Pricing Headlines for the Month

Wholesale prices last month

The majority of power and gas contracts declined in October, with a comfortable power and gas supply outlook, despite some near-term contracts rising as we head into winter and colder temperatures lift demand levels. Commodity markets also weighed on power and gas prices. Brent crude oil fell 4.5% to average $59.5/bl in October, and EU ETS carbon prices fell 4.7% to average €24.6/t.

Looking ahead

Power and gas prices are expected to rise in the coming weeks as temperatures are forecast to slip to well below seasonal normal levels. However, the impacts of this will be felt most in
near-term contracts, but some upward movements could be felt in] seasonal contracts. However, a comfortable supply outlook for both power and gas markets, with high levels of LNG imports and more renewables electricity capacity commissioning, will act to prevent any significant rises in seasonal contracts.

Non-commodity and industry updates

The European Commission approved the GB Capacity Market following a seven-month-long investigation which saw the scheme put on standstill. As a result, government is now able to invoice suppliers for payments which had been deferred during the standstill period. On 7 November, Ofgem confirmed that mutualisation will be triggered for the Renewables Obligation, with an initial shortfall in payments of £206mn.

Electricity Price Update

Last month

Power contracts for delivery this winter showed notable losses in October, as a warm start to the season and unseasonably low gas prices weighed on the power market. November 19 power fell 7.0% to average £48. 4 /M Wh. These downward movements fed into seasonal power contracts, which moved down 2.7% on average Summer 20 power slid 3.4% to £46.9/M Wh, and hit a near six
-month low of £45.5/MWh on 31 October. Lower carbon prices and comfortable supply margins also acted to weigh on seasonal contracts.

Looking ahead

Power prices are expected to rise in the coming weeks as temperatures are forecast to slip to well below seasonal normal levels. However, the impact of this may be limited to near term contracts for
delivery this winter, whereas seasonal prices continue to be weighed on by comfortable supplies. 1.1GW of new renewables capacity is expected to
commission this winter, which will act to weigh on the power market.

Gas Price Update

Last month

Gas contracts for delivery this winter also showed notable falls in October, as a warm start to the season, high levels of gas in storage and record LNG import
levels weighed on the market. These downward movements fed into seasonal gas contracts, which dropped 3.3% on average. Summer 20 gas was 4.2% lower, averaging 42.5p/th, and winter 20 gas was 3.2% lower to finish the month at 52.0p/th. Prices were weighed on by a comfortable supply outlook, particularly amid an oversupplied global LNG market which has seen high import levels to GB.

Looking ahead

Gas prices are also anticipated to rise in the coming weeks as temperatures are forecast to slip to well below seasonal normal levels. As with the power market, the impact of this may be limited to near-term contracts for delivery this winter, whereas seasonal prices continue to be weighed on by comfortable gas supplies. With European gas storage levels entering winter close to 100% full, and LNG deliveries continuing to arrive, seasonal contracts are unlikely to see any notable gains this month.

Commodities Recap

Brent Crude

Brent crude oil fell 4.5% to average $59.5/bl in October. Prices dropped to $57.5/bl on 3 October as Saudi Arabian oil production recovered faster than expected following drone strikes on production facilities. Oil prices were also influenced by the wavering optimism over US-China trade talks, with some progress reported at the end of October, and high US crude inventory levels. Some price support was seen from the possibility of deeper cuts to be made by OPEC.

Coal

API 2 coal prices dropped in October, slipping 0.6% to average $66.9/t, with news of possible closures to South Korean coal-fired plants over the winter.

Carbon

EU ETS carbon prices fell 4.7% to average €24.6/t in October, as prices dropped to a six-month low of €22.4/t early in the month with fears of a no-deal Brexit. Prices recovered later in the month, reaching a high of €26.0/t as a Brexit deal was agreed between the EU and UK; however, news of a general election continued to cause uncertainty. Volatility in the carbon market is likely to remain in the coming months.

Non-Commodity Charges & Industry Updates

Supplier Tariff Movements

In September, 20 suppliers reduced the price of their cheapest available tariff, while nine suppliers increased their cheapest tariff price. Outfox the Market continued to offer the cheapest available tariff priced at £864/year on average, followed by Green priced at £867/year on average. EDF Energy reduced the price of its cheapest available tariff with its new Simply Online Apr21 tariff priced at £931/- year on average. ENGIE’s cheapest tariff increased by £76/year to £1,101/year on average, after it removed its one year tariff, offering only two year tariffs instead. 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.

2018-19 RO Mutualisation Triggered

Ofgem confirmed on 7 November that mutualisation will be triggered for the 2018-19 Renewables Obligation (RO). Suppliers were obligated to either present RO Certificates (Rocs) or to make a buyout payment of £47.22 per Roc, or a combination of both, in order to meet their total RO by 1 September. 42 suppliers did not meet their obligations by this date and subsequently owed late payments, with an initial shortfall of £206mn. Ofgem also confirmed that a number of suppliers had failed to meet the 31 October late payment deadline, with the total missing payments being enough to trigger mutualisation. The total shortfall to be mutualised is still being calculated and will be published in December 2019. Mutualisation will act to slightly lift costs of the scheme for all other suppliers, and therefore consumers, in the market as the costs will be recovered through the electricity bill.

Citizens Advice Calles for TPI Regulation

A new report by Citizens Advice published on 25 October, has illustrated the lack of protections given to the microbusiness sector, and details evidence of microbusinesses being needlessly disconnected, pursued for debts and mis-sold contracts by energy brokers. Additionally, microbusinesses face fewer protections when suppliers go out of business. The organisation has called on Ofgem, government and industry to introduce a number of measures: for government to introduce stricter regulation of energy brokers and other third party intermediaries (TPIs); for energy brokers and TPIs to be transparent on commission and any fees which appear on bills; for industry to improve debt and disconnection processes, and for Ofgem to protect microbusinesses’ credit balances if their suppliers fail.

European Commission Approved Capacity Market

The European Commission (EC) announced on 24 October its decision to approve the GB Capacity Market (CM), following a several-month long investigation. The EC “did not find any evidence that the scheme would put demand response operators or any other capacity providers at a disadvantage with respect to their participation in the scheme”. On 25 October, it was confirmed that its approval means the government will: be able to restart the mechanism for making payments to capacity providers; invoice suppliers for the supplier charge relating to the standstill period which will be used to fund the deferred capacity payments, with these payments totalling approximately £1bn; confirm that the conditional capacity agreements awarded in the replacement T-1 auction, held in July 2019, have become full capacity agreements and; confirm the three capacity auctions scheduled for early 2020 will take place.

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