth Strategy Plus (CGS+) that matches the ambition of the net zero target. This should consist of a targeted update to the existing Clean Growth Strategy to increase ambition where required (for example on zero emission vehicle roll-out). Plus it should incorporate concrete policies that accelerate private sector investment to decarbonise priority sectors. These include surface transport, buildings and support the competitiveness of industry during this transition.
  • Passing an ambitious Environment Bill that safeguards environmental protections currently enshrined in EU law. They believe it must set ambitious and legally binding targets for environmental improvements in line with the vision of the 25 Year Environment Plan.
  • Implementing the Resources and Waste Strategy, through the introduction of detailed regulatory measures and fiscal incentives that drive greater resource efficiency and cut waste across the economy.
  • Building on the Green Finance Strategy, to rapidly grow private capital flows into the green infrastructure required to deliver the UK’s net zero target and the objectives set out in the 25 Year Environment Plan.

Our view

At EIC we believe new government policy is one of the most important steps needed to turn sentiment into action. Legislation relating to major energy users such as ESOS and SECR are steps in the right direction but they aren’t enough. Without doubt more effective policy is needed, to not only ensure energy and carbon is measured, but also that carbon reduction strategies are developed and implemented across the UK. Too often business cases for energy and carbon reduction are created and filed, never to be signed off.

Weekly Energy Market Update 23 September 2019

Gas

Gas prices saw high levels of volatility last week as the market digested the three unexpected ‘black swan’ developments of the previous week, which had triggered significant price spikes. An attack on oil facilities in Saudi Arabia led to a further price rise, as over 5% of global oil supply was shut down. The October gas contract hit highs of 40p/th, with the Winter 19 market at two-month highs of 52p/th. However, some of the uncertainty surrounding supply and demand was tempered, prompting prices to reverse some of those gains. EDF reported just 6 of its nuclear reactors are affected by welding issues, believing power stations do not need to close.

Russian gas flows via the OPAL pipeline, saw little change, despite the tighter restrictions. Furthermore, Saudi Arabia vowed to return its oil output to normal levels by the end of the month, quicker than initially feared. Short-term supply-demand fundamentals are also weighing heavily on the front of the gas curve, with October prices dropping to 32p/th. The Langeled gas pipeline is to return from maintenance tomorrow, boosting Norwegian flows to the UK.

Meanwhile, LNG sendout is expected to remain strong next month as the UK confirms three tankers already booked for October. Above seasonal-normal temperatures are also forecast for the next two weeks, slowing the typical rise in heating demand ahead of the winter season. While winter supply risks have been somewhat tempered, contracts from Winter 19 onwards remain elevated amid uncertainty over French nuclear power, Russian imports and tensions in the Middle East which are supporting oil prices. As a result, seasonal gas contracts are holding in the middle of their summer range, between their July highs and September lows.

Gas Graph

Power

Power prices mirrored movements in the gas market, with short-term contracts falling sharply across the week. The rest of the electricity curve remained elevated. Short-term contracts were highly volatile following three black swan developments. An additional oil attack in Saudi Arabia provided further price support as prices moved to fresh highs early last week.

Seasonal power contracts hit six-week highs. Prices eased after EDF reported only six reactors are affected by welding issues and indicated no power stations need to close. However, the outcome of an investigation by the regulator ASN is still unknown and that body will have the final say on plant closures. Oil prices corrected quickly as Saudi Arabia promised a return to full production by the end of the month.

Short-term power prices fell further, in line with declining gas contracts, which were weakened by the current healthy supply-demand fundamentals. Day-ahead gas prices fell 22% with front-month prices down 13%. The equivalent power contracts also moved lower on the weaker gas costs, but overall declines were more gradual across the week. Longer-dated electricity contracts were marginally higher week-on-week, despite giving back some of their early gains. Prices are still underpinned by elevated carbon costs, with the price of allowances remaining above €25/tCO2e. Seasonal contracts are holding in the middle of their summer range, above the early September lows, and below the peaks from July.

