Positive Winter Outlook from National Grid

National grid has published its yearly Winter Outlook report for the 2018/19 season. The report forecasts an electricity margin of 7.1GW, which is 0.9GW more than last year.

Transmission system demand is predicted to peak at 48.2GW, 2.5GW less than last winter, during the week commencing 10 December 2018. This includes the sum of national demand (48.85GW), alongside the demand from power stations (600MW) and the base case interconnector export value (750MW).

The Winter Outlook expects this season to operate differently to last year. Over the last two winters, gas was the cheaper fuel type for electricity generation. However, as global gas prices have risen, it’s more likely that coal will replace gas generation to some degree over the season.

 

Interconnectors

In 2014, the interconnectors were not eligible to participate in the Capacity Market’s (CM) T-4 auction. As a result, they hold no CM obligations for winter 2018/19, including interconnector capacity, as some contracts were secured by interconnectors in the Early Auction.

The Winter Outlook expects an average import flow of 2,130MW, out of a total 3,000MW (2,000MW from the French IFA interconnector and 1,000MW from the Netherlands BritNed interconnector), and an export flow to Ireland of 750MW.

National Grid anticipates that forward prices in Continental European markets will be lower than in Britain. As a result, we will likely see a net flow of power from the Continent to the UK during peak power demand periods. However, outages within the Belgium nuclear fleet, which have extended to November and beyond, could result in increases to Continental prices, causing uncertainty on interconnector flow direction.

Nemo Link, a new interconnector, is under construction and may come into commercial service at the end of January 2019. Once commissioned, it will provide a 1GW capability between Belgium and the UK.

 

Gas

The gas demand forecast for winter 2018/19 is 46.6 billion cubic meters (bcm), lower than the winter 2017/18 outturn. Peak demand for the coldest weather conditions (or a 1-in-20 winter, meaning exceptional demand on a winter day which statistically occurs once every 20 years) is forecast at 483mcm/day, with a margin of available supply of 92 million cubic meters (mcm).

The report estimates that for an average cold day this winter, the demand forecast is expected to be 407mcm/day. The non-storage supply forecast is 360mcm/day, to which 92mcm of storage can be added, providing National Grid a cold day supply forecast in excess of the forecast demand.

Average gas exports through the IUK to Continental Europe are expected to be lower than winter 2017/18 due to the expiry of long-term contracts. As a result, National Grid predicts that deliveries through from the Balgzand Bacton Line (BBL) may be price-sensitive through the season.

Following a decision by the Dutch government to cut Groningen production, output from the site will be reduced from 21bcm/year in winter 2017/18 to 12bcm/year by winter 2022/23. Production from Groningen this year will not be dictated by a cap, but instead will be weather dependent, producing no more than necessary to meet security of supply.

 

Liquefied natural gas (LNG)

During seven of the last eight months, supply of LNG to the network has been lower than in the same period in the previous year. Demand for LNG is comparatively high in Asian markets, especially in China where gas is expected to continue to grow, as it replaces coal in the Chinese heating sector. High demand, and the associated high prices have drawn LNG away from European markets.

The Winter Outlook does not expect LNG supply to the country to be high on many days this winter. However, if demand and prices rise substantially within the UK, LNG imports will increase, just as they did at the end of February 2018.

 

Stay informed with EIC

Our Market Intelligence team keep a close eye on the energy markets and industry updates, keeping our clients informed at a frequency to suit them.

Visit our website to find out more about EIC Market Intelligence.

Triads – how low can they go?

The Triad season started on 1 November and is one of the most important areas of demand management for energy users. Triads are used by National Grid to calculate transmission charges as part of the Transmission Network Use of System (TNUoS) scheme.

What are Triads?

Triads are the three half-hour periods with the highest demand between 1 November and the end of February, identified by National Grid. However, each Triad must be separated by at least 10 clear days, meaning consecutive days of high demand won’t result in multiple Triads.

 

Why should you avoid them?

The knowledge of when Triads will occur enables many companies to manage their demand consumption. If your electricity contract allows for it, reducing your usage during an expected Triad period will result in reduced transmission charges and lower bills.

