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.

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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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Pound slides to multi-year lows on Brexit concerns

Boris Johnson’s appointment as Prime Minister has seen a change in strategy regarding the UK’s negotiating stance with the European Union over its exit. The new PM has pledged to leave the EU by 31 October, deal or no deal. Furthermore, while his wish is very much for an agreed exit, Mr Johnson is taking a hard line with negotiators, refusing to meet with EU leaders until a new deal is offered, without the Irish backstop.

The heightened risk of leaving the Union without a withdrawal agreement has had a negative influence on the value of the pound. Sterling has fallen more than 2% against the Euro and 3% against the Dollar in the first week of the new PM’s premiership. The pound’s value against the Dollar is the lowest in nearly two and a half years, approaching the lows reached after Article 50 was triggered in March 2017.

Increased Costs

The weakness in the value of the pound will increase costs for consumers. British imports of energy from the Continent will require a price premium which covers the wholesale and shipping costs in delivery of supply. Weakness in the pound will make these imports even more expensive when the purchase price is converted from Euros. This would be a particular issue during periods of high demand, extreme weather or supply disruptions.

Impact on Supply

In previous blogs, we have explained how Brexit is very unlikely to mean the lights go out. The UK continues to strengthen Interconnector links with Continental Europe with the capacity for power links expected to double to over 8GW by 2022.

Britain is seeking to retain as free as possible access to the EU Internal Energy Market, post Brexit. Gas and power will still be able to flow between the EU and the UK but there is the potential for legislative issues, and trading could become less efficient while long-term security of supply is less clear.

It is a similar situation in the gas market, although the UK is much more reliant on imports, with more than half of the country’s natural gas being imported from countries in the European Economic Area – the vast majority from Norway. The UK can also import supplies of liquefied natural gas (LNG) shipped on tankers and pipeline flows from Belgium and the Netherlands.

Brexit is not expected to impact on the availability of this gas, even under no deal. However, less efficient trading, the possibility of new regulations, and heightened currency variations would all likely increase costs for consumers.

With the UK unable to meet demand with its own indigenous supply, the country is expected to become increasingly reliant on energy imports from foreign sellers, making these issues more prevalent in the day-to-day trading of energy.

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

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LONG-TERM FORECAST REPORT

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

Weekly Energy Market Update for 29 July 2019

Gas

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

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

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

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

Gas Graph

Power

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

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

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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