Catalyst Energy Market Brief April 2013
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Energy Market ReportsCatalyst Energy Market Brief April 2013

Catalyst Energy Market Brief April 2013

Chris Hurcombe

by Chris Hurcombe 03 April 2013

Report Summary:

Gas and Electricity Prices Push Up April 2013

Gas and Electricity Prices Push Up April 2013

Power and gas have annual highs last month as the UK experienced freezing weather and dwindling gas stocks, and unplanned outages caused supply concerns.In February annual power prices picked up on the back of rising oil prices. Despite the fall in oil price during March, supply concerns and colder weather have supported prices throughout the month.

April 2013 Energy Price Highlights

  • The annual April 2013 power contract climbed 2% month-on-month to average £52.9/MWh. But on average the annual power contract is still 2% lower than this time last year.
  • The annual gas contract rose 2.8% to a monthly average of 69.5p/th. The annual gas price has climbed 13% since July, and is up 3% on last year.
  • Month-ahead Brent crude decreased 6% to a monthly average of $109.6/bl following the debt crisis in Cyprus.
  • Continuing oversupply in the coal markets saw Annual API coal fall $4.55/t to a monthly average of $94.9/t.
  • Carbon prices slipped further as uncertainty continued to surround EU plans to improve carbon pricing. Annual carbon dropped 11% to a monthly average of €4.2/t.

Crude oil and annual wholesale gas and power prices graph

Crude oil and annual wholesale gas and power prices graph

Day-ahead prices surge on cold weather and supply concerns

A Siberian weather front brought freezing temperatures to much of the UK during late March. Coupled with low stocks in storage and low LNG supplies, an outage on the UK Belgian interconnector caused a surge in short-term gas prices.
Day-ahead power prices climbed 21% to average £62.0/MWh and reached a four-year high of £86.0/MWh on 22 March. Day-ahead gas increased 24% to a monthly average of 84.9p/th

 

Spot power prices and temperatures graph

Spot power prices and temperatures graph

Outlook for gas and power mixed

Short-term gas spikes are likely to be short lived as weather improves and LNG tankers are drawn to the UK by higher wholesale prices, bolstering supplies. However longer-term prices could stay high as traders remain concerned about the decline in UK domestic gas supplies and increased reliance on gas pipeline imports from the continent and LNG imports from around the world.

The UK’s most important gas storage site, Rough, is now just 7% full after extensive use during the recent cold weather. UK gas storage has been working flat out as a result of low LNG imports, and the country will have to seek more expensive imports to meet demand if the weather remains cool over April. It has been estimated that it is no-longer possible to fill up Rough fully before next autumn.

Power prices should fall as soon as warmer weather arrives, allowing low coal and carbon prices to drive down electricity. However there are still some lingering supply concerns.

RWE npower, Scottish Power and SSE are all planning on closing old coal and oil fired plant as a result of environmental legislation. Poor margins at gas-fired generators have led to the same companies mothballing gas-fired capacity. This could tighten electricity supplies over the medium-term leading to higher prices.

Annual gas prices chart

Annual gas prices chart

The annual April 13 gas contract rose during March. On average the contract was up 2.8% to 69.5p/th; it is now 13% higher than the lows seen last summer. Longer-term gas prices were also affected by the supply concerns, but gains were limited by the fall in oil prices.

 

Spot gas prices chart

Spot gas prices chart

Low storage stock and LNG supplies, high weather driven demand and an outage on the Belgian-UK interconnector pushed day-ahead gas prices up to record highs. The day-ahead gas contract increased 24% to a monthly average of 84.9p/th. The contract reached a record high of 118.0p/th on 22 March.

 

Annual power prices graph

Annual power prices graph

Annual baseload electricity rose by 2% to average £52.9/MWh during March. The contract reached a yearly-high of £53.4/MWh on 12 March. Longer-term prices were driven upwards by higher gas but limited by low carbon and coal.

 

Spot power prices graph

Spot power prices graph

Cold weather pushed up demand for power, while soaring gas prices provided the main driver for higher power. Day-ahead power prices climbed 21% to average £62.0MWh over the month and hit a four-year high of £86.0/MWh on 22 March.

Key market indicators table

Key market indicators table

Electricity & Gas Market News - April 2013

Retail reform measures set to benefit businesses

The energy regulator Ofgem has opened a consultation on its final proposals to reform the non-domestic retail energy market. The measures are intended to help businesses to find a better deal in the market and to increase competitive pressure on energy suppliers.

Raising standards

A key component of the package, confirmed on 22 March, is the introduction of new Standards of Conduct (SoC), which are scheduled to come into force in August. They are to require suppliers to "take all reasonable steps" to ensure that

 

Retail reform measures set to benefit businesses

Retail reform measures set to benefit businesses

they treat micro-business customers fairly in terms of billing, contracting and customer transfers. This will oblige suppliers to provide clear information that is not inaccurate or misleading, and act promptly to address any mistakes that have been made.