 

How low can they go?

The 2017/18 season saw the lowest level of Triad demand since records began in the early 1990s.

The maximum Triad level dropped to a record 48GW last year, having fallen more than 10GW in just eight years.

 

Overall energy consumption has been trending lower for the last decade, and one of the interesting outcomes from this Triad season will be whether a new record low can be achieved.

 

Efficiency is key

A large part of the reduction in peak demand has been due to major developments in energy efficiency. The use of new technology and appliances, as well as a switch from incandescent lighting, are all contributing to lower energy consumption.

The act of Triad avoidance has developed to the extent that it’s influencing when Triads occur, as more and more businesses across the UK look to demand side management as a means to cut their costs. National Grid highlighted last year that businesses reacting to warning signals – such as our Triad Alerts – had the potential to cut the country’s peak demand by as much as 2GW. This then makes it more difficult to predict Triads, as peaks for the winter get lower and flatter with each passing year, forcing us to adapt our model to ensure continued success.

 

Our successful track record

Forecasting Triads is dependent on a wide range of different factors. Our Triad Alert service monitors different influencers to predict the likelihood of any particular day being a Triad and automatically sends that information promptly to our clients. These businesses can then take informed action to avoid high energy usage during these more costly half-hour periods, while minimising disruption to their everyday activity. Our daily report can help you plan ahead with an overview of the next 14 days, alongside a long-term winter outlook.

Of course, calling an alert every weekday would generate a 100% success rate, but we recognise the negative impact this would have on businesses. Organisations could incur major damage to revenues if required to turn down their production each day for four months ‘just in case’, so we aim to provide as few alerts as possible.

In the previous Triad season we only called 9 Red Alerts and successfully predicted all three Triads with fewer alerts than any other tracked TPI or supplier. In fact, the total number of alerts called by Utilitywise has fallen 36% in the last three years. We successfully predicted all three half hour periods with our lowest ever number of alerts. Our in-house model is based on a traffic light system, with Red Alerts indicating we believe a Triad is highly likely and our clients should take immediate action.

For those that took action last year, based on our advice, demand was cut by an average of 14% compared to standard winter peak-period half-hour consumption. This resulted in significant average cost savings of over £30,000, and in some cases, rewards closer to £700,000 were observed.

 

Intelligent buildings, smarter business

By forecasting when Triads will occur, we empower our clients to take control of their consumption to reduce their energy use and lower their bills. Businesses can react to our Alerts simply by cutting demand during suspected Triad times or by load-shifting.

Load-shifting involves moving the most energy-intensive tasks of the day to a time when it’s less likely that a Triad will occur, for example early in the morning. This enables you to avoid Triads without reducing your overall daily energy use. Building controls make this easier. With our IoT-enabled Building Energy Management solution, we’re introducing the next generation of smart building controls. Our innovative solution brings together the required technologies to integrate your critical energy systems with a single, remotely-managed platform. This means you can manage your buildings in real-time.

Fracking in UK just weeks away

The energy firm received Government consent for the fracking of two wells in July and are expected to start drilling early October.

The fracking process

The process of hydraulic fracturing involves blasting water, sand and chemicals into rock formations to release gas and oil in horizontal wells, rather than the standard vertical. The process has faced intense opposition, with environmental protestors established at the firm’s Lancashire site for more than 600 days. A trespassing ban is in place at the site until June 2020.

 

A lengthy battle

Cuadrilla’s first tests in extracting shale gas in the north of England took place in 2011, but was halted after earth tremors were cited. This led to a seven-year political and legal battle to get the UK shale gas industry off the ground. Protestors have rallied against the possibility of environmental damage, pollution and earthquakes. Meanwhile, advocates argue the country is ignoring a domestic energy supply that could significantly reduce Britain’s reliance on gas imports from overseas. Oil and gas production from the North Sea has been declining and shale gas is seen as a potential means for reversing the slide in domestic supply.

 

Government support

The Conservative Government has largely supported the development of a shale gas industry but representatives of the oil and gas industry have complained of the slow process to gain approval for drilling. UK Onshore Oil and Gas Group, said it takes up to 50 weeks to get approval for a new well, up from an average of 12 weeks before the practice was banned.

