Pricing Headlines for the Month

Wholesale prices last month

All wholesale power and gas contracts rose in July. Gas prices were lifted by unplanned outages at gas facilities including Aasta Hansteen in Norway, a rise in gas demand for power generation amid low wind output, and a recovery in oil prices. This fed into the power market, which was further supported by higher cooling demand during the heatwave and a rise in EU ETS carbon prices, which hit a 13-year high of €29.95/t.

Looking ahead

In August, power and gas prices will have mixed drivers. Weaker summer demand and forecasts of near normal temperatures will pressure prices, while periods of tighter gas supplies amid fewer LNG imports and planned maintenance at UKCS sites could lift prices. EU ETS carbon prices will be supported by the halving of auction volumes in August, with any price gains feeding into
power contracts. Expectations of weaker demand for oil may cap any gains from tensions in the Middle East, and should therefore not be a major price driver.

Non-commodity and industry updates

The EMR Delivery Body confirmed the next Contracts for Difference auction for renewables will commence on 9 August. The auction is for Delivery Years 2023-24 and 2024-25 and has a budget of £65mn (2011-12 money). RWE confirmed plans to close its 1.6GW coal-fired power station, Aberthaw B, citing challenging market conditions. This will leave four operational coal-fired power stations in the UK.

Electricity Price Update

Last month

All seasonal baseload power contracts rose, up 3.2% on average. Winter 19 power was 2.2% higher at £56.9/MWh. Seasonal power contracts mostly mirrored their gas counterparts, as gas-fired power generation continues to dominate the GB electricity mix. CCGT generation remained dominant in the supply mix, providing 49.3% of generation in July, up from 47.3% in June. A rise in the EU ETS carbon price also supported seasonal power contracts. At ~€28/t, it accounts for approximately £18.5/MWh of the wholesale power price, so any movements can have a notable impact on electricity prices.

Looking ahead

Forecasts of lower wind generation in early August will provide support to electricity prices; however, this will be offset by an increase in available nuclear capacity following the return of Sizewell B-1 (600MW) on 5 August, Sizewell B-2 (600MW) on 9 August, and Hunterston B-8 (480MW) on 30 August. Power demand is also expected to remain low.

Gas Price Update

Last month

In July, gas supplies were tighter as only five LNG tankers arrived at UK terminals, down from six in June and well under levels seen earlier in 2019. Supplies were also impacted by an unplanned outage at Norwegian terminals in the middle of the month, which coincided with a rise in gas for power demand amid lower wind generation and higher cooling demand during the heatwave. Day-ahead gas rose for the first time since September 2018, rising 7.1% to average 30.0p/th in July. All seasonal gas contracts rose in July, up 2.2% on average. Winter 19 gas was 0.3% higher, averaging 51.5p/th.

Looking ahead

Near seasonal normal temperatures are expected throughout August and into September according to the latest forecast from The Weather Company. This will keep demand relatively low, offsetting any concerns of an undersupplied gas system as the recent influx of LNG cargoes to the UK has subsided. UK gas storage ended July above 1bcm, over 70% full, and this will keep the supply outlook going into winter comfortable, and help prevent price spikes.

Commodities Recap

Brent Crude

Brent crude oil was up 2.8% to average $64.7/bl, supported by growing tension in the Middle East between Iran and the US, which has added an insurance premium to oil tankers travelling in the Strait of Hormuz. This, combined with several consecutive weekly declines in US crude stocks, pushed prices to $67.6/bl on 11 July, the highest since 30 May. However, prices were pressured by concerns of weaker economic growth and a reduction in oil demand.

Coal

API 2 coal prices recovered slightly, reversing this year’s downward trends by rising 6.3% to average $68.0/t in July. Coal prices rose above $71.0/t in the week of Europe’s heatwave (w/c 22 July) as coal demand picked up due to forecasts of higher cooling demand across north west Europe.

Carbon

EU ETS carbon prices rose 11.2% to average €28.0/t. Prices hit a 13-year high of €29.95/t on 24 July, supported by lower wind generation and the hotter temperatures in north west Europe, which led to an increase in conventional power generation, pushing up demand for allowances.

Non-Commodity Charges & Industry Updates

Supplier Tariff Movements

In June, 15 suppliers decreased the price of their cheapest tariff, while three suppliers increased the price of their cheapest tariff. Breeze launched a new tariff priced at £878/year on average, a decrease of £205/year compared to its previous cheapest tariff. In contrast, ESB removed its 18-month Price Protect Online v2 tariff which was priced at £989/year, with its 1-year Price Protect v5 now its cheapest tariff at £1,077/year. 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.

Price cap announcement receives mixed response

Ofgem’s price cap announcement on Wednesday 7 August received a mixed response. Energy UKDirector of Policy Audrey Gallacher said: “The vast majority of a typical energy bill is made up of costs that are outside of an energy company’s direct control, with wholesale costs accounting for the biggest proportion. Today’s announcement reflects that there’s been a fall in wholesale costs since Ofgem last set the cap level.” She acknowledged that the current environment “remains challenging for suppliers, but a competitive market means that customers can benefit from increased choice.” Shadow Business Secretary Rebecca Long-Bailey criticised the announcement, saying that the cap remains higher than the level set in January. She continued: “The key point is that the retail market, left to its own devices, will systematically overcharge inactive customers. This is unacceptable, and Labour will fundamentally reform the system.” uSwitch said that the best way for customers to save money was for them to switch.

CfD Allocation Round 3 auction set for 9 August

In an announcement published on 31 July, the EMR Delivery Body confirmed that the sealed bid window for Contracts for Difference (CfD) Allocation Round 3 (AR3) will commence on 9 August.
The CfD scheme is designed to bring forward new renewable generation capacity through a competitive auction process. CfD AR3 has a budget of £65mn (2011-12 money), an overall capacity cap of 6GW and is for Delivery Years 2023-24 and 2024-25. Results of the auction process are scheduled to be released between 6 – 9 September, with offshore wind projects expected to be
awarded the majority of contracts. The costs of the CfD scheme currently represents ~£5/MWh – £6/MWh on the consumer bill, and as more projects commission this will rise above £10/MWh in
the 2020s

RWE announces the closure of Aberthaw Power Station

RWE has confirmed plans to close the 1,560MW Aberthaw B coal-fired power station, citing challenging market conditions, which has come from the recent rise in EU ETS carbon prices. Announced on Thursday 1 August, RWE will transfer Aberthaw Power Station’s existing Capacity Market agreement for the years 2019-2020 and 2020-2021 to third parties and a small proportion to other units within RWE’s fleet. In doing so, it is assured that the total amount of capacity available under the Capacity Market remains the same. Consultation with affected staff and employee representatives is now underway, where the proposed date of closure is 31st March 2020.
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