Energy Market Review – May 2019
Energy Market Headlines
Wholesale prices last month
All wholesale power and gas contracts fell in May. Seasonal gas contracts reversed the previous month’s gains, falling 3.0% on average, following a decline in Brent crude oil prices. Seasonal power prices also fell, down 2.3% on average, following their gas counterparts lower, whilst being pressured further by a slight decline in EU ETS carbon prices month-on-month.
Power and gas demand is expected to fall in line with seasonal norms as warmer temperatures are forecast throughout most of June. Higher renewables output is expected to pressure power prices, whilst an oversupplied gas system will keep gas prices relatively low. The expectations that OPEC+ will continue production cuts beyond June may support oil prices, however concerns of weaker demand amid ongoing trade disputes and slower economic growth, will likely offset any upwards momentum. API 2 coal prices are also predicted to fall as demand continues to decline into summer.
Third party charges and industry updates
Following a consultation, BEIS has proposed supply licence changes to Smart Energy GB’s remit to include microbusinesses in the smart meter rollout. After completing research on the microbusiness energy market, Ofgem has recommended improvements to protect microbusinesses. These include simplified tariffs, the addressing of high-pressure sales tactics and the introduction of standards for brokers.
All seasonal baseload power contracts moved lower in May, down 2.3% on average. Winter 19 power averaged £57.8/MWh, a 1.6% decrease from April. Seasonal power contracts mirrored their gas counterparts, as gas-fired power generation continues to dominate our electricity mix.
Day-ahead power fell 6.0% to average £41.1/MWh in May, its fifth consecutive monthly decline. The contract ended the month at £35.6/MWh, a near two-year low. Month-ahead (June) power was down 6.5% to average £41.8/MWh, 15.3% lower year-onyear (£49.3/MWh).
Despite forecasts of low wind output (below 3GW) in early June providing support to prices at times, CCGT will continue to account for the majority of power generation and will pressure prices lower as supplies remain comfortable. The return of several nuclear power plants, including Hinkley Point B-7 early in the month will also boost available power supplies.
All seasonal gas contracts fell in May, decreasing 3.0% on average. Winter 19 gas dropped 3.1% to average 54.5p/th. Summer 20 gas lost 2.7%, averaging 45.2p/th in May, a 3.1% increase from the same time last year when it was 43.8p/th.
In May, day-ahead gas fell for the eighth consecutive month, dropping 10.2% to average 31.9p/th. A total of 16 LNG tankers arrived at UK terminals last month, keeping gas supplies comfortable while above seasonal normal temperatures dampened gas demand. The month-ahead (June) gas contract lost 11.8% to average 31.5p/th, down 30% from the same time last year (44.9p/th).
Temperatures are forecast above seasonal normal levels for most of June, particularly in the second half of the year. With warmer temperatures, demand is expected to decrease in line with seasonal norms as gas for heating demand drops. This, coupled with comfortable gas supplies amid the continuing influx of LNG, will keep prices pressured near or below current levels.
Brent crude oil declined for the first time this year, down 1.3% to average $70.5/bl in May. Oil prices ended the month at $64.9/bl, the lowest price since mid-February, amid concerns that the ongoing US-China trade war will lower demand for oil. Concerns of weaker demand are more than offsetting previous worries of a tighter market following OPEC+ production cuts, which are expected to continue beyond June.
API 2 coal prices dropped for a fifth consecutive month, down 5.5% to average $68.9/t in May. Coal ended the month at a two year low of $65.4/t, amid weaker demand as a result of above seasonal normal temperatures and cheaper gas prices across Europe.
EU ETS carbon fell for the first time since February, slipping 0.3% to average €25.5/t in May. Carbon peaked at €26.9/t on 9 May but dropped to €22.9/t on 21 May. Pressure came from high renewables generation throughout Europe in May, which drove coal-fired power plant out of the generation mix and dampened demand for EUAs.
Third Party Charges & Industry Updates
Supplier tariff movements
In April, 14 suppliers decreased the price of their cheapest tariff or launched new cheaper tariffs, while 14 suppliers increased the price of their cheapest available tariff. Eversmart Energy launched a new fixed tariff which was £178/year lower than its variable tariff, while ESB Energy launched an exclusive tariff with uSwitch priced at £978/year—£120/year lower than its next cheapest two-year tariff. Breeze also launched a new version of its fixed tariff, priced £112/year lower at £920/year on average. Scottish Power’s price increased due to the removal of its Super Saver May tariff priced at £1,066/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.
BEIS proposes changing Smart Energy GB remit to include microbusinesses
Following a consultation on proposals to improve non-domestic consumers’ smart metering awareness and data access, BEIS has proposed supply licence changes to Smart Energy GB’s remit to include microbusinesses in the smart meter engagement campaign. BEIS’s response stated that its research suggests that businesses need to understand how smart metering and smart meter data is relevant to their particular contexts. BEIS said that if it did not extend activity to this space, “it’s not clear that messages from the domestic sector would ‘trickle through’ and stimulate enough understanding of relevance”. BEIS said it would only include microbusinesses on the basis that they are unlikely to have an energy manager, are more likely to be time and/or resource poor and are likely to have less energy expertise.
Report suggests further intervention to protect microbusinesses
Ofgem published a report on Friday 10 May, setting out the results of research on how microbusinesses engage with energy, and the implications for the CMA’s Price Transparency Remedy. The report found that the process for engaging with the market is still perceived by microbusinesses to involve hassle, provide uncertain benefits, and be time-consuming; with other issues including perceived tariff complexity. The report recommended that the Price Transparency Remedy be subject to further testing, that guidance is improved, and that the level of information required from microbusinesses when comparing prices could be reduced. It also put forward wider suggestions, including that tariffs are simplified, the addressing of high-pressure sales tactics and the introduction of standards for brokers.
Framework for price cap removal recommendation set out
Ofgem published a consultation on 29 May, setting out a framework for how it will assess whether conditions are in place for effective competition in the domestic energy retail market. This will be used to inform the recommendation to the Secretary of State on whether or not the default tariff cap should remain in place. Ofgem intends to consider a range of factors when assessing the level of competition, including market structural indicators such as supplier market shares, entry and exit of firms, and the number of smart meters installed.
It will also consider consumer behaviour such as the number of switches, and the number of default tariff customer accounts, as well as supplier performance indicators such as profit margins and speed of complaint resolution. Consumer outcomes will also be considered, which may include market prices, quality of service, tariff choice, and the performance of the switching process. Ofgem will publish the final framework in October and make its first recommendation by 31 August 2020. Responses are requested by 9 July.