Cuadrilla Chief Executive, Francis Egan, proclaimed his delight at the company being granted permission to drill two wells. “The UK would be crazy not to try and develop this resource,” he said. “Following hydraulic fracturing of these wells, Cuadrilla will run an initial flow test of the gas produced for approximately six months,” Egan explained.

How ESOS can help you get ahead with SECR

You probably know all about ESOS, and you may feel that even now, with 15 months until the next deadline, there’s still no rush to get started with Phase 2. We disagree. Rather than put off compliance until the bitter end, we recommend getting ahead of the curve to avoid any bottleneck in resources later on.

The ESOS Phase 2 compliance deadline is 5 December 2019, however, the qualification date is 31 December this year. This means that if you know your business will fit the criteria, you can start some compliance activities now.

ESOS applies to large organisations, classified as those with:

  • More than 250 employees or;
  • A turnover of more than €50,000,000 and an annual balance sheet total of more than €43,000,000 or;
  • Part of a corporate group containing a large enterprise.

 

It’s time to get started

In their latest ESOS newsletter, the Environment Agency (EA) emphasised that businesses can start audit work now. They state that although you won’t be able to complete the assessment of your Total Energy Consumption (TEC), as this has to include the qualification date, if you expect to qualify for Phase 2 – and you know that an energy supply will be included in your Significant Energy Consumption (SEC) – you can do the audit work on this supply.

This audit will need to have at least one-year’s energy measurement, but this can be from anytime between 6 December 2015 and 5 December 2019. The audit can use data that has been collected at any time during this period provided that it is carried out no later than 24 months after the data period (and the data has not already been used for an audit in Phase 1).

 

SECR is coming – ESOS can help get you ready

Streamlined Energy and Carbon Reporting (SECR) aims to further incentivise the improvement of energy efficiency and reduction of carbon emissions. It’s also hoped that SECR will reduce some of the administrative burden of overlapping carbon schemes. As such, it’ll be introduced from April 2019 to coincide with the end of the current CRC Energy Efficiency Scheme.

Taking action with ESOS compliance will help you get a head start with preparing for SECR compliance. Though ESOS and SECR are separate schemes, and will continue as such, you can use information from your ESOS compliance to support energy and emissions reporting and narrative on energy efficiency action taken in your annual reports.

 

Make EIC your trusted compliance partner

Whether it’s ESOS, SECR, or CCA, EIC will work with you to reach compliance deadlines and targets. In Phase 1 of ESOS we identified a total of 527GWh worth of energy savings for our clients, equivalent to £49,000,000 in cost savings.

A smarter way to avoid Triads

Each year from November to the end of February, National Grid use peak demand data to calculate how much energy users should pay in electricity transmission charges as part of the Transmission Network Use of System (TNUoS) scheme. To avoid higher costs you can undertake Triad avoidance.

What are Triads?

Triads are the three half-hour periods with the highest demand between 1 November and the end of February, identified by National Grid. Each Triad must be separated by at least 10 days. This means consecutive days of high demand won’t result in multiple Triads. Businesses that reduce their usage during these high demand points will lower their future electricity transmission costs.

You can find out if your business is affected by Triads here.

 

How will you know when to act?

Our Triad Alert Service monitors different influencers to predict the likelihood of any particular day being a Triad and automatically sends that information promptly to our clients. You can then take informed action to avoid high usage during these more costly half-hour periods, while minimising disruption to your everyday activity. Our daily report can help you plan ahead with an overview of the next 14 days alongside a long-term winter outlook.

Find out more about our Triad Alert service here.

 

We’ve got a Triad and tested track record

Predicting Triads is very challenging; falling demand and changing usage patterns mean Triads are no longer guaranteed to occur at the height of winter. Season 2017/18 included the latest Triad on record and weakest demand levels since the early 1990s.

We’ve helped hundreds of clients avoid these transmission costs by providing them with the tools needed, giving EIC an enviable track record in Triad prediction. Previously, one client saved £800,000 by acting on insight from our Triad Alert service.