Ofgem intends to allow suppliers considerable flexibility in how they implement the SoC, to meet the varying priorities of customers in the business sector. The enforcement of the standards will reflect this approach, with assessments of the seriousness of a breach including consideration of whether a "reasonable person" would have acted in the way that the supplier did.

The regulator is also considering requiring suppliers to explain to their customers how they have treated them fairly. This is intended to help customers understand what specific actions they can expect from a supplier as a consequence of the SoC.

Increased clarity

Other measures sought to provide business customers with simpler processes, and to prevent them being ?caught out? when their contracts come to an end. Ofgem wants to require suppliers to show clearly, on every bill or statement, the date that contracts will end, along with the deadline for customers giving notice to change supplier.

 

Increased clarity on energy bills

Increased clarity on energy bills

The regulator confirmed its will ban "termination windows", so that customers would no longer have only a short time-frame during which to provide notice for contract termination. Under the proposals, customers will be able to confirm their intention to end a contract that includes a fixed-term period at any time up to the last date of the notice period.

Customers will be able to end contracts that do not include a fixed-term period at any point.

Ofgem also intends to monitor more closely suppliers objections to customer transfers. The new SoC will cover how suppliers communicate with their customers during the transfer process, and Ofgem will look for evidence of those relying on "unfair terms" to object to a switch.

It may request further information from suppliers objecting at levels above the industry norm, and could publish objections data if this was deemed in the public interest.

Expanding the scope

Ofgem further confirmed plans to increase the number of businesses protected by its interventions. The regulator will re-define “micro-businesses”, so that it includes companies that consume up to 100,000kWh of electricity or 293,000kWh of gas each year.

This move will expand the number of small companies covered by the safeguards by around 160,000.

Ofgem is seeking views on its proposals by 1 May.

Implementing these proposals should be an important step forward in improving the functioning of the retail market for small businesses.
Ofgem

Business green taxes to increase, chancellor confirms

Climate Change Levy (CCL) rates will increase in line with RPI inflation from 1 April 2014, chancellor George Osborne has confirmed.

New tax plans

The CCL is a tax on electricity and gas use by volume, and is intended to encourage businesses to reduce their energy consumption.
Delivering Budget 2013 on 20 March, Osborne said the government also intended to exempt some manufacturing businesses, notably the ceramics industry from the mechanism.
Views will be sought from industry on these plans, and the government will publish draft legislation at the time of this year’s Autumn Statement.

Business green taxes to increase, chancellor confirms

Business green taxes to increase, chancellor confirms

Osborne delivered further details on the future of the carbon floor price, which came into force on 1 April and is in effect a tax on fossil fuel use in electricity generation. He confirmed the government would set the 2015-16 carbon price support at a rate equivalent to £18.08/t CO2 – up from £4.94/t CO2 this year. But to ensure Britain remains “open for business” the chancellor said there would be support for energy-intensive industries to compensate for the indirect costs of carbon taxes, and this would continue beyond 2015.

Backing shale

The Budget also contained fiscal measures designed to incentivise shale gas exploration. Alongside these financial incentives, the government will develop proposals to allow host communities are able to benefit from local projects.

The department of energy and climate change will take forward two carbon capture and storage projects to the planning and design stage of its £1bn commercialisation competition.
The government is taking steps to address the increasing impact that the low-carbon transition is having on businesses.

Government seeks to calm gas supply fears

Fears have been raised of a looming spike in energy prices after Britain's gas reserves were drained by weeks of bad weather, pushing up the cost of day-ahead gas.

Gas supplies take hits from all sides

In late March Britain's largest gas storage facility, the Rough facility in the UK North Sea, was just 10% full, compared to 49% this time last year. This, combined with a component failure at the Bacton gas import terminal in Norfolk, pushed gas prices for within-day delivery on 22 March

 

Gas supplies take hits from all sides

Gas supplies take hits from all sides

more than 50% above the previous day's close. Day-ahead gas prices soared to their highest level since 2009, pushing up longer dated contracts. The effect on short-term electricity prices was also profound, driving up day-ahead prices 20%.

These events led the media to speculate that the UK could see rationing of gas supplies in the near future.

The great gas storage debate

Britain is often thought to be more vulnerable to gas shortages than other countries because of its limited storage capacity, which – because the UK has access to North Sea reserves and has used them in place of storage – holds just 15 days’ worth of supplies, compared to France at 99 days and Germany at 122 days. The government has considered placing an obligation on suppliers to maintain stocks of gas in storage.

But a government spokesman insisted the market is doing its job and will ensure gas supplies do not run out.

