Pricing Headlines for the Month
Wholesale prices last month
Over the last month, all gas and power contracts fell. Reduced demand over the Christmas period amplified price reductions owing to mild temperatures, oversupply in the gas system, and high levels of wind generation. Prices in the commodity markets varied, with Brent crude oil rising 3.7% to $64.86/bl and API 2 coal falling 7.0% to $59.34/t. EU ETS carbon gained 3.0% to €25.32/t.
In the next month, Brent crude prices will be affected by the ongoing geopolitical tensions involving the US and the Middle East, with this volatility having the potential to be reflected in both the gas and power markets. Demand and therefore prices for both gas and power will likely remain lowered as a result of continued mild temperatures forecast for the month
ahead. Additionally, oversupply in the gas market is unlikely to cease which will place further downwards pressure on prices.
Non-commodity and industry updates
December, National Grid ESO raised a proposal for a transmission demand residual reform, introducing changes to how TNUoS charges are recovered. On 16 December, Ofgem announced they are assessing the possibility of moving to a shallower or “fully shallow” approach to distribution connection boundaries.
In December, all power contracts fell. Day ahead prices fell by 12% to £40.2/MWh, and January 20 slipped 10% from £50.6/MWh to £45.4/MWh. Demand is typically lower over the festive period;
however, these reductions were chiefly driven by high levels of wind generation and seasonally high temperatures Seasonal contracts also saw reductions, with summer 20 power losing 7% down to £4 1.9 /MWh, and winter 20 declining 4% to £50.5/MWh.
Power prices will continue to be governed by weather conditions. With temperatures forecast to remain above the seasonal average a n d wind generation remaining high, power demand will likely be reduced. Following the gas market, where oversupply is persisting, any reductions in price are likely to be exacerbated. Gains in the oil market from geopolitical tensions could offer some relief, should they feed across into the power market.
Gas Price Update
Over the past month, all gas contracts fell with the greatest reduction seen in the January 20 contract, slipping 17% to 36.9p/th. Day-ahead gas dropped 15% to 32.4p/th. Unabating oversupply in the gas system in conjunction with reduced gas-for-power demand from mild temperatures have kept prices low for the month of December. December also saw a record-high of 29 LNG tankers arriving in the UK from abroad, and this continued influence of oversupply has also fed into seasonal contracts. Summer 20 was down 14% to 33.6p/th and winter 20 fell 8% down to 45.4p/th.
Following the 11-year high in LNG sendout and further tankers scheduled to arrive in the UK, oversupply in the system is unlikely to cease. The effect of this will be to continue the trend of low gas prices seen across all contracts in December. Seasonally mild temperatures will contribute further, reducing gas-for-power demand and thereby keeping any price movements in a downwards direction.
Brent crude oil gained 3.7% on average, peaking at $64.86/bl. Oil prices were volatile in December; optimism surrounding the US-China Trade Agreement bolstered prices. However, this upwards influence was countered when the US President signed a bill backing Hong Kong protestors, flaring tensions with China. Rising political tensions between the US and the Middle East at the latter end of the month saw gains in the price of the commodity.
In December, API 2 Coal moved 7.0% down to $59.34/t, with weak demand in the two main demand hubs of Europe and Asia driving this decline. Prices dipped to $60.00/t for the first time since July 2016, amid the announcement of the closure of Aberthaw coal-fired plant at the end of March 2020.
In the last month EU ETS Carbon rose 3.0% to €25.32/t. Slight gains in prices were seen following the UK General Election and were further supported by a lack of market over the Christmas period, where auctions paused on 16 December.
Non-Commodity Charges & Industry Updates
Supplier Tariff Movements
In November, 25 suppliers reduced the price of their cheapest tariff offered since the end of October 2019, while five suppliers increased the price of their cheapest available tariff. SSE posted the greatest price reduction of £272/year with the launch of its Exclusive 1 Year Fixed v8 tariff priced at £893/year on average. Shell Energy posted the greatest increase
in the cheapest available tariffs of £71/year due to it not offering its Fixed December 2020 tariff priced at £980/yearon average through EnergyHelpline in November. Domestic tariff movements are a useful proxy for small and medium sized business rates, as the bills are largely made up of the same components.
Proposal Raised on Transmission Demand Residual Reform
Ofgem released its decision on the Targeted Charging Review on Thursday 21 November. Under the reforms, residual charges will be levied entirely on demand, with banded transmission and distribution residual charges for non-domestic customers, based on agreed capacity bandings for larger customers and net consumption for smaller customers. For non-domestic consumers, Ofgem considers that final banded fixed charges will remove the key existing distortions, while appropriately balancing equity across bands with equality among relatively similar users within them. This will increase charges for some users, but the regulator considers this is fair and proportionate.
OFGEM Outlines Latest Thinking on Charging Signals
Following the second working paper for its Network Access and Forward-Looking Charges review, Ofgem are examining the distribution charging boundary and transmission network charges. The regulator is looking at the potential to move to a shallower or “fully shallow” approach to distribution connection boundaries, defining small users as distribution-connected users who do not have an agreed capacity. Ofgem considers new potential alternatives to the Triad approach, including having different critical peak periods in different locations.
Large Variation in Smart Export Guarantee Tariff Rates
Energy suppliers have published their tariff rates under the Smart Export Guarantee (SEG), which came into effect on 1 January. Under the SEG, electricity suppliers that have more than 150,000 customers are required to offer at least one tariff for power exported to the grid from renewables generators smaller than 5MW. Obligated suppliers are required to offer tariffs with rates above 0p/kWh. Offered fixed rates across 14 suppliers so far range from 5.6p/kWh (Social Energy) to 0.5p/kWh (Utility Warehouse). However, Social Energy’s tariff is not strictly a SEG as it is exclusively for their supply customer, and only offered to solar PV with battery storage. A number of other suppliers are also offering exclusive export tariffs for their existing customers. Shell Energy initially published a tariff of 0.001p/kWh, however, this has since moved to 3.5p/kWh – insisting first price was a ‘pilot’ tariff. The SEG is a replacement scheme for the Feed-in Tariff (FiT), however, unlike the FiT scheme, cost will not add to the consumer electricity bill.