Energy Industry News UK – October 2018
Read on for the latest energy industry news UK from the energy experts at Smarter Business.
Energy Industry News UK – Pricing Headlines for the Month
Wholesale prices last month
Wholesale power and gas prices rose for a seventh consecutive month in September. Power prices went up amid relatively low renewables generation, increasing the reliance on more expensive gas and coal-fired power stations to meet demand. This means that the sustained growth in underlying commodity markets, particularly gas and coal, has fed through into the power market.
Non-commodity charges and industry updates
While Third Party Charges are generally set to rise in the coming years, and therefore lift costs to consumers’ energy bills, the current rise in wholesale power prices could see the costs of renewable subsidy schemes such as the Contracts for Difference (CfD) decrease. As developers in the CfD scheme receive a top-up payment from the wholesale price to a pre-determined strike price, any rise in power prices reduces the level of any top-up payments required.
Revised colder weather forecasts for early October are expected to increase gas demand, with regional gas demand at a four-month high in response to increased heating in homes. Higher demand will likely push gas prices upwards, and feed into wholesale power markets. EU Emissions Trading Scheme (EU ETS) carbon prices are expected to remain high, with seven of Belgium’s eight nuclear reactors offline from 20 October. This could result in higher fossil fuel burning in Europe and push demand for allowances higher.
Electricity Price Update
Power prices continued to experience strong growth in September, due to the ongoing upwards momentum in underlying commodity markets and a fall in renewable generation. All seasonal power contracts rose, gaining 8.5% on average. Gas prices were the primary driver, as gas-fired power generation makes up most of our electricity mix. EU ETS carbon prices also provided support to power prices throughout September, as average carbon prices gained 15.2% month-to-month. The price of emitting carbon factors into the cost of power generation, therefore lifting wholesale electricity costs.
Forecasts show that the margin between electricity supply and demand looks comfortable for October, although this could yet be reduced by unplanned outages. By contrast, power demand is expected to pick up as we head into the middle of October, which could support near-term power prices.
Gas Price Update
All gas contracts rose in September as low renewables generation increased gas demand for power generation, whilst cooling temperatures towards the end of the month saw heating demand increase. All seasonal gas contracts grew in September, up 11.4% on average. A combination of short-term factors – including lower temperatures and soaring commodity prices – have fed through into longer-term contracts.
A cold start to the winter season could put pressure on supplies, with potential spikes in near-term gas prices. However, according to a recent prediction by the Weather Company on 19 September, temperatures are forecast to remain near or slightly above seasonal normal temperatures, with forecasts suggesting October will be up to 60-70% warmer than average. Temperatures up until December are expected to continue to remain above-average across most of Europe, potentially limiting gas for heating demand in the near-term.
Brent Crude Oil
Brent crude oil prices rose last month for the first time since May, up 7.5% to average $79.2/bl during September. As gas contracts are often linked to the price of oil, any changes in oil prices could impact gas and power markets.
API 2 coal prices were up 8.3% to average $96.1/t in September. According to vessel tracking data, global coal shipments have grown by 3.8% between January and August this year, up to 835.5mn tonnes. Prices reached a fresh five-year high on 21 September, hitting $98.4/t. The growing role of coal in the power mix could mean higher prices.
EU ETS carbon gained 15.2% to average €21.7/t, its ninth consecutive monthly rise. Prices hit a fresh 10-year high of €25.8/t on 10 September. However, prices experienced a notable decline in the second half of the month, ending the month closer to €20.0/t. This drop has been attributed to hedge funds and speculators selling previously bought allowances and traders chasing short-term profits.
Energy Industry News UK: Non-Commodity Charges & Industry Charges
Network charging reforms could see energy users save
Also worth mentioning as energy industry news UK, reforms to Balancing Services Use of System (BSUoS) charges could remove the benefits small generators gain from being connected to the local electricity grid, rather than the national transmission network.
BSUoS charges are paid by suppliers and transmission-connected generators, with an almost even split between the two groups. The rate is set on a per megawatt-hour basis for each half-hour settlement period. Distributed generators are exempt from the charges, and can also receive avoidance payments from suppliers.
A proposed modification to the Connection and Use of System Code (CUSC) – which governs how that section of the market operates – would apply BSUoS charges to exports to the power grid from distributed generators, ending their current exemption. Suppliers would also be charged according to their gross demand rather than net demand, meaning distributed generators would no longer be able to collect avoidance payments. The proposer estimated that the impact would be to increase costs for distributed generators by £5/MWh, while consumers would save £230mn/ year.
At the industry panel which considered these changes on 28 September, there was agreement that BSUoS needed to be addressed and reformed in order to be made fit for purpose for the evolving nature of the system and market. However, participants were concerned that a rapid, system operator-led review might not allow all stakeholders to participate fully. Ofgem intends to set out its overall framework for taking forward BSUoS reform in the near future. It is expected that this would be led by a specific task force, under the umbrella of the so-called “Charging Futures Forum” framework.
FSB calls for “smarter, cheaper and fairer” energy market
Research by the industry group the Federation of Small Businesses (FSB) has called for new measures to make the energy market smarter, easier and cheaper for small businesses. Published on Tuesday 11 September, the report called for “open banking” style measures that would make it easier for small businesses to switch providers and secure cheaper tariffs. The report said that
energy data can be shared and used in a “secure and safe way”– to empower customers to help them make better and more informed decisions about their energy service. The FSB called for reforms, including standardising tariffs in machine-readable formats to allow for automated comparisons to energy tariff offerings; making smart meter data available to approved third parties; and allowing energy customers to hand over contract switching responsibilities to third parties.
Wholesale energy price surge could lead to savings on renewable schemes
Analysis by think tank the Energy and Climate Intelligence Unit (ECIU) – published on Tuesday 4 October – has suggested that the cost of the Contract for Difference (CfD) scheme has fallen by as much as 25% due to an increase in wholesale energy prices. The CfD is the government’s main mechanism for supporting new low-carbon power generation, giving developers the difference between the wholesale price and a pre-agreed “strike price”, secured through a competitive auction. The ECIU’s analysis found that the forecast of £41/ MWh for the 2018-19 financial year was too pessimistic. It highlighted that the prices of coal, gas and carbon so far this financial year had collectively pushed the average UK wholesale price of energy up to an average of £57/ MWh. The ECIU said that this means that the government is now paying less to top up developers to the strike price and the £1.18bn that the Treasury was expecting to pay in the financial year could actually come down to £884mn.
These summaries should give you a general update on the latest energy industry news UK, but if you have any questions, please don’t hesitate to get in touch.