Energy Market Review – August 2019
Pricing Headlines for the Month
Wholesale prices last month
All wholesale power and gas contracts fell month-on-month, with both winter 19 gas and power contracts hitting two-year lows. Gas prices have been pressured by lower demand as temperatures were above seasonal normal levels throughout most of the month, while power prices followed their gas counterparts lower and were pressured by higher wind generation.
In September, forecasts of above seasonal normal level temperatures will pressure prices and subdue demand. However, planned maintenance at the Langeled pipeline will restrict Norwegian gas flows between 5-23 September. Although this may be a bullish price driver, high gas storage levels and the scheduled arrival of LNG tankers will keep supplies healthy. Concerns of weaker economic growth and a no-deal Brexit will weigh on Brent crude oil and EU ETS carbon prices, while lower demand is expected for coal.
Non-commodity and industry updates
On 30 August, Ofgem released its forecast costs of administering the Renewables Obligation (RO) for 2019-20. The forecast of £5.5mn represents a 25.4% increase on administration costs in 2018-19. The costs will be recovered in October 2019 from money paid into the RO buy-out fund. Ofgem has also decided that all the Electricity System Operator’s efficiently incurred costs will be passed through to consumers through a Totex funding model.
All seasonal power contracts moved lower, down 2.7% on average, with winter 19 power dropping 5.0% to £54.1/MWh. The winter 19 power contract hit a 15 month low of £51.5/MWh on 27 August. Day ahead power dropped 5.3% to average £39.6/MWh , falling to £35.6/MWh on 16 August, the lowest since 31 May. Although power prices continued to follow their gas counterparts lower, a monthly rise in wind generation also pressured prices. Wind generation accounted for 18.9% of the generation mix in August, up from 12.8% in July. A drop in the EU ETS carbon price also pressured seasonal power contracts.
Power prices are expected to follow theirgas counterparts, with any gains from maintenance in September being capped by higher LNG send out and comfortable storage levels. Uncertainty for EU ETS prices surrounding a no deal Brexit will also weigh on prices unless a deal is agreed.
Gas Price Update
All seasonal gas contracts fell in August, down 2.3% on average and reversing the
previous month’s gains. Winter 19 gas was 5.5% lower, averaging 48.7p/th. The contract hit a two-year low of 45.9p/th on 28 August. Summer 20 gas was down 3.0% to average 44.7p/th. Day-ahead gas prices fell 5.6% to average 28.3p/th. The contract dropped to 26.0p/th on 8 August, the lowest since June. Prices have been pressured by lower demand as temperatures were above seasonal normal, as well as by comfortable supplies.
The scheduled arrival of two LNG tankers early in September and high (at 97% full) gas storage levels have offset concerns of a tighter market during planned maintenance in Norway in September. This, combined with the expectation of a resurgence in LNG cargoes arriving post-summer, will cap any price gains this winter. Comfortable supplies will meet high levels of gas-for-power demand this winter as coal plants remain too costly to run compared to gas plants. Prices are therefore expected to remain relatively flat over the next month.
Brent crude oil dropped 7.5% to average $59.8/bl. Prices have been pressured by
concerns of weaker economic growth, lower oil demand and growing US production. This led US bank Morgan Stanley to lower its oil 2019 price forecasts, down to $60/bl from $65/bl. In perspective, oil prices have averaged $65/bl in the first eight months of the year, and it is therefore expected that prices will fall further before the end of 2019.
API 2 coal prices fell 4.5% to average $65.0/t in August. Coal prices dropped to $63.1/t on 28 August, the lowest since 19 June as coal demand remains weak throughout Europe.
EU ETS carbon prices fell 3.1% to average €27.1/t in August. Prices dropped to €24.8/t, the lowest since 20 June 2019. Concerns of a no-deal Brexit have been the primary driver for downwards movements in the last month, and with the return of normal auction volumes in September, prices are not expected to return towards recent 13-year high levels
Non-Commodity Charges & Industry Updates
Supplier Tariff Movements
In July, eight suppliers decreased the price of their cheapest tariff, while 17 suppliers increased the price of their cheapest tariff. SSE’s cheapest tariff increased by £220/year to £1,203/year on average following the withdrawal of its Exclusive 1 Year Fixed v2 tariff. Ovo Energy launched a new version of its Better Energy tariff, priced at £1,035/year on average., down from £1,191/year in June. New entrant GOTO Energy began offering tariffs with a tariff priced at £997/year on average. 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
Total 2018-19 RO Confirmed, 2019-20 Administrative Costs Published
Ofgem announced on 21 August the total Renewables Obligation (RO) for the 2018-19 period is 129.0mn RO Certificates (Rocs). Suppliers have up until 1 September 2019 to meet their obligations for the 2018-19 period. The total cost of the RO in 2018-19 was therefore £6.1bn, equivalent to £22.1/MWh on the consumer bill.
On Friday 30 August, Ofgem released its costs from administering the RO. The forecast administrative cost for 2019-20 is £5,538,665, just under 0.09% of the estimated value of the scheme. The regulator said that this is substantially below the benchmarks for the cost of administering government schemes, but that this year’s costs represent a 25.4%
increase over the cost of administration in 2018-19.
Consultation Issued on Financial Parameters for ESO Price Control
The Electricity System Operator (ESO) will be funded through a Totex model, Ofgem has decided, with all its efficiently incurred costs to be passed through to consumers. The regulator issued its decision on Wednesday 28 August, alongside a consultation on setting the financial parameters of the model now it has been confirmed, which includes the allowed returns methodology; the approach to financeability; and the indexation for the Weighted Average Cost of Capital allowance. Ofgem is also considering potential changes to the ESO’s incentive scheme to ensure coherence with its regulatory framework, and
to align the framework with different incentives and business plan expectations. Responses to the consultation are requested by 25 September with a final decision expected to be published later this Autumn.
Transmission Outage on Friday 9 August
The near simultaneous failures of a CCGT and offshore wind farm around 16:54 BST on Friday 9 August were followed by the disconnection of distribution load in several areas of the country. At 16:52 a transmission circuit was hit by a lightning strike which triggered an automatic disconnection to protect the system and clear the disturbance within 20 seconds. This resulted in the loss of approximately 500MW of embedded generation. Immediately following the lightning strike and almost simultaneously two large generators (Hornsea offshore wind farm and Little Barford gas-fired plant) experience unplanned outages leading to a further loss of 1,378MW of generation. As a result of the sudden loss in generation, there was a dramatic fall in system frequency to below 49.5Hz. The frequency fell to such a level (48.8Hz) that customers were automatically disconnected to protect the integrity of the national network. Overall the frequency was outside of the lower statutory boundary of 49.5Hz for 135 seconds and remained outside the boundary of the targeted lower operational limit (49.8Hz) for an additional 90 seconds. A total of 1.1mn customers were affected, with all customers reconnected by 17:37. National Grid has reported that numerous lightning strikes on transmission network triggered transmission line protection to disconnect and clear disturbance and initiate subsequent reconnection. Following the outages “other generators on the network responded to the loss by increasing their output as expected.”