Private investment, public gain: Green investment after lockdown

EIC discusses the Northvolt gigafactory, and how private funding is now flooding into green investment and sustainability projects.

Recharging capital

It began with grassroots environmentalism, then government mandate and finally, major financial institutions have started supporting a green future in earnest. Support in the form of loans and bonds for sustainable economic development and innovation, specifically solar storage options.

One such investment occurred last Thursday as the European Investment Bank (EIB) issued a €350 million loan to Northvolt for its lithium battery plant.

The site is based in Northern Sweden and is intended to produce the most environmentally-friendly battery storage packs to date. Using 100% renewable energy and locally-sourced materials, it will soften the characteristically high environmental cost of the Lithium-ion batteries it produces.

The cells will be used mainly in cars, which are responsible for 12% of the EU’s current carbon footprint.

Northvolt has already secured a €2bn supply contract with BMW and Volkswagen is interested in collaborating on a similar factory in Germany. The latter of these two is no surprise after VW unveiled plans to convert its Emden production plant to electric vehicle production.

birds eye view of land by the seaLofty ambitions

The gigafactory will have an initial production capacity of 16 GWh per year and be the first of its kind.

Both the investor and supplier share similarly ambitious intentions moving forward as well. Northvolt plans to scale capacity to 40GWh annually while, back in May, EIB stated its intention to increase green investment financing to over €1bn by the end of the year.

China still dominates the solar battery market, of course, producing more than five times that amount in 2019 alone. However, Northvolt and EIB have just set an important precedent and other banks are now joining the green investment fray.

“I believe that EIB financing support for Northvolt has been a textbook example of how our financial and technical due diligence can help crowd in private investors to visionary projects,”

Andrew McDowell, VP EIB

The COVID-19 lockdown has wrought chaos in several energy markets, most notably West Texas Intermediate – which went negative for the first time in April.

Projections show global growth shrinking to -3% after such dramatic losses in this market, as well as many others. Fortunately, the immediate crisis of COVID-19 has not blinkered business and political leaders to the looming threat of climate change.

Despite these losses, April saw a 272% increase of ESG (environmental, social, governance) bonds compared to April last year.

Green investment rush

Finally, investment in green infrastructure has become vogue among Europe’s financiers and firms should take notice. Last week Sadiq Khan promised £1.5bn to upgrade London’s water and gas networks and prepare for more electric vehicle use.

Beyond our shores, Danish investment bank, Saxo, is already making predictions about renewable technology taking over the global market.

“Governments will increase investments and subsidies for ‘green’ industries, starting a new mega trend in equity markets… We believe that these green stocks could, over time, become some of the world’s most valuable companies”

Peter Garnry, Saxo Bank Head of Equity Strategy

Renewable technology rewards boldness and expediency with huge ROI over time. However, the endorsement of institutions like BlackRock and EIB helps reduce risk profiles, making it more attractive to investors.

EIC have championed firms renewable interests for over 40 years, buying and managing approximately 12TWh of energy each year.

The EIC sustainability offering provides carbon compliance, utility management and procurement advice. Combining this expertise under one banner, you and your investors will have all your bases covered when outfitting your firm for a low carbon future.

Alone, together: Mental health during lockdown

EIC looks back on the recent Mental Health Awareness Week UK, this year’s theme of kindness and some of the stories of kindness that have emerged from the energy sector since lockdown began.

Kindness to all

The theme of kindness could not have been more appropriate for this year’s Mental Health Week UK, with so many struggling under the emotional, financial and medical burdens of COVID-19 and the subsequent lockdown.

Indeed, kindness, solidarity and generosity are things that have been in great demand as a result of the widespread concerns wrought by coronavirus. Despite the added pressure felt simultaneously by the commercial energy sector, it’s proponents have responded with a magnanimity seldom anticipated by their customers.

Orsted

Danish renewables supplier, Orsted, has promised more than £165,000 to various health and charity organisations across the UK to help support them through the crisis, beneficiaries include Guy and St. Thomas’ Hospital and Liverpool University Hospitals NHS Foundation Trust. Duncan Clark, the supplier’s UK region head, impressed the importance of solidarity between companies and their customers:

“Across the UK, the current situation is having a profound effect on families and communities.. It is at times like these that we must come together to do what we can to support each other.”

