Smarter Energy Market Review – November 2018
Wholesale prices last month
In October, many wholesale power and gas contracts fell for the first time since June. High LNG imports and comfortable power and gas supplies have given some relief as we move into winter. Coal, oil and carbon prices (which are all-important for power prices) dropped to respective five, eight and 16-week lows during October.
Non-commodity charges and industry updates
While Third Party Charges are generally set to rise in the coming years, therefore increasing costs to consumers’ energy bills, the current rise in wholesale power prices could see the costs of renewable subsidy schemes – such as the Contracts for Difference (CfD) – decrease. As developers in the CfD scheme receive a top-up payment from the wholesale price to a predetermined strike price, any rise in power prices reduces the level of any top-up payments required.
As temperatures are forecast to remain slightly above seasonal normal levels in November, and gas supplies are comfortable amid high LNG imports, the recent fall in wholesale prices could continue.
Commodity prices could also fall further, with Brent Crude oil decreasing as previous fears of a tight market turn to concerns of oversupply in the coming months. Potential downward movements in commodity markets could add further pressure to power and gas prices along the curve.
Electricity Price Update
On average, seasonal power contracts fell 2.7% in October, the first monthly decline since June. Prices fluctuated throughout October amid volatile renewables output, which acts to push wholesale costs higher when it is low as more expensive forms of generation are required to meet demand.
EU ETS carbon prices also eased power prices throughout October, as average carbon prices fell for the first since December 2017, down 9.8% month-on-month. The price of emitting
carbon is factored into the cost of power generation, and so acts to influence wholesale electricity contracts.
The return of three nuclear reactors in November, the expected continuation of high LNG imports and milder temperatures could ease supply margins as demand is lower and generation capacity increases. The healthier gas supply outlook, in combination with reduced commodity prices, could impact power contracts for summer 19 and beyond.
Gas Price Update
All gas contracts fell in October as several LNG cargoes came to UK terminals towards the end of the month, boosting supplies and reducing prior supply concerns. Most seasonal gas contracts decreased in October, falling 1.0% on average. Summer 19 gas prices averaged 61.6p/th, falling to an eight-week low of 58.3p/th on 31 October. Seasonal contracts followed commodity prices lower, as oil dropped to an eight-week low.
As temperatures are forecast to remain near or slightly above seasonal normal levels in November, gas demand could ease amid high LNG imports. This is expected to continue into
November and could weigh on gas and power prices along the forward curve. Brent crude oil prices are expected to remain at or below current levels as OPEC production reached a two-year high in October and the US grants eight countries waivers ahead of Iran sanctions. This is important for gas prices, as oil prices still impact on oil-indexed gas contracts which are delivered in Europe.
Brent Crude Oil
Brent crude oil prices rose 2.0% to average $80.8/bl in October. Prices have responded with volatility ahead of the upcoming US sanctions on Iran, which continued to drive supply uncertainty. However, news that Saudi Arabia and Russia would increase production eased concerns and drove prices to an eight-week low.
API 2 coal prices ticked up 1.2% to average $97.3/t. Coal peaked at $100.2/t on 3 October as winter restocking in Asia continued to sustain high prices. However, prices dropped to $94.0/t on 11 October as European demand fell, with German ARA terminal coal stocks nearing four-year highs.
EU ETS carbon fell 9.8% to average €19.5/t in October, its first monthly decline since December 2017. Prices were above €20.0/t for most of the first half of the month but fell to a 16-week low of €15.3/t on 30 October. This came after the release of the UK Autumn Budget on 29 October, which said in the event of a “no deal” Brexit, a Carbon Emissions Tax would be imposed at £16/tCO2 to replace the EU ETS.
Non-Commodity Charges & Industry Charges
Supplier tariff movements
In September, 31 suppliers changed their price banding, with 28 applying price increases on their cheapest domestic tariffs. The most significant price increase came from ENSTROGA, which previously offered the cheapest fixed product in August, priced at £862/year. However, it launched a new fixed product in September priced at £1,082/year on average. Scottish Power showed the largest fall, launching a new version of its Super Saver tariff, priced at £1,051/year on average. This was £101/year less than its cheapest dual fuel offering in August.
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. Higher tariff rates have been a result of increased wholesale power and gas prices during 2018, as well as rising Third Party Charges. Several suppliers have recently exited the supply market, which has been partially attributed to higher and more volatile wholesale prices.
Autumn budget changes CCL rates and clarifies carbon pricing
The UK Budget was delivered by Chancellor Philip Hammond on 29 October. While there was little on energy in the speech, the Budget documents confirmed the Climate Change Levy (CCL) rates to 2020- 21, with a rebalancing of the rates for gas and electricity. The CCL is a tax on energy delivered to nondomestic users in the UK and represents approximately 8% of TPCs on an SME’s electricity bill. The electricity rate will be lowered in 2020-21 and 2021-22, whilst the gas rate will increase in 2020-21 and 2021-22 so it reaches 60% of the electricity main rate by 2021-22. The discount for sectors with Climate Change Agreements will change to reflect the change in CCL main rates. Policy costings reveal there is no net change in revenues expected from these moves, except 2023-24 where an additional £5mn is raised.
The Autumn Budget also confirmed that the government will again freeze the Carbon Price Support (CPS) – a tax for emissions on top of the EU Emissions Trading Scheme (EU ETS) – at its current level of £18/t until the end of 2020-21. However, the Chancellor also highlighted the recent high prices of the EU ETS, which are now at £17/t, and said he might, therefore, seek to reduce the CPS after 2021 if the total carbon price remains high. The CPS and EU ETS adds approximately £14/MWh to the wholesale cost of electricity, so has a considerable impact on the bill. The Budget also confirmed that in the event of a “no-deal” Brexit, the UK government would implement a Carbon Emissions Tax imposed at £16/tCO2 to replace the EU ETS.
Businesses with high energy use will benefit from £315mn of funding to support their low-carbon transition, while Enhanced Capital Allowances will be extended to companies investing in electric vehicle infrastructure.
Renewables policy cost set to rise, but growth to soon slow
On 28 September, BEIS announced the Renewable Obligation (RO) on suppliers for 2019-20. The target was set at 0.484 Rocs/MWh in England, Scotland and Wales and 0.190 Rocs/MWh in Northern Ireland. The RO is one of the main schemes supporting renewable electricity projects in the UK and represents a significant cost on the consumer bill. Costs for the RO in 2019-20 are expected to be £22.85/MWh, a 3.4% rise on 2018-19 costs.
Although the growth in costs of renewables subsidy scheme are set to slow from April 2019 and into the 2020s, their unit costs to most customers could rise further if government’s proposals to increase the number of exempt energy intensive industries (EII) go ahead. Currently, certain eligible EIIs are exempt, or will likely become exempt, from the costs of the RO, Contracts for Difference and FiT schemes. Increasing the number of exempt EIIs in the future could act to push costs up for other consumers, including small and medium-sized businesses. This consultation closed on 7 September, and a response is being awaited.
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