Weather pushes up gas and electricity prices
Weather pushes up gas and electricity prices
Oil prices climbed to nine-month highs in February pulling electricity and gas prices up with them. However gains in power contracts were limited by further falls in carbon prices. Annual gas and electricity prices began to pick up over the month, and they are now close to levels seen in September 2012. The main driver of the increase has been the surge in international oil prices.
- Month-ahead Brent crude increased 4% to a monthly average of $116.4/bl as Opec lifted its oil demand growth outlook for 2013 as a result of renewed economic optimism.
- As a consequence the annual gas contract rose 2.1% to a monthly average of 67.6p/th. The annual gas price has climbed 10% since July, but it is still down 1% on last year.
- Electricity was more muted. The annual April 2013 electricity contract climbed 0.7% month-on-month to average £51.8/MWh. But the annual power contract is still 3% lower than this time last year.
But carbon prices tumbled even further, following continued uncertainty about EU measures to increase the price of emissions by withholding allowances from the market. Annual carbon dropped 15% to a monthly average of €4.7/t.
Crude oil and annual wholesale gas and power prices graph
Cold weather and supply concerns push day-ahead contracts to yearly highs
January saw the UK gripped by freezing temperatures, which drove short-term electricity and gas prices up to 11 month highs. The weather over February was, as forecast, just as cold. As a result day-ahead electricity and gas prices reached yearly highs.
Day-ahead electricity prices climbed over 2% to average £51.22/MWh and reaching £58.0/MWh on 25 February. Day-ahead gas increased similarly to a monthly average of 68.4p/th as a result of low gas storage levels and colder weather
Spot power prices and temperatures graph
Outlook for power
The UK’s most important gas storage site, Rough, is now just over a third full after extensive use during the recent colder weather. UK gas storage has been working flat out as a result of low LNG imports. If there is another sustained spell of cold weather, prices could increase significantly.
Furthermore around 5GW of old fossil fuel plant is expected to close in March, which could tighten electricity supply and lead to higher prices.
Opec and the International Energy Agency (IEA) recently published their latest Oil Market Reports – but they told different stories. Opec predicted an increase in oil demand growth over the year as a result of signs of global economic recovery and colder weather. In contrast, the IEA downgraded its oil demand growth forecast reflecting more subdued economic activity.
Annual gas prices chart
The annual April 13 gas contract rose notably in February. On average the contract was up 2.1% to 67.6p/th; it is now 10% higher than the lows seen last summer. The increase in gas price was primarily driven by rising oil prices, which reached a nine-month high in February.
Spot gas prices chart
Cold weather and concerns about supplies pushed day-ahead gas prices towards yearly highs. The day-ahead gas contract increased 2% to a monthly average of 68.4p/th and reached a yearly high of 73.0p/th on 26 February.
Annual power prices graph
Annual baseload electricity rose by 0.7% to average £51.8/MWh during February. But the contract is still nearly 3% lower compared with this time last year. The power contract did not rise as fast as its gas counterpart as a result of record low carbon prices.
Spot power prices graph
Cold weather in February coupled with low wind supported day-ahead prices. They climbed just over 2% to average £51.22/MWh and reached a yearly high of £58.0/MWh on 25 February.
Key market indicators table
Electricity & Gas Market News - March 2013
Tight gas capacity to push up UK energy prices
The UK could hit an electricity supply “crunch” in as little as two years’ time, outgoing Ofgem chief executive Alastair Buchanan has warned
Capacity margin narrowing
In a widely reported lecture in London on 19 February, Buchanan noted that around a fifth of the UK's energy generating capacity is set to close over the next decade as new EU pollution rules come into force and as older plants reach the end of their useful life. Although this is not new news, indeed Ofgem’s 2012 Electricity Capacity Assessment predicted a similar prognosis; according to Buchanan efforts to plug the looming capacity gap with renewables and new nuclear power continue to be undermined by the financial crisis.
According to Buchanan this may leave the UK with two options: to break the EU pollution directive by continuing to use old coal and gas plants and face penalties; or increasingly to rely on cleaner gas-fired power generation. The latter option, he thought, was more likely: “We will see supply and demand tightness and we will lean on gas”, he commented. Indeed Buchanan predicted that by 2020 near 70% of UK electricity generation may have to come from gas – compared with the current level of 30%.
What about costs?
Despite recent efforts from the government to increase domestic production, North Sea gas supplies are set to decline a further 25% by 2020.
According to Buchanan this, situation, combined with the lack of clean electricity generation capacity and the need to meet carbon reduction targets, will leave the UK heavily reliant on gas imports. “No one doubts that there is plenty of gas out there, but what is critical to Britain is how much will be available over the next five years and how much we will have to pay for it to ensure that it comes here”, Buchanan commented. He also pointed out that access to new unconventional gas supplies and increased electricity interconnection with other markets s could be negative as well as positive
World demand, and therefore competition, for gas supplies is set to rise over the next decade – driven by China and India, which are set to continue on their rapid growth trajectories. He concluded that, when combined, these drivers are likely to significantly push up the cost of gas, and therefore power as well, in the UK.
On the bright side, Buchanan said, these emerging market dynamics should provide a further signal to energy generators to build new plant. They should also incentivise businesses to take action to protect themselves against likely energy price spikes by investing in energy efficiency and on-site power generation.
Buchanan’s update on well-known issues makes it clear that the system is presently in flux. There is a need to attract both investment in a range of technologies and new gas supplies. These pressures will push prices upwards. But he did think the market would bring the necessary investment
Delayed CRC league table finally published
The Environment Agency has published the final Carbon Reduction Commitment (CRC) Performance League Table.