Duncan Clark, Orsted

British gas  

Big six supplier British Gas stated their allegiance to customer welfare early on in the lockdown by announcing that vulnerable customers would be issued with 2 weeks of discretionary credit for electricity. The support will be pre-loaded onto keys or cards while gas customers will receive £5 credit, British Gas is also offering a remote version of the same service for those customers with smart meters.

Emergency measures 

Emergency credit limit for gas and electricity has been extended across the board by many major suppliers in the UK,  with E.ON raising the limit tenfold from £5 to £50 and nPower raising emergency credit limits from £7 to £45. 

Hands across the oceans

The trend of solidarity hasn’t stopped in the UK, energy companies across Europe are taking up the cause of customer support during the challenges of COVID-19. Italy was infamous for being one of the worst affected European countries and taken as an omen to be heeded by other EU states, domestic energy giant ENEL has answered with vigour. The supplier has donated €23m to support Italian healthcare professionals by funding hospitals, beds and machinery and president Patrizia Grieco framed this move as an act of duty from ENEL.  

“We are an Italian multinational with strong ties with the territory. It’s natural but also a duty to aid the territories where we operate and the communities we work with every day.”

Meanwhile in France, multinational ENGIE, has also contributed to Italy’s fight against the virus by providing free electricity and technical assistance on the construction of new medical units. 

 

 

A kinder world

The primary beneficiary of the lockdown measures however, might be an unexpected one, with the slowing of economic activity and the subsequent drop in emissions, the planet is receiving a long overdue dose of kindness from our entire species.

COVID-19 may have given us an opportunity to reflect on our current practices as well as a vision of what the world could look like with better, greener behaviour from us. 

EIC are champions of sustainable business practices through an end-to-end approach that can support you from initial procurement of your utilities, through to maximising their efficiency with IoT in order to faster deliver a sustainable commercial culture.

The strides EIC is taking to help the UK build a green commercial sector and reach climate targets are myriad and you can find out how to engage with them on our website.

Stay ahead of changes as the clocks spring forward

This weekend will see the official start of British Summer Time (BST), as clocks will spring forward one hour on Sunday 29 March 2020. How can IoT controls help you adapt to the clock change?

The clock change accelerates the seasonal trends towards lower demand during the warmer, lighter summer months.

Historically, the scale of peak power reduction following the clock change has been around 10%. However, early forecasts show an expected 5% drop in average demand for the week following the change. An unseasonably mild winter has kept demand levels depressed in general this year.

The advent of demand management and significant developments in energy efficiency and IoT controls have made the UK consumer more proactive when it comes to when and how they use electricity. It can be seen in the graph that overall demand, before and after the clock change, is trending downwards.

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, reducing demand requirements for the transmission network.

Renewables continue to deliver a growing percentage of the UK electricity mix. The 2019 share for wind, solar, hydro and bioenergy electricity sources was 31.8%, up from 27.5% in 2018.

How clock change impacts behaviour

The graph above shows how the peak demand changes before and after the clock change. The earlier evenings cause an increase in electricity demand as consumers use more sources of light and heat. Post-change, a longer day-time means that less lighting is used through the day and also has the effect of pushing daily peak demand to later in the evening.

The graph shows that over the last five years before the clock change, peak demand occurs at around 6.30pm in the weeks leading up. However, once the hour is gained peak demand occurs later in the day, at around 8.00pm on average.

The impact of coronavirus

As the COVID-19 situation has developed it has become increasingly clear that there will be an impact to demand levels. The graph below shows the effect of the temporary closure of schools and some businesses, with peak demand forecast to fall around 1GW on average week-on-week. The combination of the further closure of offices and the clock change will likely see demand drop heavily over the coming week.

React to changes in real-time

How can you best react to changing demand patterns and sources of generation? How can you ensure time-consuming but critical processes affected by the clock change are carried out efficiently?

With IoT-enabled controls, your business can access all the key information about your sites usage on a single platform. This allows you to make instantaneous changes to multiple sites at the touch of a button.

One of our multi-site clients previously spent three weeks making adjustments ahead of the clock changes. This involved engineers attending each site and changing multiple systems. With our system we could make the same changes in a matter of seconds.

STAY INFORMED WITH EIC INSIGHTS

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

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.