Last season we hit all three Triad periods, issuing just nine red alerts, lower than any other TPI or supplier – a testament to our in-house technology, analytics, and expertise. Of course, calling an alert every weekday would generate a 100% success rate but we recognise the negative impact this would have. Businesses could incur major damage to their revenues if required to turn down production each day for a quarter of the year ‘just in case’.

By issuing fewer alerts we ensure our clients are not unnecessarily disrupted from their day-to-day activities. Those that took action in response to our alerts last season cut demand by an average of 15% compared to standard peak-period half-hour consumption.

 

Intelligent buildings, smarter business

By forecasting when Triads will occur, we empower our clients to take control of their consumption to reduce their energy use and lower their bills. Businesses can react to our Alerts simply by cutting demand during suspected Triad times or by load-shifting.

Load-shifting involves moving the most energy-intensive tasks of the day to a time when it’s less likely that a Triad will occur, for example early in the morning. This enables you to avoid Triads without reducing your overall daily energy use. Building controls make this easier. With our IoT-enabled Building Energy Management solution, we’re introducing the next generation of smart building controls. Our innovative solution brings together the required technologies to integrate your critical energy systems with a single, remotely-managed platform. This means you can manage your buildings in real-time.

The Triad season begins on 1 November. To find out more about our Triad Alert service click here call 01527 511 757 or email info@eic.co.uk.

Gas and power prices surge – take action

The Winter 18 gas and power contracts are up by 52% and 50% respectively in the last year. The following seasons have also risen, however not by as much. Winter 19 gas and power contracts are 34% and 38% higher year-on-year.

If you’re on a fixed contract, all is not yet lost, though we’re urging you to act quickly.

 

A clear impact of the price rises is that gas and power for next year are much more expensive than a year ago. However, next year’s prices, and the year after that, for gas and power are still at a discount.

The market remains in a heavy period of backwardation. This is when contracts for a commodity are cheaper in the future than they are for periods closer to delivery. This isn’t because the market expects prices to be lower in the future, but largely due to the market pricing for current supply shortage levels.

Gas remains in high demand, partly because of the cold winter and the earlier effects of the ‘Beast from the East’ depleting storage reserves. Injections this year have been strong but may not be enough to reach the highs from last year.

Another factor at play is that gas prices elsewhere in the world are much higher. This is encouraging those with the ability to move gas to higher price destinations. The recent market rises have been substantial, but have only returned prices back to where they were trading four years ago.

 

Furthermore, it’s only the front seasonal contracts that have risen to this elevated range. The front Winter gas contract is holding between 65p/th and 75p/th, with the Summer market range between 56p/th and 66p/th. If you haven’t fixed your October 18 start contracts yet, don’t delay any further.

 

What’s the risk to your energy bills?

Even if the market only moves to the middle of the above stated ranges the wholesale element could still increase significantly.

If the above curve flattens in line with the longer-dated contracts moving up to the range that prices were at just four years ago, you could be hit with a further 20% price increase. The below table outlines how your annual electricity spend would increase if your business were hit by this rise:

 

 

Current annual electricity spend

Contract start date

£10,000

£100,000

£1,000,000

1 April 2018

£10,057£100,573£1,005,725
30 August 2018

£11,412

£114,122

£1,141,219

Further 20% rise

£12,483£124,826

£1,248,258

 

The shortage now is partly due to the low storage levels seen at the end of winter, which has prompted substantial injections. However, structural problems remain, particularly in regard to a lack of UK storage capacity. Dutch gas production will continue to decline, as will supply from the North Sea. The ongoing worldwide transition from coal to gas will also support demand. As a result competition for gas is here to stay, encouraging higher gas prices for the UK to attract sufficient supply.

Wholesale costs for suppliers have risen significantly in the last two years. Many gas and power contracts are at record highs, after prices accelerated their move higher earlier this year, and again during August. These increased costs will be passed on to consumers in the form of higher bills, with suppliers paying more for their energy at a wholesale level.