Leaders and laggards
In the 2011-12 index construction firm BAM Group, engineering company Skanska and technology firm Motorola seized the top spots. Many local authorities also scored well, with Manchester City Council making it into the top five. But Manchester United Football Club, which took the top spot last year, plummeted to 488th place.
Last of its kind
The rankings are determined using: reported energy use, improvements in energy efficiency and actions taken to reduce
energy use and carbon emissions before the CRC was launched. But critics have argued this approach fails to take sufficient account of earlier steps taken to improve energy efficiency. The government has ruled this performance round will be the last. Although eligible companies must still report on their energy use and carbon emissions under the CRC, and pay a tax based on energy use, they will no longer be ranked on performance.
This performance table was originally intended to be published late last year, but was delayed after a large number of participants filed incorrect data.
It is unlikely many businesses will mourn the removal of the performance ranking from the scheme. Environment Agency
MEPs throw lifeline to flagging carbon market
EU policy-makers have voted in favour of plans to delay issue (or back-load) of 900mn carbon allowances from the EU Emissions Trading Scheme.
Despite an EU parliamentary committee recently voting against the proposals, the MEPs passed plans on 19 February to withhold allowances from the scheme in a bid to increase carbon prices. But the committee postponed a vote to allow negotiations on a text for the proposal to begin, causing the ailing carbon price to fall further.
Carbon prices plummet
The present glut of EU carbon allowances has resulted in the price of carbon halving during 2012. This situation prompted the European Commission to propose the short-term fix – temporarily withdrawing allowances from the scheme in a bid to boost demand by restricting supply. The UK would prefer permits to be permanently withdrawn from the scheme and has argued for the 2020 emissions reduction target to be increased to increase demand – as well as setting its own carbon floor price.
The EU parliament will consider the back-loading proposal in April.
The UK carbon floor price is set to be introduced in April, so unless the price of carbon under the EU ETS increases UK companies will be at a significant cost disadvantage compared with their EU counterparts.
Network companies confirm 2013-14 charge increases
Network charges have increased over recent years and 2013 is set to be no different.
Electricity transmission network use of system (TNUoS) charges, which typically account for 5% of a business electricity bill, are set to rise nationwide, generally by double-figure percentages. It follows the tabling by Ofgem of new revenue limits to cover TNUoS charges in the eight years to 2020-21. Charges for large users with half hourly electricity meters are set to increase, on average, by over 10% in 2013-14. Different charges are applied for non half hourly metered customers, but the regional pattern of higher increases in the south and lower ones in Scotland is similar.
From 1 April electricity distribution (DUoS) charges are also set to see double-digit rises in most regions. These charges typically account for 10%-25% of non-domestic bills, meaning businesses could see a significant increase in costs.
Gas distribution companies have also confirmed that from 1 April gas distribution and transmission charges together will increase between 5% and 15%, depending on region.
Stakeholders back calls for 2030 decarbonisation target
Businesses, trade unions and non-governmental organisations have once again called on the government to introduce a decarbonisation target for the power sector.
In a letter, dated 20 February, more than 35 organisations put their name to a statement arguing that MPs should “seize this unique opportunity to commit the UK in the Energy Bill to have a near carbon-free power sector by 2030”. The grouping suggested the UK has the potential to become a world-leader in low-carbon energy, but a ramp-up in low-carbon investment is needed. This, they argued, could be incentivised by the inclusion of a 2030 decarbonisation target in the Bill.
According to WWF, a 2030 decarbonisation target was proposed by the department of energy, but plans were halted by the Treasury as it believed this would be damaging to industry. As a compromise the Bill, in its current form, gives the government powers to set a target in 2016.
Business interest in self-generation grows
Businesses that generate their own energy from renewable sources will reap the rewards.
The majority of electricity used by UK businesses is generated by large power stations, and is supplied over long distances. But in a report issued late-January, EDF Energy predicted the local renewable energy generation market in the UK would double over the next five years as businesses take advantage of the opportunities presented by on-site generation.
A separate report by Opus Energy issued on 28 January found nearly four out of 10 businesses expected to have renewable energy technologies installed at their properties in the future – up from less than a third in the preceding year.
Shale could push oil prices down 40%, says PwC
Shale oil production could reach up to 12% of global oil production and push global oil prices down, according to a new report by PwC.
To date the promise of shale oil has remained in the shadow of shale gas. But PwC suggested shale oil could come into its own soon, pushing down oil prices by up to 40% and boosting the world’s economy. The report Shale Oil: The Next Energy Revolution suggested the level of global economic growth could increase by as much as 3.7% by 2035 as a result of the extra supply of oil. This would boost the world economy by up to $2.7tn (£1.7tn) over the next two decades.
But the report also acknowledged the benefits of the price reductions will vary by country.
UK missing out on green growth opportunity, says EEF
Manufacturing of low-carbon products is “faltering” in the UK, according to manufacturers’ organisation EEF.
In a recent report the organisation raised concerns that, despite its potential, the UK is in danger of missing out on a green growth opportunity worth £880bn up to 2050. The report Tech for Growth:
Delivering Green Growth Through Technology said, while the total UK market for low-carbon goods and services grew 4.7% in 2010-11 to more than £122bn, the country’s low-carbon manufacturing output contracted.
The organisation urged the government to deliver a more coherent and comprehensive green industrial strategy. It also urged the government to outline by summer 2013 the portfolio of low-carbon technologies on which the UK’s innovation effort will be focused.