Electricity Graph

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What has caused September price swings?

Concerns over supply, demand and flexibility within energy markets ahead of the highest demand period of the year were highly price supportive.

Black Swans

In less than a week of trading, front-month gas prices climbed 25%, and the corresponding power contract rose 15%.
The Winter 19 power contract spiked £4.55 in just one day, while Winter 19 gas jumped over 6p/th, the largest daily move on a seasonal contract since at least 2008.

gas season prices

The initial price spikes were triggered by the simultaneous discovery of three ‘black swans’, an industry term describing unpredictable events that go beyond normal expectations of the situation.

season power prices

A fourth such event occurred a few days later when rebels attacked Saudi Arabian oil facilities. Brent and WTI crude oil prices saw the highest within-day spikes in 30 years, with both markets gaining more than $8/bbl in one day. The jump in the oil market provided more bullish support to the wider energy mix, with longer-dated gas and power contracts moving to new highs on the back of the increased oil costs.

crude oil prices

As these unpredictable events have developed, energy prices have given back some of the exceptional gains. However, prices remain elevated across the month, above the lows seen in early September. Here we explain what these issues were and how they are impacting on the energy market.

Groningen Gas

The Dutch Government reported that the production cap at its Groningen gas field will be lowered to 11.8bcm for the upcoming gas year from 1 October 2019. The state also confirmed that the site – previously Europe’s largest – would close entirely by 2022, eight years earlier than expected.

groningen gas production

Production at the field has been gradually slowing for seven years after drilling led to a series of earthquakes, forcing legislation to limit output. In 2013 the field was producing 54BCM/y, declining to 11.8BCM for 2019/20. While the reduced supply from Groningen was somewhat expected within the market, supply was expected to be available for another eight years. This curtailment helped to support a sudden price rise across the curve.

dutch gas production

The loss of production has been reflected in the loss of flexibility within Dutch gas supply, and therefore reducing the ability to respond to spikes in demand or other supply issues. Five years ago Dutch gas production was able to ramp up to 277MCM/d in response to high demand on a cold day. However, production last winter peaked at just 164mcm, while output so far in September 2019 has averaged under 50mcm/d.

OPAL Pipeline

The OPAL pipeline in Germany connects the Nord Stream pipeline with connections in central and western Europe. This month the European Commission overturned a ruling in 2016 which had effectively allowed Russian giant Gazprom a near monopoly of the volume of the pipeline, with 90% access. A complaint from neighbouring countries, led by Poland, saw this ruling challenged and the Russian transit through the link must now be cut to 40%.

The OPAL pipeline had allowed Russian gas to reach central Europe via Nord Stream and onwards, without transiting war-torn Ukraine. The EU decision will see Gazprom’s access cut by half, potentially reducing the availability of Russian gas to enter Europe, unless other transit routes are made available.

French nuclear power plants

EDF reported welding issues with at least five of its nuclear reactors, which could force shutdowns of the power stations. This would greatly reduce available power supplies for France, where 80% of its generation is supplied by nuclear and the majority of domestic heating is electric. Demand for imports will increase as will demand for more expensive and less efficient gas and coal plant, which also increases the consumption of carbon.

The UK’s interconnection with France sees imports from France provide the marginal supply to Britain, ensuring the countries’ pricing is closely aligned. Issues with French nuclear manufacturing had previously occurred in autumn 2016 when over 40% of France’s nuclear fleet closed down. This caused record spikes in UK power prices, with the Day-ahead market at over £150/MWh, and the front-month contract doubling from £40/MWh to over £80/MWh.

UK day ahead power prices

The potential loss of nuclear generation adds significant risk to the coming winter, particularly if tighter power supplies coincide with cold, windless weather conditions when gas demand is already at its highest levels for the year.
Since the initial announcement, EDF Energy has confirmed just six nuclear reactors are affected by the welding issues identified. The company believes no immediate action is required, an announcement which triggered a pull back in prices. However, the ultimate decision on whether to close nuclear plants for repairs lies with the French nuclear regulator ASN.