 

It’s time to take action

EIC can help you manage these price rises. Back in April, our energy experts advised businesses to fix their October 2018 contract starts immediately for 24 months. Those that followed our advice at the time saved themselves 42% on their wholesale gas cost and 34% on their wholesale electricity cost, compared to what they’d be paying now.

 

How we can help you with energy procurement

Here at EIC, we pride ourselves on our market knowledge and giving timely advice to our clients. We can help businesses of all sizes to find the right energy contracts for their needs.

If you’re a larger energy user, we can help you with fixed price energy procurement to help you secure prices and provide budget certainty. We’re also on hand to help you with flexible energy procurement, should you find fixed contracts too restrictive; we can help you take advantage of a volatile energy market and make sure you capitalise on market rises and falls. Our aim is to maximise contract flexibility whilst minimising your costs.

We can also help you budget effectively for your energy costs by providing year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

To find out more about our energy procurement services, and how we can help you find the right contract for your business needs, call us on 01527 511 757 or email info@eic.co.uk.

Domestic energy price cap proposal announced by Ofgem

The proposal follows the passing of the Government’s Domestic Gas and Electricity (Tariff Cap) Act, which became law on 19 July. This legislation was passed by Parliament to provide a temporary price cap for domestic customers on Standard Variable Tariffs (SVTs) and default tariffs, assigning Ofgem with the duty to ensure a fair price.

Ofgem has currently opened a statutory consultation on the announcements, allowing suppliers and stakeholders to comment on the proposals before 6 October. The regulator is working towards having the cap in place by the end of 2018.

 

The impact on customers

The introduction of the price cap will see a requirement for suppliers to cut their prices to the level of, or below, the cap. This is proposed to be £1,136 per year for a typical dual fuel customer paying by direct debit and £1,219 per year for a customer paying by standard credit.

Exact savings for each household will be dependent on the cost of their current deal, how much energy they use, and whether they use both gas and electricity. On average it’s been estimated that the typical customer, on a dual fuel deal of gas and electricity, will save around £75 a year. Ofgem believes the price cap would save consumers a total of around £1 billion.

 

The price cap moving forwards

Ofgem plan to update the level of the cap in April and October every year in order to account for the latest costs of supplying gas and electricity.

The price cap is a temporary measure, to be in place until 2023 at the latest. This is designed to allow Ofgem time to implement further reforms to make the energy market more competitive, enabling it to work more effectively for all consumers.

 

Stay informed with EIC

Our Market Intelligence team keep a close eye on the energy markets and industry updates. Visit our website to find out more about EIC Market Intelligence.

Britain running on sunshine as summer demand falls

The changes have come from an evolution in how energy is being used, and those who successfully manage these demand patterns, particularly if combined with Demand Side Response (DSR), could see significant cost savings.

Analysis from EIC has shown that maximum summer demand (seen between May and August) has fallen 17% in the last decade. From a peak of 44GW in 2012, maximum consumption for the current summer has fallen to just 35GW.

This near 10GW loss in demand is similar to the reduction seen during the winter. Furthermore, it’s not only peak consumption that’s been reduced but baseload generation. Minimum summer demand has fallen by 19% since 2009. How much of this is down to efficiency improvements or consumption moving behind the meter is unclear. However, the change does mean National Grid has nearly 10GW less electricity demand to manage on its transmission network.

The trend can be seen more clearly when broken down by month. Average peak demand during May 2012 was over 39GW. This year that figure was just 31.5GW, a reduction of over 7GW in only six years.

Improving energy efficiency

The cost of LED lighting halved between 2011 and 2013. During this time, consumers switching towards the more efficient bulbs helped facilitate a strong drop in demand. This could be helped further with news that the EU will ban the use of halogen lightbulbs from 1 September 2018.

Another major explanation for the demand drop, aside from efficiency improvements in appliances and lighting, is the significant growth in small-scale on-site solar capacity over the same period. Small-scale distribution connected solar has a capacity of under 4KW but the number of installations has grown from under 30,000 in 2010 to nearly 900,000 in 2018. An increase of almost 2,900%.

The total capacity of the small-scale solar now available is over 2.5GW, which is not far off the total capacity for the new Hinkley Point C nuclear power station.

