Smarter Energy Market Review – February 2019
Pricing Headlines for the Month
Wholesale prices last month
All wholesale power and gas contracts fell in January as comfortable gas supplies prevented below seasonal normal temperatures from supporting prices. Seasonal gas contracts went down 4.2% on average despite an increase in Brent crude oil prices, with summer 19 gas ending January at a six-month low of 48.9p/th. Seasonal power prices dropped 2.3% on average, with summer 19 power ending the month at a five-month low of £52.2/MWh.
Non-commodity and industry updates
The government published a draft version of the rules for the third Contracts for Difference auction which is due to take place in May 2019. The publication confirmed a budget of £60mn for the auction to subsidise renewable projects to begin generation from 2023. BEIS also launched a consultation on proposals to raise awareness around smart meters among non-domestic consumers. It aims to improve the take-up of smart meters among micro-businesses and enable greater cost savings.
A comfortable gas supply outlook amid an influx of LNG imports to the UK will continue to put pressure on power and gas prices, with several tankers already scheduled to arrive this month. Furthermore, current forecasts expect near or slightly above seasonal normal temperatures during February, which could also lower prices. Meanwhile, oil prices are expected to remain near current levels as OPEC cuts are offset by rising US production and slower than expected global economic growth.
Electricity Price Update
All seasonal baseload power contracts out to summer 21 decreased in January, down 2.3% on average. Summer 19 power fell 4.4% to average £55.1/MWh, ending the month at a
five-month low of £52.2/MWh. Power contracts followed gas prices lower despite a rise in both oil and carbon prices, which were up 2.4% and 4.0% respectively. Oil and carbon prices remain an important driver of energy contracts in GB, with many gas contracts linked to the price of oil and carbon prices factored into the cost of power generation.
Prices are expected to remain close to their current levels over the next two weeks with the potential to decrease slightly. Forecasts of milder temperatures and comfortable gas supplies are likely to prevent gas prices from rising and could see them fall further. With gas still accounting for around 40% of the electricity generation, these movements will feed through into power prices.
Gas Price Update
All seasonal gas contracts fell in January, dropping 4.2% on average. Summer 19 gas saw the biggest change, decreasing 7.4% to average 52.6p/th and hitting a five-month low of 48.9p/th on 31 January. However, the summer 19 contract is 24.7% higher in January 2019 than in January 2018, when it was 42.1p/th. Prices fell despite a cold spell towards the end of the month which lifted regional gas demand from 197.7mcm/d in December to 234.3mcm/d in January. Gas prices have dropped amid forecasts of milder temperatures in February and a comfortable gas supply outlook following the arrival of 16 liquified natural gas (LNG) tankers to GB terminals in January.
Revised forecasts expect near or slightly above seasonal normal temperatures to the middle of February. This will ease gas demand and leave the gas system over-supplied as several LNG tankers are already scheduled to arrive in the first half of the month. In combination with comfortable gas storage levels (at 80% full), gas prices should remain at, or slightly below, their current levels.
Brent Crude Oil
Brent crude oil prices rose for the first time in three months, up 2.4% to average $60.1/bl. Brent crude oil prices have been supported by the start of the latest OPEC+ production cuts, which aim to reduce the group’s oil production by 1.2mn bpd until June 2019. The rise in oil prices was despite news that US crude production hit a record high 11.9mn bpd in January, as well as growing concerns that weaker economic growth will dampen global oil demand.
API 2 coal prices went down 3.5% to average $84.4/t. Coal prices were pressured by a mild start to the year, with full coal stocks and increasing competition from gas in Europe.
EU ETS carbon rose for the second consecutive month, up 4.0% to average €23.5/t. The introduction of the Market Stability Reserve (MSR) resulted in a 40% reduction in auction volumes, with 38.8mn EUAs available in January, compared to a 2018 monthly average of 76.6mn EUAs.
Non-Commodity Charges & Industry Charges
Supplier tariff movements
In December, 15 suppliers moved down one or more bandings whilst 11 moved higher. The greatest decrease in dual fuel tariff prices was seen by Scottish Power with its standard variable tariff dropping by £120/year to bring it in line with the price cap of £1,137/year. Utility Point replaced Powershop as the market leader with an 18-month dual fuel fixed deal priced at £903/year. Overall, only 16 tariffs available in December 2018 were priced below £1,000/year, compared to 87 in the previous year.
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. While there were more downwards movements in tariffs in December, reflective of the recent fall in wholesale prices, Ofgem has lifted its default and PPM price caps.
Ofgem has lifted its default and PPM price caps due to higher wholesale costs
Ofgem confirmed on 7 February that from 1 April, the levels of the default tariff price cap will rise on average by £117 and pre-payment meter cap by £106 for the next six-month period to reflect higher costs. While the prices of wholesale energy have fallen in recent months, overall these costs remain 17% higher than the last cap period. In addition, network and policy costs have risen. These account for using and maintaining the transmission and distribution networks, and those that account for low carbon subsidy schemes.
BEIS unveils rules for third Contracts for Difference (CfD) auction
On 21 January government published the Draft Allocation Framework for the third CfD auction, which is set to take place in May this year. This sets out the rules by which the auction will be undertaken, confirming a budget of £60mn for renewable projects to begin generation from 2023. If the entire £60mn budget is spent, it could increase the amount that consumers pay to subsidise the scheme by around £0.2/MWh, but this will not have an impact on bills until 2023.
BEIS launches consultation to improve smart meter awareness
BEIS launched a consultation on proposals to raise the awareness of smart meters among nondomestic consumers. The consultation, published on 24 January, proposed two changes to the nondomestic smart meter rollout. One change aims to tackle low awareness of smart meters amongst micro-businesses to improve take-up and enable greater cost savings, while the second will consider approaches for the way non-domestic consumer data is made available to consumers and how this could encourage better engagement with the rollout.
EDF to close 2,000MW coal-fired power station
EDF Energy announced that it has taken the decision to end generation at the 2,000MW Cottam coal-fired power station in north Nottinghamshire. The company aims to shut down generation on 30 September 2019, citing “the challenging market conditions over the last few years and the context of the drive to decarbonise electricity generation”. Once closed, this will bring total coal-fired power plant capacity in GB to between 8-9GW, significantly below the 23GW operational in 2011. This news comes as finalised statistics of the UK’s greenhouse gas emissions in 2017 show a drop of 2.7% from 2016 and 42% since 1990, confirming the UK met its second carbon budget.