T-3 Capacity Market auction clears at new lows

The T-3 Capacity Market (CM) auction has cleared at £6.44 per kilowatt per year, marking the lowest outturn for a T-3 auction to date. The result will guarantee capacity for delivery over winter 2022/23.

A required capacity of 44.2GW was made available to bidders representing a total 59GW of derated capacity. The final result saw National Grid ESO procure 45.1GW of capacity.

The T-3 auction is the first since the reinstatement of the CM in October 2019. Two further auctions are scheduled for this year; a T-1 auction commencing 6 February and a T-4 auction to start 5 March.

The Market was originally suspended in November 2018, following a ruling from the European Court of Justice that the design of the scheme was biased against small-scale, clean energy units and therefore should not be eligible for State Aid approval. However, the ensuing investigation carried out by the European Commission reconfirmed its eligibility, enabling the Market to be restored.

Capacity Market consultation launched

Following the recent reinstatement of the Capacity Market the Department for Business, Energy and Industrial Strategy (BEIS) has launched a consultation on proposed changes to the scheme. The government hope to implement improvements to the CM’s design to reflect recent market and regulatory developments.

In summary, the government proposes to:

  • Allow all types of capacities to apply to prequalify to bid for all the agreement lengths available in the Market, provided they can demonstrate they meet relevant capital expenditure thresholds.
  • Reduce the minimum capacity to participate from 2MW to 1MW.
  • Legislate the government’s commitment to procuring at least 50% of the capacity set-aside for the T-1 auction.
  • Incorporate any new capacity type into the CM that can demonstrably contribute to the generation adequacy problem.
  • Establish a reporting and verification mechanism for the carbon emission limits to be applied to the Market.
  • Remove the exclusion of plants with Long-term STOR (Short-term operating reserve) contracts from the CM.

The consultation will conclude on 2 March 2020.

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

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.

 

STAY INFORMED WITH EIC INSIGHTS

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

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.

STAY INFORMED WITH EIC INSIGHTS

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

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.

Winter energy price cap level to see bills fall

The impact on customers

The new level will see the default price cap fall from £1,254 to £1,179 (over a 6% drop). The pre-payment meter cap will fall from £1,242 to £1,217 per year (around a 2% drop).

Ofgem expect energy bills to fall this winter for around 15 million households. Exact savings for each household will depend on; the cost of their current deal, how much energy they use and whether they use both gas and electricity.

The justification for this decrease has come from a significant fall in wholesale prices between February and June 2019. Healthy market fundamentals, record gas storage stocks, and periods of low demand across the last winter all contributed to this.

Households are able to cut their bills further by comparing tariffs to find the cheapest that will suit them.

The price cap moving forwards

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

The price cap is a temporary measure, to be in place until 2023 at the latest. This allows 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 INSIGHTS

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.

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How will Brexit impact on the energy industry?

More than three years have passed since the United Kingdom voted to leave the European Union. Debate is still ongoing over the process of our departure, any possible “deal”, payments or a transition period. However, following his appointment to Prime Minister, Boris Johnson has hardened the UK’s negotiating position, promising that the UK will leave the EU on 31 October 2019, deal or no deal. Here we attempt to provide some insight into how this may impact various facets of the energy industry.

The energy sector in the UK had already seen significant changes with the Energy Act 2011 and various proposals for reform of the electricity market. The possible impact of Brexit on the UK and global economy could be far-reaching. However, the direct impact on the energy industry is likely to be more muted. Oil and gas markets are traded on an international level and the EU has little influence over the make-up of a member state’s energy mix. There will be no danger of blackouts or supply shortages and in the short-term you may see little day-to-day change. However, the longer-term outlook for post-Brexit energy may be altered, with one of the major issues being the UK’s relationship with, or role within, the EU’s Internal Energy Market (IEM).

The EU Internal Energy Market (IEM) – will Britain stay a part?

The IEM is a borderless network of gas and electricity transfers between EU member states. Common market rules and cross-border infrastructure allow for energy to be transferred between countries tariff-free.

Post-Brexit, Britain is likely to have less influence over EU energy regulation but will be able to adopt a different, potentially lighter, framework for its energy polices. The extent to which the UK still adheres or follows the EU energy regulation will be dependent on any ‘deal’ reached before the deadline.

