Pricing Headlines for the Month
Wholesale prices last month
Nearly all wholesale power and gas contracts fell in June. Baseload power prices continued to follow the gas market lower, with periods of high wind and solar generation also pressuring prices. Gas prices moved lower as forecasts of record-breaking temperatures decreased gas demand, while the supply outlook remains comfortable.
Power and gas demand is expected to fall in line with seasonal norms as above normal temperatures are forecast. This, in combination with a comfortable gas supply outlook, will act to lower gas and power prices. However, both Brent crude oil and EU ETS carbon prices are expected to rise in July. Suggestions from OPEC members that the group will extend oil production cuts could tighten the market, whilst EU ETS auctions will see EUA supplies halve in August. These factors will feed into gas and power prices and act offset falls from lower demand.
All seasonal power prices fell in May, down 1.5% on average. Winter 19 power moved lower by 3.7% to average £55.7/MWh, but was just 2.0% higher than the contract was a year ago in June 2018 (£54.6/MWh). Prices continued to follow the gas market lower, as the electricity mix remains dominated by gas-fired power stations. Periods of high wind and solar generation, which have no costly fuel inputs, also pressured prices, particularly in near-term contracts with day-ahead power experiencing a sixth consecutive monthly decline in June.
Forecasts of lower wind output for the first half of July will provide support to prices at times. Expectations of higher EU ETS carbon prices, which is factored into the cost of power generation, will also act to lift prices. However, any further reductions in gas prices and the return of three nuclear reactors will boost available generating capacity and could offset gains.
Gas Price Update
In June, Day-ahead gas fell for a ninth consecutive month, dropping 12.1% to average 28.0p/th, the lowest monthly average since April 2016. The month-ahead (July) gas contract was down 14.6% to average 27.2p/th. Falls in near-term gas prices were due to comfortable supplies, despite a reduction in LNG imports, and low demand amid high temperatures. These falls fed through to longer-term seasonal contracts. Seasonal gas contracts fell by 1.5% on average, which were also weighed on by a decline in Brent crude oil prices. Winter 19 gas decreased 5.7% to average 51.3p/th, 8.5% lower than in June 2018 when the contract averaged 56.1p/th.
Above seasonal normal temperatures are forecast for most of July, resulting in weaker gas demand. Although gas demand for power generation is expected to pick up at times due to weaker wind generation, and LNG send-out remains relatively low as fewer tankers are scheduled to arrive in July, gas supplies will remain comfortable with UKCS and Norwegian flows providing around 80% of the gas supply mix.
Brent crude oil declined for the second consecutive month, down 10.8% to average $62.9/bl in June. However, oil prices peaked at $66.8/bl at the end of June as the G20 summit was expected to have positive outcomes for US-China trade talks. This, in combination with the anticipation that OPEC+ would agree to extend production cuts into the second half of the year, were enough to offset reports of record US production which had previously driven prices down.
API 2 coal prices dropped for a sixth consecutive month, down 7.2% to average $64.0/t in June. Coal dropped as low as $62.8/t on 17 June, but recovered to end the month just below $65/t, as demand in Europe rose due to record-breaking temperatures resulting in higher power demand for cooling
EU ETS carbon fell for a second consecutive month, slipping 1.4% to average €25.2/t. Carbon prices peaked at €27.5/t on 26 June, a fresh two-month high. Prices were supported towards the end of the month by a combination of lower auction volumes, and a heatwave across Europe.
Non-Commodity Charges & Industry Updates
British carbon tax of £16/t in the event of no-deal Brexit
The UK government confirmed that a British carbon tax, as outlined in the 2018 Autumn budget, on carbon emissions from power stations and factories would begin on 4 November 2019 in the event of a no-deal Brexit on 31 October 2019. The carbon tax will be set at £16/t, and be topped up by the Carbon Price Support of £18/t. In the event of a deal, GB will remain in the EU ETS until the end of phase three in 2020, at which point a domestic emissions trading system would link to the EU ETS from January 2021. If a deal is agreed, then UK emitters will have until 30 April 2020 to surrender carbon permits for 2019 emissions.
Ofgem confirms removal of opt-out option for microbusiness HH data access
Ofgem announced on 25 June that under its Market-Wide Half Hourly Settlement reform, suppliers will be allowed access to Half-Hourly (HH) domestic customer data and be required to process it for settlement purposes unless the customer opts out. Currently, access to HH data is undertaken on an opt-in basis for domestic consumers and an opt-out basis for microbusinesses; under Ofgem’s decision, in addition to the change to accessing domestic customer HH data, microbusinesses will no longer have the option to opt-out. The current regulations would continue for existing customers up until they change their electricity contract. Ofgem announced on 25 June that under its Market-Wide Half Hourly Settlement reform, suppliers will be allowed access to Half-Hourly (HH) domestic customer data and be required to process it for settlement purposes unless the customer opts out. Currently, access to HH data is undertaken on an opt-in basis for domestic consumers and an opt-out basis for microbusinesses; under Ofgem’s decision, in addition to the change to accessing domestic customer HH data, microbusinesses will no longer have the option to opt-out. The current regulations would continue for existing customers up until they change their electricity contract.
Net-zero carbon taskforce launched to help companies play role in 2050 target
Business in the Community (BITC) has launched the Net Zero Carbon Taskforce. Announced on 12 June, the taskforce’s mission is to “inspire and mobilise businesses to reverse the impacts of the climate crisis”. It aims to identify the simplest, most effective actions businesses can take to help reduce the climate breakdown. Gudrun Cartwright, Environment Director at Business in the Community, said: “While Business in the Community endorses this target, 2050 may be too late according to current science-based predictions. UK cities are committing to earlier targets such as Glasgow’s target to achieve net zero carbon by 2045, Manchester by 2038, Edinburgh and Bristol by 2030 and Nottingham by 2028.”.
Future Energy Scenario explores key stepping stones to reaching net-zero
National Grid ESO issued its Future Energy Scenarios report on 11 July, setting out credible pathways and scenarios for the future of energy. Whilst Net Zero by 2050 is achievable, the report highlights that it requires immediate action and the need for greater coordination across the whole energy system. Developed following feedback from more than 600 experts, the analysis predicts 35mn EVs to on the road by 2050, which can be used to store roughly one-fifth of GB’s solar generation. The report highlights that UK homes and businesses will need to transition to hydrogen and electric technologies for heat. For Net-Zero, electrification is greater than in any core scenario, mainly due to greater electrification of the industrial and commercial sector.
BEIS launches SEG to guarantee payment for homes and businesses
On 9 June, BEIS announced that the Smart Export Guarantee (SEG) will replace the Feed-in Tariff scheme for electricity exports. In the announcement, BEIS said this will ensure that small-scale electricity generators installing solar, wind or other forms of renewable generation with a capacity up to 5MW will be paid for each unit of electricity they sell to the grid. SEG will place a legal obligation on energy suppliers with over 150,000 customers to introduce export tariffs by 1 January 2020.