National Grid has emergency arrangements in place in the event of a gas shortage. The first phase involves suppliers requesting large users on interruptible contracts to switch to other fuels. A further phase involves National Grid asking suppliers who obtain energy from other sources to maximise supply capacity.

The pressure on UK gas supplies has now been eased after the arrival of a number of LNG tankers and the return of milder weather. But these events have focussed attention on energy security and the importance on ensuring the UK has a diverse energy mix.

Government "needs new nuclear contingency plan", warn MPs

Government ministers must stop “crossing their fingers” and develop a back-up strategy in case major investment in new nuclear power does not materialise, MPs have warned.

The energy and climate change select committee published its Building New Nuclear: The Challenges Ahead report last month, and noted that projects in France and Finland had already experienced delays and cost overruns. It warned there were many potential obstacles to investment in the sector, including uncertainty over mechanisms to support low-carbon generation being introduced through the government’s Energy Bill.

The government aims to achieve 16GW of new nuclear power capacity in the UK by 2025.

Climate watchdog calls for 2030 decarbonisation target

The government has been urged by its climate adviser to bring forward its plans to set a 2030 decarbonisation target for the power sector.

In a recent letter to energy and climate change secretary Ed Davey, Committee on Climate Change chair Lord Deben said the government should consider introducing the target next year in order to provide more confidence to investors in the sector. He warned that failing to do so would adversely affect supply chain investment decisions and project development, thereby raising costs for consumers.

A cross-party coalition of MPs has since proposed an amendment to the government?s Energy Bill that would require the target to be confirmed in 2014.

Targeted investment in shale gas could benefit green agenda, says study

The UK should use natural gas strategically to replace coal as a fuel for its power stations, and help decarbonise its power sector, academics have argued.

In a policy paper unveiled on 18 March, the Grantham Research Institute on Climate Change and the Environment said the potential of shale gas was worth investigating, but warned that extraction in the UK could be constrained by the size of the resource and the cost of exploiting it. The paper warned that a dash for gas promised on the assumption of low prices was a “risky” option. It said a better strategy would be targeting “smart” gas, where the resource was used only in those areas where it offered the greatest value in decarbonising the power sector.

The paper also warned that without carbon capture and storage technologies the extensive use of gas would be inconsistent with the UK’s legally-binding carbon budgets.

Business call for new energy efficiency incentives

Most medium and large-sized businesses would welcome an incentive scheme designed to encourage energy efficiency but there is no consensus on the best design, new Carbon Trust research has shown.

The organisation was commissioned by the government to undertake research that examined the attitudes of businesses in the UK to a range of energy efficiency policy options. Published on 6 March, it found that several factors affected companies’ view on different schemes, including the complexity of the proposed scheme and the capability of the organisation to understand and manage it. The researchers also found that companies’ capital constraints played an important part in deciding whether to release investment for energy efficiency improvements.
The research showed there was no “silver bullet policy that would suit all businesses”.

Industry calls for low-carbon vision to unlock economic growth

Britain’s manufacturers have called on the government to give them the clarity they need to invest in the low-carbon economy.

In its Tech for Growth report, manufacturers’ organisation EEF recently warned that mixed messages from government departments had been damaging to the sector, and had undermined investor confidence. The report said the government needed to outline this year the role it expected manufacturers to play in achieving climate change objectives.

The report recommended that the government urgently set out the portfolio of low-carbon technologies on which the UK’s innovation efforts will be focused. It said policy-makers needed to ensure that interventions focused on cost reductions and market interventions.

Green Deal gathers momentum

The government has claimed the UK’s new energy efficiency market is “gathering momentum” after the first set of statistics were revealed on public uptake of the Green Deal energy efficiency scheme.

Statistics unveiled on 14 March showed that in little over a month more than 1,800 assessments had been undertaken for the scheme, which aims to make it easier for consumers to implement energy efficiency measures by removing the need for them to pay for the measures upfront.

The figures further showed that 40 businesses were already authorised as providers, with an additional 629 registered to carry out installations and 619 individuals able to offer assessments.

EU ETS needs more than a quick fix, says new report

The European Commission should permanently remove 900mn allowances from the EU Emissions Trading Scheme (EU ETS) rather than simply delaying their sale, according to a paper by the Grantham Research Institute on Climate Change and the Environment.

The European Commission has proposed delaying the sale of allowances under the scheme to raise the price of carbon, which has fallen to a level that policy-makers fear could damage the credibility of the EU ETS. But the Institute suggested that the permanent removal of allowances was the only “credible” short-term market intervention.

In the long term it recommended introducing a mechanism that mitigated the impact of supply-demand imbalance.

Think-tank Sandbag has also issued a paper calling for the cancellation of 2.2bn allowances to help align the scheme with the EU’s climate change targets.