Energy Prices Rise To Six-Month High
Energy Prices Rise To Six-Month High
Annual wholesale gas and power prices hit six-month highs in October, despite falling international energy prices. This was driven by rising demand and concerns the UK would not be able to attract any LNG cargoes over the near term. The annual power contract is now at levels last seen in the spring. Annual April 2013 baseload electricity increased to a six-month peak of £52.9/MWh on 23 October – 10% above summer lows and 1% above the highest point in August. Despite this, annual April 13 baseload power remains around 6% lower than this time last year. Annual April 2013 gas reached a six-month high of 67.2p/th on 23 October; this is 3% higher than last month, but still 4% below last year’s figures.
Oil prices dropped over continuing concerns about global economic growth, although on-going tensions in the Middle East provided some support. Month-ahead Brent crude oil dropped to a two-week low of $107.9/bl on 26 October.
Cheap American coal flooding the market kept coal prices below $100/t for the whole month, with a 30-month low of $93.2/t recorded on 16 October.
Carbon prices bucked the falling trend in international commodity prices. The imminent publication of the EU Commission’s proposals for extracting carbon allowances from the market pushed 2013 EU Emissions Trading Scheme carbon above €8.0/t, with a monthly high of €8.3/t seen on 17 October.
Increasing demand drives up shorter-term prices
Shorter-term contracts were significantly affected by gas supply concerns and higher demand. Low wind speeds, nuclear outages, and maintenance at the France–UK interconnector also meant more expensive gas-fired generation was called on to balance the system. These factors pushed the day-ahead power price up to an eight-month high of £50.9/MWh, while the day-ahead gas prices increased 12% month on month to an eight-month high of 67.5/p/th. The last time day-ahead prices were this high was during the cold-snap in February.
Outlook lower for power
In its latest Winter Outlook Report, National Grid said it expected electricity demand to increase compared to the previous winter as a result of a modest rise in economic activity over the last year. It also expected available generation capacity to dip by 500MW as a result of closures of, and on-going repairs at, some power stations. Higher demand and lower available capacity should drive power prices up this winter.
In contrast pressures from LNG supply on British gas prices could ease over the winter. Maintenance at key Qatari facilities is set to end, which means more gas will be available for export to the UK. According to the International Energy Agency, oil prices could also be lower than expected over the next five years as a result of lower demand growth, higher oil production, and greater energy efficiency.
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Longer-term gas prices rose over the month as a result of concerns about long-term supply. The annual April 13 gas price reached a six-month high of 67.2p/th on 23 October, a 3% increase over last month's average figure. Day-ahead gas prices increased 5% on average in October, as a result of tighter supply and rising demand. The contract hit an eight-month high of 68.0p/th on 23 October.
Longer-term power prices increased month on month in line with higher gas prices. Annual April 2013 baseload electricity reached a six-month peak of £52.9/MWh on 23 October. The contract is now around 10% higher than the July low.
Day-ahead baseload power prices rose notably in October. The contract climbed 7% month on month to an average of £46.3/MWh, rising to an eight-month high of £50.9MWh on 23 October. Politicians seek to assure voters on commitment to green growth
Energy and environmental issues were a hot topic during the political party conference season as the Coalition partners sought to assure voters that
they were doing all they can to secure boost UK energy investment but keep customer costs down.
All about balance
Energy and climate change secretary Ed Davey stressed the need to vary the UK’s energy supplies while addressing delegates at the Liberal Democrat conference in Brighton at the end of September. He went on to say a balanced and secure generation mix does not centre on “one solution”.
Although Davey warned against an excessive focus on renewables, he noted “rocketing” oil and gas prices had meant previously expensive technologies, such as renewables and nuclear, are now competitive with traditional forms of power generation.
Deputy prime minister Nick Clegg also said the government would ensure the UK takes the lead in building “a new economy for the new century”, powered by low-carbon technologies and ensuring energy security while reducing reliance on imported fuels.
New strategy unfolding
Climate change minister Greg Barker used his speech at the Conservative Party conference in Birmingham in early October to hit back at claims the party had abandoned its pledge to become the “greenest government ever”. He pointed to successful introduction of a number of new green policies, such as the Green Deal and the Renewable Heat Incentive, as proof of the party’s commitment. Although he acknowledged many of these initiatives were originally put forward by the previous administration, Barker claimed they have been “reformed” to deliver better value for money and more ambitious results.
Prime minister David Cameron outlined the importance of green initiatives in his speech, noting the UK has some of the largest wind resources in Europe and is therefore well-positioned to generate a large proportion of demand requirements from this source. This, he said, would not only increase energy security, but it would provide wide-ranging opportunities for green businesses.
The conference also saw chancellor George Osborne talk of implementing an “enterprise strategy” enabling increased investment in both renewable energy and new shale gas projects.
Government "must up its game"
However, shadow energy and climate change secretary Caroline Flint accused the government of creating uncertainty and deterring green investment. Speaking at the Labour Party conference on 1 October, she alleged the Coalition had overseen a steady decline in investor confidence since taking office, and promised a Labour government would seek to restore confidence across the economy and support green businesses.
Flint also spoke about the party’s plans to replace Ofgem with a stronger regulator with the power to “stand up to the Big Six”.
Party leader Ed Miliband made no mention of the environment or energy in his speech to the conference, but later insisted green growth is central to the “One Nation Labour” vision.
Rising energy bills and environmental concerns are now a major concern for voters, so it is no surprise these issues were covered in some detail at the party conferences.
Carbon compensation plans move forward
Plans to compensate energy-intensive industries for the cost of implementing green policies moved a step closer after the government set out the
£250mn scheme’s parameters on 5 October.