Saudi Arabia oil attack

The last piece of news impacting energy markets in September was a series of rebel drone attacks on major Saudi Arabian oil processing facilities at Abqaiq and oil fields at Khurais. The United States has blamed the attack on Iran, but Tehran claim no involvement. US-Iranian tensions were already heightened after a failed nuclear power agreement last year and attacks on oil tankers in the Middle East.

The rebel attack in Saudi Arabia forced around 7 million barrels per day of production offline, halving the country’s output and impacting on more than 5% of global oil supply.

However, Saudi Arabia confirmed it met customer orders by tapping into substantial storage reserves. Furthermore, the affected facilities would be back to pre-attack volumes by the end of September. Tensions remain heightened in the region but the swift return to operation of the affect facilities prompted oil prices to drop back from the earlier peaks.

Price Outlook

Uncertainty lingers over these issues, despite fresh developments so the potential for further price spikes remains in play. However, within the recent volatility on energy contracts, prices across gas, power, oil, coal and carbon remain within a sideways range. In fact, the majority of contracts range-bound since the start of the summer season.

The threat of a break below this range has been mitigated by the recent price spikes. However, the highs reached in July have yet to be tested. How the energy market breaks out of this range will determine future price action.

Weekly Energy Market Update for 29 July 2019

Gas

Balance of Summer gas prices continue to move lower. The September gas contract has moved to new lows in anticipation of low demand for the remainder of the summer. August gas prices fell 3% across the week but are finding support from expectations of heavy maintenance, which will reduce North Sea production next month. Weakness at the front of the curve reflected healthy supplies and low energy demand levels.

The UK experienced its hottest ever July day, but the extreme heat made little extra impact on gas demand. Overall gas consumption remained at its summer lows with weak domestic consumption and excess gas being injected into already very healthy gas storage sites.

UK gas storage stocks rose 15% last week, while total European gas reserves are fuller than ever before. This will reduce injection demand for the rest of the summer and limit the ability of storage to absorb excess production. This would risk further oversupply, pushing prices to lows that will encourage producers to reduce output, as the demand will not be there. Winter 19 prices followed the summer market lower but the rest of the curve saw little change.

Contracts from Summer 20 onwards spent the last week stabilising in the middle of their July range. The strong gains seen in the first half of July have been partly reversed after costs fell heavily early last week. Prices retreated after reaching levels that would have attracted spot LNG cargoes to Europe, an additional supply source that is not required. Any further losses on the curve are being capped by the continued strength in the carbon market. Carbon costs are holding around €29/tCO2e, close to all-time highs.

Gas Graph

Power

Power prices moved lower last week, in line with the weaker gas contracts. However, price movement was more gradual. Seasonal contracts remain above their early July lows, following the strong rally seen in the first half of the month. While prices have dropped back from their mid-month highs, the market remains elevated, supported by the continued strength in the carbon market and higher coal prices. The cost of carbon allowances remains close to record highs at €30/tCO2e, having risen nearly €25 over the last two years.

Peak electricity demand rose marginally last week, supported by low wind and demand for cooling as the UK experienced its hottest ever July day. However, demand levels only peaked around 34GW, within the summer range, heavily limited by the UK’s lack of air-conditioning infrastructure. Peak consumption is forecast to drop to new lows of 32GW this week. Gas dominates the fuel mix but the impact is muted by the low summer demand levels.

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Future Energy Scenarios

Future Energy Scenarios

The National Grid ESO (Electricity System Operator) has published its yearly Future Energy Scenarios (FES) report detailing four separate pathways that cover the future of energy to 2050 and beyond.

The ESO has taken onboard changes in policy, combined with technological progress and market forces, to create a range of credible scenarios. The scenarios have been modelled to reflect varying levels of decentralisation and the speed of decarbonisation.

The Pathways

Community Renewables (CE) – In this scenario there is a large focus on local energy schemes, boosting individual consumer engagement. Improved energy efficiency is a priority. Strong policy support promotes innovation and the transition towards renewables.