As the use of small-scale solar (the type typically installed on housing or commercial property) has grown demand has fallen. More and more of within-day demand is being met by onsite generation. Consumers can take advantage of the bright and warm summer weather conditions to generate their own solar power, thus reducing the call for demand from the transmission network.

The solar impact

The introduction of high volumes of solar generation to the grid – total capacity across all PV sites is over 13GW – has also significantly altered the shape of demand. Consumption across a 24 hour period has flattened in recent years.

The traditional three demand peaks (morning, early afternoon, and evening) have shifted closer to the two peak morning and early evening winter pattern. The ability to generate high levels of embedded – behind the meter – generation during the day in the summer has flattened and at times inverted the typical middle peak. This has left the load shape peaking in early morning (as people wake up) and later in the evening, as people return home from work.

The absolute peak of the day has also shifted in time, moving from early afternoon to the typical early evening peak of 5-5:30pm, again similar to the winter season.

The below graph shows the change over time of the July load shape, which highlights both the reduction in demand and the change in shape, with consumption flattening during daylight hours as a result of behind the meter solar generation dampening network demand. With electricity costs – both wholesale and system – reflecting supply and demand, if consumption is being changed, then it also has an impact on these costs.

Stay informed with EIC

Our in-house analysis highlights the impact of onsite generation on load patterns and the extent to which demand can be changed by taking action, and subsequently how behaviours can alter a business’ energy costs.

If you can shift demand away from historical high consumption periods, you can cut your energy costs and make significant savings. One such way to do this is by using smart building controls, such as our IoT-enabled Building Energy Management solution.

To find out more download our brochure, call +44 1527 511 757, or email us.

Reduce your CRC costs through the secondary market

The cost associated with CRC reporting will be replaced from 1 April 2019 with an increase in the Climate Change Levy (CCL), whilst the reporting element of the scheme is to be replaced with Streamlined Energy and Carbon Reporting (SECR).

Participants are required to order, pay, and surrender allowances each compliance year in order to comply with the CRC scheme. There is no further opportunity to purchase forecast allowances at a lower cost, and July 2019 will be the last time ‘Buy to Comply’ allowances will need to be purchased to meet CRC obligations. One allowance equates to one tonne of CO2 reportable, and allowances purchased in the ‘Buy to Comply’ sale will cost more than those sold in the forecast sale at around £1.10 additional cost per allowance.

Allowances can be purchased in government sales of allowances or, where available, through the secondary market.

What is the secondary market?

CRC allows the trading of allowances through buying or selling to another CRC account holder on the registry. This does not impact the ‘Buy to Comply’ allowance process and doesn’t have set deadlines for purchasing or selling allowances.

The appetite for trading on the secondary market is dependent on the use by other participants and there is no guarantee that buying and selling of allowances will occur when using the notice board.

Why use the secondary market?

The decrease in fossil fuel use for electricity generation and the increase in renewable electricity production has had a positive impact on the emission factor. This has been a favourable outcome for most CRC participants, reducing their emissions and allowance obligations for electricity in CRC reporting.

Organisations that have utilised the lower cost forecast purchase option for CRC reporting have been caught out by the decrease in electricity emission factors for 2017/18 reporting by over forecasting allowances required. This has left some organisations with surplus allowances.

The cost to comply in the 2018/19 Buy to Comply sale has been set at £18.30 per tonne of CO2 reportable.

Purchasing on the CRC secondary market could save your organisation on average approximately £2.18 per tonne of CO2.

How can EIC help?

EIC can manage the transfer process for you from start to finish*, whether you have surplus allowances to sell or are looking to buy on the secondary market to reduce the cost of complying for the final year of CRC reporting.

The process is simple and if you would like to find out more our dedicated Carbon team is on hand to guide you. You can contact our team on 01527 511 757 or email us.

*EIC will not process payment of allowances on behalf of an organisation. Payments for allowances bought or sold on the secondary market are to be made off system between the participants involved. Any additional administration or transaction fees associated with the transfer will need to be pre-agreed between the two organisations.

