Energy Market Brief October 2012
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Energy Market Brief October 2012

Chris Hurcombe

by Chris Hurcombe 01 October 2012

Report Summary:

Energy and Gas Slip to a Six-Week Low

Energy Market Brief October 2012

UK energy and gas prices dropped throughout September as oil, coal and carbon prices decreased. Prices are now similar to levels seen in early August, when oil prices started to increase following escalating tensions in the Middle East.  Annual power prices dropped from just below the £50.0/MWh threshold during the month, reaching £48.1/MWh on 24 September. But annual gas prices slipped to 59.6p/th on 12 September.

Despite this downward trend, annual gas and power prices are still 4% higher than the lows seen in July. Annual prices are now around 15% below last year’s figures, and 4% below recent peaks.

Crude oil and annual wholesale gas and power prices graph

Oil prices fell from a high of $117.0/bl to a two-month low of $107/bl on 20 September as Saudi Arabia pledged to boost production and keep oil prices low. Coal prices remained below $100/t for much of the month as a result of continued oversupply, falling to a two-month low of $98.0/t on 24 September.

Carbon prices followed the wider energy market downwards; 2013 EU ETS carbon allowances remained below €8.0/t for much of the month, hitting a four-week low of €7.3/t on 18 September.

Increasing demand drives up shorter-term prices

Despite lower international energy prices, shorter-term contract prices increased month-on-month as a result of cooler temperatures causing higher demand and falling North Sea production volumes. Despite record wind power output being recorded during the month, day-ahead power rose to a four-month high of £44.8/MWh on 21 September.

The day-ahead gas price also increased on average in September by 12% as a result of cooling weather and tighter supply. The contract hit a seven-month high of 62.8p/th on 17 September.

Spot energy prices and temperatures graph oct12Outlook lower for power

Reliance on cheap coal is likely to keep power prices depressed over the winter as generators are expected to run their coal plants flat out instead of more expensive gas-fired power stations. The UK has seen wind output at record levels as new capacity is added to the system; extra wind could displace gas-fired generators from the system and might contribute to lower power prices. New capacity in the form of RWE npower’s 2GW Pembroke Station has come online and the system is expected to stay well supplied over the winter.

Gas prices could be kept low by falling oil prices if Saudi Arabia manages to use its excess production capacity to keep oil prices down. But there is the possibility increased Asian demand for LNG could draw cargoes away from our shores, bringing upward pressures.

Catalyst Energy Solutions’ independent approach enables clients to manage their exposure to energy price risk, while at the same time benefiting from a first-class service. Our procurement solutions make it simple: contact a member of the team on 0870 710 7560 to discuss your requirements.

Annual gas prices chart october 20212 Longer-term gas prices dropped month-on-month tracking lower oil prices. The annual October 12 gas price reached a six-week low of 62.1p/th on 24 September. Winter 12 gas also fell below the 65.0p/th threshold in late September and is now 3% below last month. Spot gas prices chart october 2012

The day-ahead gas prices increased 12% on average in September as a result of cooling weather and tighter supply. The contract hit a seven-month high of 62.8p/th on 17 September.

Annual power prices graph october 2012

Longer-term power prices dropped month-on-month in line with lower oil prices. The annual October 2012 baseload electricity price has fallen from the three-month peak seen in early September. The contract is now 4% above the lows seen in late July.

Spot electricity prices graph October 2012

Day-ahead baseload power prices rose during September. The contract climbed 6% month-on-month to an average of £43.7/MWh and reached a four-month high of £44.8/MWh on 21 September.

Key market indicators october 2012 Climate adviser warns government on gas dependency

The independent Climate Change Committee (CCC) has warned the government it would breach the Climate Change Act 2008 and increase costs for consumers if it pursued plans for a surge in new gas investment.

In a letter sent to energy and climate change secretary Ed Davey on 13 September, the CCC criticised the government’s “mixed messages” on energy policy. Specifically, it expressed “great concern” the proposed expansion of gas-fired power is incompatible with the UK’s legislated carbon reduction targets.

The letter also highlighted the government’s “ambivalent” position on whether it is trying to build a low-carbon or a gas-based power system, which it said is acting to weaken the signal provided by carbon budgets to investors. This, according to the Committee, makes “more pronounced the perceived risk that Electricity Market Reform (EMR) will perpetuate the current stop-start approach to investment in low-carbon technologies”.costs savings arising from a low-carbon strategy graph

Clear objective

To remedy this, the Committee called on the government to support the signals provided by carbon budgets. It suggested a clear carbon objective for EMR be set in secondary legislation (to reduce carbon intensity of power generation to around 50gCO2/kWh by 2030) in-line with the energy and climate change select committee’s recommendations.

The letter was followed by an appendix detailing the modeling which underpins the CCC’s view “deep cuts in power sector emissions will be required to meet the 2050 [greenhouse gas emissions] target”. It said: “Without significant cuts, power sector emissions would account for almost all of the allowed emissions under the 2050 target.” It also deconstructed the argument, put forward by chancellor George Osborne, that “gas is cheap”.