Continued access to the IEM is a key priority for the UK Government in its Brexit negotiations. This would allow the country to continue to take advantage of various benefits associated with the IEM including increased security of supply, market coupling, cross-border balancing and capacity market integration.

Having recognised the benefits of the IEM the Government is seeking to retain as free as possible access to internal market and to maintain a strong influence on energy within the EU.

Plans to increase interconnectivity with the Continent are continuing and enhancing with many new interconnector links currently in development (see below). Irrespective of negotiations, this will require close co-operation with the EU Internal Energy Market going forward.

However, there are some inconsistencies in regards to UK plans encompassing full membership of the IEM. Continued participation is likely to involve the UK adopting various European legislation, which may not tally fully with UK judicial ambitions unless the UK remains part of the institutions which handle EU energy regulation (ACER, ENTSO-E and ENTSO-G for example).

Will Brexit impact on connectivity between the UK and Europe – what about interconnectors?

The ongoing negotiations regarding the UK’s 2019 exit from the E U, are having no real impact on developments, with four new interconnector links now under construction.

The Government wants to see all the current planned projects through to operation, the majority of which will not be completed until after the UK has left the EU in 2019. Former Business Secretary Greg Clark had indicated he was keen for the UK to remain in the EU’s I E M, although the final result will depend on the outcome of Brexit negotiations.

Regardless of the outcome, the UK’s energy networks’ connections to the EU will remain in place. The Government recently posted guidance on the trading of gas and electricity with the EU if there is no Brexit deal. The publication highlights that there are only small changes expected to interconnector operations. Interconnector operators have been advised to engage with relevant EU national regulators to confirm any requirements for the reassessment of their access rules.

The main area that may see impact is for proposed interconnectors, which are still in stages of project development, without final financial decisions. Uncertainty caused by Brexit, surrounding commercial, regulatory and operational impacts, will likely see planning stages re-visited to adjust for these challenges.

The UK may lose access to the Connecting Europe Facility (CEF) going forward. The CEF help to provide funding for interconnectors across Europe through targeted infrastructure investment. The Government have confirmed that any commitments that have already been made by the CEF regarding interconnectors into the UK will be safe following the UK’s withdrawal. However, it is not clear whether companies in the UK will be able to seek investments for new projects.

How will Brexit impact on the carbon market? Will the UK be part of the EU ETS?

The Government has published plans for the implementation of a UK carbon tax in the case of a ‘no-deal’ Brexit. Under a ‘no deal’ scenario, the UK would be excluded from participating in the EU ETS. This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system.

In this instance, the UK government will initially meet its existing carbon pricing commitments through the tax system. A carbon price would be applied across the UK, with the inclusion of Northern Ireland, starting at £16/tCO2, less than the current EU ETS price, maintaining the level of carbon pricing across the UK economy post-Brexit.

The tax would be applied to the industrial installations and power plants currently participating in the EU ETS from 4 November 2019. The aviation sector would be exempt from this tax.

Will EU state aid rules still apply to the UK?

Unless the UK remains part of the European Economic Area (EEA), then the EU state aid rules would no longer apply. The Government has said it will transfer existing EU state aid law into domestic law after Brexit. The Competition and Markets Authority will take over responsibility of state aid enforcement. Going forward UK rules may diverge from the EU but the extent of this will be limited by the terms of a future UK-EU trade deal. In the immediate aftermath of Brexit, no significant change to state aid rules are expected.

How will Brexit affect the nuclear sector?

The UK indicated its intention to withdraw from the European Atomic Energy Community (Euratom) and the associated treaty (the Euratom Treaty) on 29 March 2017 as part of the Article 50 withdrawal process.

A report from the House of Lord’s energy sub-committee in January 2018 highlighted the potential for this withdrawal to impact UK nuclear operations such as fuel supply, waste management, and research.

However, the Government has made clear withdrawal from Euratom will not affect nuclear security and safety requirements. A Nuclear Safeguards Bill was introduced to Parliament in October 2017, highlighting how this will be achieved by amending the Energy Act 2013.

The Government will also continue to fund nuclear research in the UK, through programs like the Joint European Torus, Europe’s largest nuclear fusion device. Going forward, the UK will negotiate nuclear cooperation terms with other Euratom and non-Euratom members.