Europe cannot compete with Chinese dash for LNG

European storage started this summer at its lowest levels on record following the impact of the ‘Beast From the East’. This should have encouraged very strong injections right through the summer, ensuring there is enough supply to deal with winter demand.

 

Storage across Europe has been filling, and overall levels are closing in on the average seen over the previous five years.

 

 

However, when we look a little deeper, we can see that injections were very strong in June. As the summer has progressed the rate of injections has remained fairly constant, while in previous years the rate increased as we moved further into summer. Industrial shutdowns and school holidays in August freed up gas for increased injections.

 

This August has only seen a moderate increase on July’s levels and, possibly more importantly, a slower rate of injections than last year. This is despite the need to put more gas into storage.

 

Why is less gas going into storage?

Demand and piped supply have remained at similar levels to previous years but the biggest difference is coming from Liquefied Natural Gas (LNG). Looking at total LNG send out across Europe we can see a significant reduction in volumes. The difference is almost the same as the equivalent reduction in injections.

 

The lower levels of LNG are because fewer cargoes are coming to Continental Europe and the UK.

This is due to prices elsewhere being much higher. Looking at the volume of LNG received in the UK, along with prices in the UK and the Far East, it’s clear to see when the difference between the prices has an effect on our level of imports. Suppliers will send the gas to the area they will make the most profit.

 

Prices in Asia have such a large premium over Europe due to China’s insatiable demand for gas.

As the Chinese government looks to clean up the environment, it’s switching thousands of homes and businesses away from coal and onto gas. This has seen demand for LNG double in the last two years:

 

For UK consumers, as the gas market becomes ever more global, increased competition for gas will likely put pressure on prices, pushing them down. However, in the shorter term, if the UK needs extra gas (for instance due to a cold snap or supply issue) prices will have to at least match the Asian price to attract supplies for one of the UK’s three LNG terminals.

With Asian LNG prices for the coming winter over 20p/therm higher than in the UK this is an early indication of the cost of meeting higher demand in the heating season. This issue of reduced flexibility is particularly prevalent this year in the light of the Rough closure and the scaling back of Groningen production.

 

Stay informed with EIC

Our Market Intelligence team keep a close eye on the energy markets and industry updates, keeping our clients informed at a frequency to suit them.

Visit our website to find out more about our Market Intelligence offerings.

 

Long-term Price Forecasting

Electricity and gas are some of the most volatile commodities today. If you’re uncertain about how to budget effectively for your energy costs then we have a solution for you; access year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

This report calculates future energy prices which include the ever-increasing green subsidies, network costs, and taxes.

Capacity Market under review

The overall objectives of this review are to assess whether:

  • the CM is needed in future;
  • the CM currently meets its objectives of ensuring security of supply, cost effectiveness, and avoiding unintended consequences;
  • these objectives remain appropriate; and
  • they can be achieved in the future in a way that imposes less regulation.

 

The call for evidence

Both the CM and EPS were introduced five years ago as part of the Energy Act 2013. The announced ‘call for evidence’ is the first step in the review process.

The Government believes both the Capacity Market and the Emissions Performance Standard are working broadly as intended. The initial document states they “do not foresee the need for fundamental change.” However, this review will allow feedback to help them understand more about stakeholder issues and whether there are any changes to be considered. With this in mind, the Government has already indicated that there are some desirable changes that could improve the CM to ensure it continues to meet its objectives in the future.

Based on stakeholder feedback, two initial priority issues have been noted for the Capacity Market review:

  • There needs to be consideration as to whether, and how, to enable participation by subsidy-free renewables in the CM.
  • Following the latest round of CM auctions there has been feedback in relation to interconnectors. It’s been suggested that the contribution to security of supply made by interconnectors added to the system in future will face diminishing returns, as they are reliant on the same limited pool of spare capacity in the interconnected countries. The Government will consider whether changes to the methodology are required to ensure future interconnectors are not over-compensated relative to their real contribution.

Ofgem review

In addition to the Government review, energy regulator Ofgem will carry out a separate review on the Capacity Market to support the process. Ofgem will be announcing the details concerning the content and arrangements of their review at a later date. However, it can be assumed that it will seek to address very similar themes.

