Smarter Energy Market Review – March 2019
Pricing Headlines for the Month
Wholesale prices last month
All wholesale power and gas contracts fell in February as comfortable gas supplies and record high winter temperatures eased gas and power demand. Seasonal power prices were down 4.8% on average in February, with summer 19 power falling 9.8% to average £49.7/MWh. Seasonal gas contracts dropped 5.5% on average in February despite an increase in Brent crude oil prices.
Current forecasts expect temperatures to fall from recent highs, although they are expected to remain above seasonal normal levels through March. This is expected to keep gas and power prices low, with comfortable supplies predicted to continue into the coming month with several LNG tankers scheduled to arrive in early March. Brent crude oil prices are likely to be supported by OPEC production cuts in the month ahead. However, concerns of weak economic growth and rising US crude production may cap gains.
Non-commodity charges and industry updates
The government confirmed its intentions to collect Capacity Market payments from suppliers once the current standstill of the scheme ends. These charges are recovered by suppliers through the consumer bill, and currently cost ~£2.6/MWh. Ofgem confirmed the Renewables Obligation buy-out price for 2019-20. The increase reflects an average Retail Price Index increase of 3.3% and translates to a cost to consumer of £23.6/MWh.
Electricity Price Update
All seasonal baseload power contracts decreased in February, down 4.8% on average. Power for delivery in summer 2019 averaged £49.7/MWh, down 9.8% from January, with the contract dropping to a nine-month low of £47.5/MWh on 25 February. Power prices have continued to follow their gas counterparts lower and were also pressured by a fall in the price that power generators have to pay to cover their carbon emissions. CCGT generation remained dominant in the supply mix, providing 42.1% of the generation mix in February, although this was down from 48.4% in January.
Gas supplies are expected to remain comfortable in March amid an influx of LNG supply. With gas-fired generation providing upwards of 40% of Great Britain’s electricity any fall in gas prices will also feed directly into power prices. Additionally, the arrival of Storm Freya early in March saw wind speeds up to 80mph, leading to high levels of wind output.
Gas Price Update
All seasonal gas contracts fell in February, dropping 5.3% on average. Summer 19 gas saw the biggest change, falling 12.6% to average 46.0p/th. The contract hit a 10-month low of 44.1p/th on 25 February. However, the summer 19 contract is 16.0% higher in February 2019 than it was in February 2018, when it was 39.6p/th. Gas prices dropped as temperatures were well above seasonal normal levels throughout much of the month, with record high winter temperatures suppressing gas demand. This led to the gas system being oversupplied, with the arrival of 12 LNG tankers adding to an already comfortable supply picture.
Temperatures are forecast to remain above seasonal normal temperatures throughout most of March. This will dampen gas demand in the near-term and keep the system oversupplied as the influx of LNG tankers to Europe continues, with six tankers scheduled to arrive to GB terminals before the middle of the month.
Brent Crude Oil
Brent crude oil prices continued to recover in February, up 7.0% to average $64.3/bl. Prices have been supported by OPEC’s production cuts, which have seen the group’s supply fall to four-year lows, and sanctions on Venezuela and Iran further reducing global supplies. Thi growth was despite US crude oil output hitting a record 12mn bpd and concerns that the ongoing US-China trade war would dampen global economic growth and reduce oil demand.
API 2 coal prices dropped for a second consecutive month, down 6.8% to average $78.6/t in February. Coal prices fell amid weak demand in the Northern Hemisphere, as both Europe and Asia faced temperatures well above seasonal normal levels.
EU ETS carbon prices fell for the first time in three months, down 10.2% to average €21.1/t. Prices decreased from the previous month as warmer weather reduced fossil fuel power generation across Europe, and therefore lowered demand for emissions allowances.
Non-Commodity Charges & Industry Charges
Supplier tariff movements
In January, 6 suppliers cheapest dual fuel tariffs moved up price bandings, whilst 10 moved down bandings. The greatest decrease in dual fuel tariff prices came from Orbit Energy with its cheapest tariff now priced at £974/year. This tariff was launched with a promise to remain 10% below the default price cap. Utility Point’s 18-month dual fuel tariff remained the cheapest tariff available, priced at £903/year. A downwards trend in tariff movements is reflective of a reduction in wholesale power and gas prices. 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 publishes Capacity Market response
On 28 February, the government published its response to its consultation which detailed necessary changes to operate the Capacity Market during the current standstill. The standstill has occurred because of a legal challenge against the scheme, which now needs to regain State aid approval from the European Commission, with generator auctions and the collection of payments from suppliers being postponed. The response confirmed that government intends to hold a replacement T-1 auction in summer 2019 for generation capacity to be available over winter 2019-20. Government also said it will mandate that payments required from suppliers are collected and paid in full shortly after the standstill ends. Ultimately, these payments are recovered by suppliers through the consumer bill, with Capacity Market costs forecast to account for 4% of total Third Party Charges on the consumer bill in 2019-20 (~£3.4/MWh).
Roc buy-out price rises in line with inflation
On 21 February, Ofgem confirmed that the Renewables Obligation (RO) buy-out price for 2019-20 will be £48.78. This is the price that suppliers will have to pay for each RO certificate (Roc) they do not present towards their 2019-20 obligation. This translates into a cost to consumers of £23.6/MWh; however, certain eligible energy-intensive industries can gain exemptions for up to 85% of these costs. Ofgem said the changes reflect an average Retail Price Index increase of 3.3% during the 2018 calendar year.
BEIS publishes Offshore Wind Sector Deal
On 7 March BEIS published its Offshore Wind Sector Deal, announcing that one-third of British electricity is set to be produced by offshore wind power by 2030. The deal will result in a new £250mn Offshore Wind Growth Partnership to increase UK competitiveness in turbine production, as well as increasing the sector target for the amount of UK content in homegrown offshore wind projects to 60%. BEIS also said that this deal will result in a predicted 70% of British electricity being produced from low carbon sources by 2030 and over £40bn of infrastructure investment in the UK. BEIS said it will also reduce the cost of projects in the 2020s and overall system costs, so projects commissioning in 2030 will cost consumers less “as we move towards a subsidy free world”. Additionally, BEIS said the deal would see The Crown Estate release new seabed land from 2019 for new offshore wind developments.