For a company to be considered for a share of compensation, it must fall within an eligible sector – mainly covering manufacturing industries. However, compensation will only be awarded if the company can demonstrate the combined cost of the carbon floor price and the EU Emissions Trading Scheme (EU ETS) in 2020 will amount to at least 5% of its gross value added.
To maintain the incentive on businesses to increase energy efficiency, a number of benchmarks will be introduced. Companies achieving levels below these benchmarks will find the level of compensation they are awarded is reduced.
Since the EU ETS compensation and carbon price support compensation schemes are similar, the application process for both is likely to be the same. If deemed eligible, compensation will be paid in arrears to companies on a quarterly basis.
Responses are invited before 21 December.
The £250mn compensation scheme is an important gesture, but energy costs to business will continue to rise as the cost of government environmental programmes increases.
New renewables target will increase electricity costs for all
All consumers are likely to see increased costs arising from the Renewables Obligation (RO), the government has confirmed.
Under a revision of the Obligation in late September, energy suppliers will now have to ensure they purchase a higher volume of Renewables Obligation Certificates (Rocs) for the year ending 31 March 2014.
As a result, electricity suppliers are set to pass the increased costs on to customers ? meaning larger businesses will see up to 2% added to power bills.
The reason for the increased target is a number of new large-scale renewables projects are likely to flow power next year, in particular new offshore wind farms. They include the 270MW Lincs offshore project being developed by Centrica Energy, the
first phase of E.ON UK’s, DONG Energy’s and Masdar’s 1.2GW London Array, and the 60MW Teesside offshore windfarm owned by EDF Energy. Under changes introduced in 2009, the target is now set in practice so that it exceeds the expected number of Rocs in the market by 10%.
In order to boost UK renewables generation, electricity suppliers are obliged under the RO to source escalating proportions of the electricity they supply to end-consumers from renewables sources each year. To prove they have supplied their targeted amount of green power, suppliers must buy Rocs from renewables generators or face a buy-out charge. These costs are then passed-through to customers.
This increase in the obligation on electricity suppliers will mean all customers will see higher costs. The RO is expected to add on average nearly £6.50/MWh to electricity bills in 2013-14, an increase of about £1.50/MWh on the cost in the current financial year.
Tightening capacity gap imminent, warns energy regulator
Falling levels of spare capacity in the electricity system could increase risks to system security, energy regulator Ofgem has warned.
In its first Electricity Capacity Assessment, issued on 5 October, Ofgem warned the high level of spare capacity in the UK electricity market is “set to end quite rapidly over the next few years” as older coal- and oil-fired power stations are forced to close under EU pollution regulations.
But while the near-10% drop in spare capacity could highlight the need for new investment, operating margins are at levels seen during the middle of the last decade and do not compare unfavourably with some seen in neighbouring markets.
Businesses ready to report emissions: CDP
Most of the UK’s largest businesses are ready to meet new carbon reporting regulations, according to new research by the Carbon Disclosure Project (CDP).
The Future of Reporting report, jointly written by consultant PricewaterhouseCoopers and issued on 11 October, found 64% of FTSE 350 companies already include emissions data in their annual reports. However, this leaves a third still to act despite new rules on carbon reporting set to come into force next April.
Although the CDP welcomed the UK’s initiative for introducing mandatory carbon reporting for the country’s largest businesses, it raised concerns over the lack of detail on the proposals.
CBI calls for more detail on Energy Bill
Financiers looking to make investments in the energy sector need “substantive policy detail”, not carbon targets, according to the CBI.
Speaking at a CBI event on 18 October, the business lobbyist’s deputy director-general, Neil Bentley, stressed the upcoming Energy Bill must deliver the pace of decarbonisation required to meet the UK’s carbon budgets. But he said, to incentivise companies to begin investing, the business sector needed more clarity on funds available and assurance the legislation would work for the most at-risk energy-intensive businesses.
The same day energy and climate change secretary Ed Davey confirmed the Energy Bill will be presented to parliament during November.
Green policies increasing costs for business
Businesses are likely to see rising energy bills as a result of green policies, according to the Federation of Small Businesses (FSB).
The Making Sense of Going Green report, published late-September, said there are many policies on the horizon that could impact the cost of energy for non-domestic customers. But the most significant are likely to be Electricity Market Reform (EMR), the carbon floor price, and the Climate Change Levy (CCL).
EMR on top of the costs of the Renewables Obligation could increase energy bills by some 35% by 2030. Combined with the introduction of the carbon price floor in April next year, these policies could mean UK businesses will be paying higher electricity bills than their EU counterparts.
Offshore wind "will protect consumers from price hikes"
Incentivising wind energy development would provide a “hedge” against the risk of global energy price volatility and “protect” consumers, according to Mainstream Renewable Power.
Its Capturing the Value of Offshore Wind report, issued on 18 October, concluded that volatile world energy markets make a generation portfolio dominated by unabated gas and coal the most expensive option. But diverse generation assets, including a “significant amount” of offshore wind, lowered the risk and the cost for consumers.
It also suggested adopting a carbon tax instead of providing targeted support for specific technologies would push up energy prices over the long term.
Energy Efficiency Directive gets green light
The EU is nearing the end of the process of drawing up the legislation requiring all large businesses to undergo an energy audit every four years.
These audits, legislated for under the Energy Efficiency Directive, will need to start within three years of the directive’s entry into force. Small- and medium-sized companies are currently excluded.
Energy companies will be obligated to deliver energy savings equivalent to 1.5% of annual energy sales between 2014 and 2020.
The European Council’s approval of the directive on 4 October paves the way for it to be signed into law by member states later this month.