Gas and Power Prices Fall Despite Rising Oil
Gas and Power Prices Fall Despite Rising Oil
Long-term gas and power prices were largely flat during July as rising oil prices were offset by low demand. But during August annual power and gas prices started to fall as concerns about winter gas supplies faded and demand continued to fall as a result of the warmer weather.Annual gas prices dipped as a result of low summer demand and easing concerns about gas supply. Annual October 13 gas fell 1.2% to a monthly average of 67.6p/th. But the contract is still 2% higher than the average for the corresponding contract last August.
Falling gas prices and the reduction in coal prices resulted in the annual October 13 power contract falling 0.8% to a monthly average of £51.7/MWh. But this is 2% lower than the same time last year. Month-ahead Brent crude oil increased by 2.7% to an average of $110.0/bl in August, following concerns about tensions in the Middle East affecting oil supplies. Average coal prices dropped 3.1% to $83.3/t in August, as the market remains oversupplied. Coal prices are now approaching three-year lows.
Crude oil and annual wholesale gas and power prices graph
Day-ahead power prices dropped in August as a result of warmer temperatures pushing demand downwards. Power prices were also affected by the end of routine maintenance at several nuclear power stations. Day-ahead power was down 2.8% to a monthly average of £47.3/MWh, 8% higher than the average for the same time last year.
But despite the warmer weather, day-ahead gas dipped slightly to a monthly average of 64.9p/th following on-going outages at North Sea gas fields. Some of these fields are expected to return online during September. Spot power prices and temperatures graph
Gas demand is expected to remain low during September and October as power stations are less likely to be operating, owing to the return of nuclear power stations from maintenance and weather forecasts, which suggest these months will be warmer than usual. However, industry body Oil and Gas UK has reduced its forecast for 2013 production in the North Sea. Oil and gas output is forecast to fall up to 22% compared to 2012. This follows a 19% fall in 2012. The fall was driven by outages and shutdowns, on top of natural declines in gas UK fields. If indigenous gas supplies are down, the UK will have to import more gas or LNG, which could increase gas prices over the medium-term and also have a knock on effect on the cost of electricity. Annual gas prices chart
Despite rising oil prices, annual gas prices dipped in August as concerns over North Sea production over the winter were calmed. Monthly average annual October 13 gas was down 1.2% to 67.6p/th, 2% higher than the average for August 2012 and 3% higher than the 2012 average of 65.8p/th. Spot gas prices chart
However, on-going maintenance in the North Sea has supported short-term gas prices despite the warmer weather. Day-ahead gas prices dipped slightly to an average of 64.9p/th in August compared to 65.0p/th in July. The day-ahead gas contract was 21% higher than the average for August 2012. Annual power prices graph
Longer-term power prices tracked reductions in their gas counterparts and the continued drop in coal prices. Coal and gas are the primary generation fuels on the electricity system and changes in their prices can affect power prices. Monthly average annual October 13 power was down 0.8% to £51.7/MWh, 2% lower than the average for August 2012 and 4% lower than the 2012 average. Spot power prices graph
The return of nuclear power stations from maintenance and strong wind output helped reduce electricity prices. Month-on-month the day-ahead baseload power contract fell 2.8% to average £47.3MWh in August, 8% higher than the 2012 average of £43.7/MWh. Key market indicators table
Big Six act on auto-rollover contracts
All of the Big Six energy suppliers have announced that they are to change the way they contract with business consumers.
Leading the pack
British Gas was the first supplier to end auto-rollovers, announcing on 17 July that products without the option would be launched in September this year for new customers. From June 2014, existing British Gas customers will be offered renewal options requiring them to make a choice about which product they would like to sign up to – but this will not include another automatic
RWE npower said on 7 August it would also end auto-rollovers, and SSE confirmed on 16 August it would do the same. SSE also announced that it will extend its existing micro-business back-billing commitment to cover small businesses – this means companies will not be back-billed beyond 12 months, where SSE’s error has led to underpayment.
EDF Energy launched on 20 August a new automatic rollover contract with no exit fees for small business customers. The supplier will now offer a 12-month fixed deal to customers on these types of contracts – without a penalty charge should they wish to change tariffs.
E.ON UK said on 23 August that before April 2014, when it will launch new products without an auto-rollover option, it will encourage its existing customers to opt out from being automatically rolled over. Customers who choose not to take a new fixed-term contract once their existing one expires will be moved onto the company’s cheapest variable rate tariff, which includes a 30-day notice period and no exit fee.
On 27 August Scottish Power confirmed it would no longer offer auto-rollover contracts to new small business customers from April 2014. The practice will be ended for existing customers later next year. The company also committed to reducing the period for back-billing customers to 12 months.
One step further
The Federation of Small Business welcomed the announcements, but national chairman John Allan said he wanted “to see the Big Six go one step further”. He called on energy suppliers to publish small business energy tariffs, claiming this would allow businesses to easily compare prices across suppliers.
These moves mean that business owners will no longer be sold products that automatically commit them to further fixed-term contracts after their existing contracts have finished.
Government clarifies CfD FiT terms
The government has set out further details of how one of the core elements of its Electricity Market Reform (EMR) package will function.