Consumer Evolution (CR) – This scenario sees a shift towards local generation and increased consumer engagement, like Community Renewables. However, a lack of strong policy direction means that progress is slow.

Two Degrees (TD) – Large-scale solutions are developed and consumers are provided with alternative heat and transport options. Priorities include increasing renewable capacity, improving energy efficiency and accelerating new technologies.

Steady Progression (SP) – This scenario evaluates the pace of the low-carbon transition at a rate comparable to today, slowing towards 2050.

Work on the FES 2019 document predates the UK government’s target for Net Zero emissions by 2050. Therefore, the scenarios follow the original Climate Change Act 2008 target of an 80% reduction in greenhouse emissions by 2050, compared to 1990 levels.

Of the scenarios, Community Renewables and Two Degrees meet the 80% target with common themes of strong policy support and high consumer engagement. One of the main drivers in reducing the UK’s carbon emissions to date has been environmental legislation.

Is Net Zero likely?

The ESO included a Net Zero spotlight in the FES 2019 publication to reflect the recent Net Zero publication by the Committee on Climate Change (CCC).

Analysis in the FES 2019 report aligns with the Net Zero publication by the CCC. This states that reaching Net Zero carbon emissions by 2050 is achievable, but only through immediate action across all key technology and policy areas.

In this scenario, the ESO highlight that electrification of the industrial and commercial sectors is vital in reducing emissions. Carbon capture, usage and storage (CCUS) technologies also have an essential role to play.

At the 2019 Future Energy Scenarios Conference the new target was acknowledged and will likely be taken into account for the pathways modelling in FES 2020.

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Long-Term Forecast Report

Our team of specialists work hard identifying trends, examining historical figures and forecasting for the future. Their expertise has enabled us to produce the Long-Term Forecast Report. A valuable tool which illustrates the annual projected increases to your energy bills and calculates your energy spend  allowing you to confidently forward budget and avoid any nasty surprises.

An Insight into Gas Storage

Gas storage in the UK and on the Continent are both continuing to fill up fast and are much higher than normal levels for the time of year. With so little of the injection season having passed, for storage to be at these record high levels could pose problems later in the summer, when assets are even fuller and demand even lower.

UK

Medium Range Storage in the UK is 66% full, with considerably more gas in store for this time of year than at any point in the last six years.

The high inventories are partially boosted by Interconnector (IUK) maintenance happening in April as opposed to June. However this schedule change was to coincide with a time when the conduit was typically less active. With just 5TWh of working gas capacity left to fill, IUK exports will be key in using up any excess supply.

In September 2016, storage was at almost full capacity and the IUK was flowing at its maximum level. This pushed prompt prices as low as 20.6p/th. However, this situation is less likely now as the BBL pipeline, which currently only flows from the Netherlands, is undergoing maintenance to enable reverse flows (UK to the Continent). This will open up a route for a further 40 MCM/d of gas to flow away from the UK.

Europe

European storage reserves are 100 times bigger than the UK with a working gas capacity of 1087 TWh. This is currently 62% full. Having entered the injection season at the highest levels on record due to the additional LNG coming to Europe, injections have actually begun the season fairly strongly. Additions to gas storage are only marginally below last year’s levels when the injection season began with inventories at record low levels.

Injections across Europe through summer 2018 run at, on average, 3.3 TWh/d. However in June, July and August this moved to 4.0 TWh/d. If we run at that rate of injections this summer, then storage will be full by the middle of September.

However, as assets fill, due to increased pressure within the facility the rate of injection slows. At this rate, European assets will be 90% full by late August. Assuming the injection rate then halves, Europe will have to accommodate, or see a supply reduction, of 1TWh of gas per day throughout September, that would typically go into storage. This is over half of the UK’s total demand on a summer day.

This scenario is likely to tip the supply demand balance and could put very strong pressure on gas and power prices later this summer.

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Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the most timely updates you can find us on Twitter and LinkedIn Follow us today.

Visit our webpage to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.