Pricing Headlines for the Month
Wholesale prices last month
All wholesale power contracts rose in December, while gas contracts experienced mixed trends. Seasonal power contracts to winter 2021 went up 3.1% on average and were supported by soaring EU ETS carbon prices – this despite uncertainty over the UK’s participation in the scheme post-Brexit. Seasonal gas contracts saw less growth, with a comfortable gas supply outlook and a fall in Brent crude oil prices.
Non-commodity charges and industry updates
The Met Office has highlighted the risk of a cold snap later this month and into February, which could act to lift gas and power prices. However, the GB gas market remains well supplied which will help limit potential price spikes. Brent crude oil and EU ETS carbon prices are also expected to rise early in 2019, with oil production cuts commencing, and the start of supply curbing measures in the EU’s carbon emitting scheme. This could act to lift gas and power prices along the curve.
On 18 December, the government confirmed that the Feed-in-Tariff scheme will close to new applicants from 31 March 2019. The scheme currently contributes around 7% of Third Party Charges on the electricity bill. Payments to cover the Capacity Market could still be collected despite the current standstill of the scheme. It has been argued that allowing the collection of funds during the standstill will protect industry and consumers should the scheme be reinstated.
Electricity Price Update
All seasonal power contracts decreased in November, down 3.3% on average. Falling EU ETS carbon prices have continued to pressure the power curve as the cost of emitting carbon is factored into the cost of power generation. Lower gas, oil and coal prices have also weighed on power contracts.
In December, power prices could rise as wind generation is expected to average 6.3GW until 14 December; while a fall in nuclear capacity and a delay in the return of Hunterston B could lead to tighter than previously expected supply margins until January 2019. The nuclear Hunterston B plant has a total generation capacity of 965MW and has been offline since March 2018 to allow safety investigations after cracks were found in the plant’s nuclear reactor.
Gas Price Update
Most seasonal gas contracts rose in December, up 1.1% on average. Summer 19 gas gained 0.8% to 57.0p/th, with the contract 35.2% higher than it was in January 2018. In contrast, winter 19 gas dropped 0.3% in December to 65.4p/th. Prices rose despite a sustained fall in Brent crude oil prices, which has helped push gas prices lower at the start of 2019. Additionally, a comfortable supply outlook with a surge in the amount of Liquified Natural Gas (LNG) imports to GB has helped to prevent seasonal gas contracts from rising further.
Gas prices are expected gas prices to remain near current levels in January, with several offsetting price drivers. Although the Met Office has highlighted the risk of a cold snap later this month and into February, which would act to lift prices, the gas market remains well supplied with high levels of LNG imports. In addition, OPEC-led oil output cuts commencing in 2019 could lift gas prices, with the two markets interlinked. However, the effectiveness of the cuts is yet to be seen.
Brent Crude Oil
Brent crude oil prices fell 12.2% to average $58.7/bl in December. Fears of an oversupplied market pressured prices to their lowest since September 2017. This was despite plans by OPEC for production cuts of 1.2mn bpd in 2019, as growing US shale production to offset the impacts. If OPEC’s output cuts have their desired effect and lift prices, these increases could feed into GB gas and power markets in the future.
API 2 coal prices lifted 0.4% to average $87.5/t in December. However, prices ended the month lower at $85.8/t as China banned seaborne coal imports from November, reducing global demand for the commodity.
EU ETS carbon rose 18.4% to average €22.6/t in December. The lack of EUA auctions over Christmas, combined with the start of supply curbing measures in the scheme from January 2019, supported prices across the month. EU ETS carbon prices are important as they are factored into the cost of power generation; however, there is uncertainty over the UK’s future carbon pricing policies post Brexit.
Non-Commodity Charges & Industry Charges
Supplier tariff movements
In November, 19 suppliers moved down one or more bandings, with the greatest decrease in cheapest dual fuel offering seen by Toto Energy with the launch of its Online Fixed Saver at £980/year. Powershop remains as market leader this month despite implementing a £49/year increase on its cheapest dual fuel offering. Analysis has revealed that there were 57 price rises for domestic customers recorded in 2018 – up from 15 the year before – the worst on record for price rises. 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.
Government confirms closure of FiT
The government published its response to the findings of its consultation on the closure of the Feed-In -Tariffs (FiT) scheme to new applicants from 31 March 2019. This confirmed that it would go ahead with the closure, including export tariffs. Released on Tuesday 18 December, the government said that this decision was reached following a consultation and “reflects our desire to move towards fairer, cost reflective pricing and the continued drive to minimise support costs on consumers as set out in the Control for Low Carbon Levies.” It added that the FiT scheme does not “support the vision set out in the Industrial Strategy and Clean Growth Strategy.” The announcement follows Energy and Clean Growth Minister Claire Perry stating in the Commons in November that “solar power should not be provided to the grid for free.”
BEIS proposes route to market for small-scale renewables
The government has announced a proposed replacement scheme for the export tariff under the FiT scheme, called the Smart Export Guarantee (SEG). Announced on Tuesday 8 January, the SEG is planned to guarantee new small-scale renewable electricity providers payment from suppliers for electricity exported to the grid. The proposed design would see BEIS mandate that larger electricity suppliers (>250,000 domestic electricity supply customers) offer small-scale generators a price per kWh for the electricity they export to the grid. Exported power would have to be metered, with suppliers obliged to provide at least one export tariff. Suppliers would determine the tariff per kWh for remuneration, and the length of the contract. Views are invited by 5 March. Government have said that this new mechanism should not have an impact on the amount of money that consumers pay for low carbon levies, and is in line with government’s strategy to introduce market -based solutions to aid the development of small-scale renewables
Capacity Market Supplier Charge to remain
A proposal has been raised to allow the collection of the Capacity Market (CM) charge that suppliers have to pay to subsidise the scheme while the scheme is at a standstill. As part of the suspension of the scheme all payments to capacity providers – which are funded by charges on the consumer bill – were stopped. It was argued that allowing suppliers to collect and pay the charge during the standstill would protect industry and consumers should the CM be reinstated. The funds would be withheld until the reinstatement of the scheme, at which point they would either be released to capacity providers or paid back to energy suppliers. The CM scheme currently contributes around 3% (£2.6/MWh) of total TPCs on the consumer electricity bill.
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