On 12 August, investors were provided with more information about both the terms and allocation process for the proposed contracts for difference feed-in tariffs (CfD FiTs). CfD FiTs guarantee to pay low-carbon generators a fixed sum – or strike price – for electricity generated on top of what they earn from selling power to the market. The strike price offered will vary for each form of power generation.
The government hopes CfD FiTs will help to stimulate £110bn of investment in low-carbon energy by 2020. But it has also estimated the regime will make it around £5bn cheaper to deliver the government’s green targets up to 2030, when compared to existing policy instruments.
Rules of the game
The update confirmed that the CfD FiT contracts will initially be offered on a “first come first served” basis, while there is sufficient funding in the overall budget. When half the annual budgetary levels are exceeded, this will be replaced by allocation rounds, which will be run twice a year. In this scenario the least expensive projects will be awarded funding first.
To ensure “timely delivery” of projects a “substantial financial commitment” milestone will be implemented. This will require developers to have spent a certain percentage of overall costs within one year of signing the contract. A target commissioning window will also be introduced, within which developers will be encouraged to complete the project.
The government expects to publish the final terms by December 2013 ready for the regime to begin in 2014.
These measures should help ensure the CfD FiT scheme remains within budget, keeping down overall costs for consumers.
Capita awarded smart meter DCC licence
The government has named Capita as the preferred bidder for the smart meter Data and Communications Company (DCC) licence.
The government’s announcement, issued on 14 August, confirmed Capita would be expected to perform the role of DCC licensee for 12 years, and could earn £175mn for doing so.
The DCC will be responsible for operating the data and communications hub that sits at the heart of the smart metering system. It will provide a two-way channel between the meters and a central communications hub, to which data users such as energy suppliers and network companies will have access.
CGI IT UK has been selected as the preferred bidder for the Data Service Provider contract (DSP). The DSP will develop and operate the system controlling the movement of messages to and from smart meters.
It was also announced that Arqiva is the preferred bidder for the Communications Service Provider (CSP) for the north region, while Telefónica has been chosen for the central and south regions.
The government believes the UK-wide roll-out of smart meters, which will take place between 2015 and 2020, will deliver a number of benefits for households and businesses. Most importantly, it will allow them better to manage their energy consumption and therefore costs, while also making it easier to switch between energy suppliers.
The selection of the preferred bidders for the smart meter contracts is an important milestone in the smart metering roll-out.
Incentives needed to encourage gas storage investment
The government must make it easier for suppliers to invest in more gas storage capacity if the UK is to avoid interruptions in supply, Energy and Utilities Alliance chief executive Mike Foster has claimed.
In a press statement, published on 12 August, Foster argued that increasing levels of gas storage will help provide insurance against rising energy bills for consumers. He said it would also help to guard against the kind of price spikes experienced during the cold weather in March. Foster noted that the UK stores less gas than other European countries, but with North Sea production in decline this situation would urgently need to be addressed.
Government revamps Green Deal Code of Practice
The government has revised the Green Deal Code of Practice, which sets out requirements for persons acting as Green Deal providers, assessors, installers, and certification bodies.
The new code, published on 31 July, states that a Green Deal participant must ensure all its information and promotional material relating to the scheme includes, or includes links to, “clear, jargon-free and appropriate information”. This is so that customers can understand what the Green Deal entails.
The code also obligates providers to use the Green Deal Quality Mark on identifying documentation and any marketing materials in relation to the scheme. But it will prevent participants from using the mark in a way that is “misleading or inappropriate”.
Support businesses to install renewables, say MPs
Financial support should be given to businesses that are looking to install medium-sized renewable energy generating systems, a committee of MPs has said.
Issued on 6 August, a report by the energy and climate change select committee warned that, without additional backing, energy projects in the 10MW-50MW range risked “slipping through the net”.
The report identifies a number of barriers to local energy projects, including securing funding and power purchase agreements, grid connection and overcoming public opposition.
Scottish businesses to benefit from power distribution subsidy
Householders and businesses in the north of Scotland are set to save around £50mn each year on their energy bills, after the government announced on 19 August that it is to retain a scheme to help with electricity distribution costs.
The Hydro Benefit Replacement Scheme offers protection from the relatively high distribution costs faced by electricity users in the far north of the country. It provides 70,000 non-domestic consumers and 690,000 households in the north of Scotland with reductions on their electricity bills. The scheme is paid for by all consumers across Great Britain, costing the average household less than £1 a year.
EMR could jeopardise demand-side response: think tank
The pace of the government’s planned reforms for achieving security of supply risk undermining the demand-side response (DSR) industry, a new study has warned.
The Energy Bill, which is currently progressing through Parliament, will provide the government with powers to establish a capacity market. This will allow future electricity requirements to be pre-emptively procured and should help to reduce the risk of blackouts in Britain. The government believes that DSR – which involves either a reduction, or shift in the time of electricity use – will have a prominent role to play in the capacity market.
But on 22 August, think-tank SmartGrid GB warned the policy timeline for implementing the DSR aspects of the capacity market was “too ambitious”. It recommended a longer development timeline to ensure the initial framework was appropriate.