The Emissions Performance Standard

The objective of the EPS is to ensure that new fossil-fuel-fired electricity generation helps improve security of supply but still contributes to the UK’s decarbonisation objectives. The mechanism is a limit on the carbon dioxide emissions produced by new fossil-fuel generation plants. The Government is seeking stakeholder views on the effectiveness of the EPS. The five-year review of the EPS will answer similar high-level questions to the CM Review.

What to look out for

The call for evidence will be open between 8 August and 1 October 2018. A summary of the responses will be published later this year. The outcomes of these reviews will then be reported to Parliament in summer 2019.

Impact on consumers

The Capacity Market’s annual auctions define both how much capacity has been bought and at what price. The overall costs for both the capacity bought and the administration of the scheme are passed on to consumer bills, with the cost of capacity being the largest element.

EIC supports security of supply and any move to maintain a fairly structured scheme that keeps price impact to customers at a minimum. We can help you prepare for and control the impact of all your non-commodity costs, including Capacity Market Charges, with the help of our Long-Term Price Forecast Report.

With this report, you can access year-on-year price projections for the next five years. The report calculates future energy prices which include the ever-increasing green subsidies, network costs, and taxes.

Is wind technology facing an uncertain future?

With a remaining budget of £557m (in 2012/13 prices) Utilitywise estimates that funding may not be able to cover all of the offshore wind projects currently in development, let alone provide support for any other technologies.

The next CfD auction is expected to focus heavily on offshore wind projects, with the Government eager to develop the country’s geographical advantage towards this technology. Offshore wind also faces less local opposition and environmental challenges than onshore wind. Onshore wind has been banned from entering the CfD auctions, although the next round will have an exception for projects within the Scottish Islands. This is due to the Government’s focus on what it defines as ‘less established’ technologies, and the application of onshore wind in this location fits their definition.

Growth in offshore wind across the UK is already set to accelerate from the current 6GW of capacity in operation. Just over 18GW of additional capacity is in various states of development, with 8GW of that already contracted with a CfD or FIDER subsidy agreement. A further 1.5GW is under construction (meaning the project has broken ground, so is likely to have secured funding arrangements).

All this leaves more than 8GW of offshore wind capacity up for grabs in the upcoming Capacity Market auction. However, if the clearing price in next year’s auction is similar to that in the previous auction – around £57/MWh – EIC calculations show the cost of subsidising all of this capacity would exceed the £557m budget within the next decade, when the new schemes come online.

 

What if the Strike Price falls?

Should the offshore wind Strike Price fall to £55/MWh, which some reports indicate the technology could still operate at, then the budget could support around 80% of the planned capacity by 2030.

However, if costs fell even further, and the Strike Price can be set at levels equivalent to current wholesale prices of £50/MWh at the time of agreements, then this could support all of the in development offshore projects and 40% of the planned onshore sites. In this case, projects would effectively be zero-cost with inflation the main factor providing uplift.

Currently, there is 8GW of onshore wind capacity in differing states of development, only 0.7GW of which has already secured a CfD contract (this was in earlier auctions when the technology was still allowed to take part). Around 6.5GW of the remaining capacity has yet to begin construction and would likely be seeking a subsidy contract of some kind.

 

How will this impact you?

Based on the funds currently provided to the new auctions, regardless of the Strike Price, consumers are expected to face an increase on their electricity bills of around £2.50 to £3/MWh per year by 2030.

The cost to consumers could rise further if the Government wanted to support onshore wind while still pushing for the bulk of planned offshore to be developed, and if Strike Prices were higher than those noted above. This would need a larger budget for CfD contracts and would lead to additional costs, which would then require even higher bills to ensure customers pay for the increased green energy capacity.

 

Long-term price forecasting from EIC

EIC can help you remain informed of price increases and help you budget for any impact these auctions may have on your costs. If you’re uncertain about how to budget effectively for your energy costs then we have a solution for you; access year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

This report calculates future energy prices which include the ever-increasing green subsidies, network costs, and taxes.