Will Brexit affect the UK’s climate change targets?

The UK passed law in June to reach Net Zero carbon emissions by 2050. The country’s climate change targets will remain unchanged, regardless of whether a Brexit deal is reached. However, there are expectations that potential economic impact from a no-deal Brexit may act as a significant hindrance to decarbonisation efforts.

Additionally, there are several international issues in this area which will need to be settled. The UK’s emissions reduction target forms part of the EU target under the Paris Agreement and this will need to be withdrawn. The UK would also need to submit its own Nationally Determined Contribution under the United Nations Framework Convention on Climate Change (UNFCCC) processes. It is yet to be determined whether the UK will continue to participate in the EU ETS post-Brexit but plans under a no-deal scenario were outlined in the October 2018 budget.

The House of Commons Business, Energy and Industrial Strategy Committee has strongly recommended remaining in the EU ETS at least until the end of Phase III in 2020. The UK’s 5th carbon budget adopted in 2016 assumes continued participation in the EU ETS, and will need to be altered if the UK leaves the EU ETS.

What about renewable energy?

After Brexit, the UK will no longer be obligated by renewable energy targets as part of the EU Renewable Energy Directive. Additional freedom from state aid restrictions has the potential to allow the Government to shape renewable energy support schemes.

The development of large scale projects may be impacted by the availability of funding from EU institutions such as the European Investment Bank. However, renewable and low carbon energy will remain a focal point of UK energy policy post-Brexit, with national and international decarbonisation obligations unaffected by their relationship with the EU.

As part of the European Union (Withdrawal) Act 2019 EU legislation will be initially transposed into UK law from 31 October 2019. For some elements of the EU law, the UK will need to reach an agreement with the EU in order to maintain the status quo.

Will coal plants stay open?

Coal-fired power plants in the UK are required to adhere to the EU Industrial Emissions Directive (IED) which places conditions on such plants in order to control and reduce the emissions and waste generated by these power plant. Strict emissions limits often require substantial investment in technology to reduce pollution. Several plant determined this was not cost effective, and will close down. All but one coal plant has chosen not to adhere to the new regulations and will close by 2023. The Cottam plant announced it will shut down at the end of the summer, while Fiddlers Ferry will close its remaining units in March 2020. Despite Brexit, these unabated coal plant will close. The Government has confirmed its policy to remove coal from the fuel mix entirely by 2025.

The Medium Combustion Plants Directive 2015 (MCP) operates in a similar manner, limiting the emissions of harmful pollutants. The UK has adopted both the IED and the MCP into its European Union (Withdrawal) Act, meaning that in the short-term these regimes will continue beyond October 2019. In the long term, the UK and EU will need to agree on common standards following Brexit.

What about EU investment in energy projects?

Several EU initiatives promote investment in energy infrastructure which encompasses funding towards UK projects. The European Investment Bank (EIB) for example has invested over €13bn into UK energy projects since 2010.

The draft EU Withdrawal Treaty anticipates this funding will continue, at least for projects approved by the EIB for investment before 29 March 2019.

After withdrawal from the EU, the UK will not be eligible for specific financial operations from the EIB which are reserved for EU member states. New projects may be supported by the EU depending on the nature and whether it aligns with the EU’s own energy policy. Cross-border projects, such as interconnectors and pipelines, may be available to non-member states.

The UK Treasury has sought to boost funding certainty and has vowed to underwrite all funding obtained via a direct bid to the European Commission and has also confirmed Horizon 2020 projects will still be funded.

What about the gas market, will supplies be affected?

The UK already operates a diverse import infrastructure, consisting of interconnectors and LNG terminals to allow for the import of gas, mitigating against supply risks. Operations and gas flows are expected to continue as normal, irrespective of any Brexit.

A more significant impact is likely to come from the expiry of long term supply contracts and restrictions which allow for selling capacity on a long term basis. The tariff network coderestricts the price at which interconnectors can sell their capacity. With Brexit it is unclear whether interconnectors will continue to be bound by these restrictions.

Other benefits like the Early Warning Mechanism and the Gas Advisory Council may be lost unless the UK can negotiate to retain its role in these.

For Brexit to have a significant impact on gas prices (barring any substantial currency moves) then the withdrawal from the EU would need to lead to export tariffs on EU gas flowing to the UK.

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