Negligible benefit

According to the CCC, by the mid-2020s use of unabated gas-fired generation rather than cost- effective low-carbon generation would “significantly increase system costs […]. Even in an extremely unlikely case where the gas price in the EU falls to the level in the US […] there is negligible benefit switching from cost-effective low-carbon generation to unabated gas-fired generation”.

In his response to the letter on 13 September, Davey said the government is “absolutely committed to meeting our statutory carbon budgets” and confirmed it is currently considering implementing a 2030 electricity decarbonisation target. However, he said existing plans are “consistent with significant decarbonisation of the power sector”.

This is an important intervention that will give new energy minister John Hayes – who is looking closely at issues related to gas – much to contemplate.

Business confidence in infrastructure "ebbing away"

Over two-thirds (67%) of UK businesses do not believe energy infrastructure improvements will have a positive impact on the sector in the next five years, according to a joint CBI and KPMG survey.
Better Connected, Better Business, published on 17 September, cited energy as a major concern with a majority of respondents (95%) stating they were concerned about energy costs; two-thirds of companies in the manufacturing sector classed themselves as “very concerned”.

The survey of 568 representatives from businesses of all sizes and sectors across the UK, also reported confidence was “ebbing away” in regards improvements to water, transport and building infrastructure because a lack of government action on policy was holding up investment.

Just one-third of companies felt the government’s current policies would have a positive impact on infrastructure investment – a 10% drop from last year’s survey. In addition, less than 50% of infrastructure providers said they were expecting a boost in infrastructure investment.

While the majority surveyed said the UK’s infrastructure compared well with that of emerging markets, nearly two-thirds of companies felt it was less favourable than elsewhere in the EU.
CBI director-general John Cridland said the government must now “show it can deliver [infrastructure investment] on the ground”. Commenting on the survey, he added: “The government needs to take some big decisions that will have a major, lasting impact on inward investment and businesses’ ability to compete overseas.”

This is another significant contribution from the CBI on the steps the government needs to take to attract private sector investment in infrastructure.

Government sets out sustainable industrial vision

Business secretary Vince Cable has underlined the need for the government to embed environmental sustainability into its wider industrial strategy.

Speaking on 11 September at London’s Imperial College, he confirmed there would be a focus on working with “key sectors” to ensure the UK can continue to compete in the global arena. Cable identified various areas requiring urgent action to secure “long-term industrial success”, including supporting the research, development and deployment of innovative technologies, such as those in the low-carbon and renewables sectors.

Cable also set out a raft of measures to enable British industry to build on its competitive advantage over the next 20 years. These included a £165mn boost for skills and a new government-backed business bank, which he said would work alongside the Green Investment Bank. He also confirmed the government would deliver a number of “partnership sector strategies” in the coming year, including nuclear power and renewables.

In a paper published to coincide with Cable’s speech, the business department noted the potential for the government to have an impact in the energy sector as “very high”, through procurement policy, measures to reduce market uncertainty, and demonstration projects. A full industrial strategy for energy is expected early next year.
The government is making a concerted effort to understand more closely those sectors that require targeted policy interventions, with energy at the forefront.

Hendry loses post in Cabinet reshuffle

Charles Hendry MP has been removed from his role as energy minister following a major reshuffle of the Cabinet.

Downing Street confirmed on 4 September that Hendry will be replaced by Lincolnshire MP John Hayes. On his appointment, Hayes said the UK faces “a major challenge to keep the lights on” in the most “cost-effective way”. But he stressed the UK must not become overly reliant on any one technology, and should ensure there is a “balanced” low-carbon energy mix. He added he was keen to work with businesses to secure much-needed investment, and he “looked forward” to ensuring the passage of the government’s Energy Bill through parliament.

The new minister will support energy and climate change secretary Ed Davey on a number of issues, including the Energy Bill, and on designing and monitoring technology-specific policies (including those on nuclear power, fossil fuels, renewables and grid technologies).

The Cabinet reshuffle also saw former Northern Ireland secretary Owen Paterson replace Caroline Spelman as the environment, food and rural affairs secretary.

TUC calls for large user support

The government must provide more support for energy-intensive industries in the transition towards a greener economy, according to a report by the Trades Union Congress (TUC).

In the Building Our Low-carbon Industries report, published on 23 August, the trade association suggested high-energy costs and emissions targets are making life difficult for larger energy users in the UK – in particular in the steel, cement, ceramic sectors. Although the £250mn fund that chancellor George Osborne earmarked to help businesses cope with the financial effect of climate change policies was welcomed, the report said the government must do much more to ensure these sectors remain competitive.

The report, jointly written with trade association the Energy Intensive Users Group, also suggested enabling the Green Investment Bank to borrow when it becomes operational in 2013, allowing funds to be channelled into low-carbon industrial technologies. The TUC also wanted to see the creation of a “comprehensive” green industrial strategy, incentivising energy-intensive industries to invest in cleaner and more efficient technologies.

Government defends energy saving 5% VAT rate

The government has confirmed it will defend its 5% VAT rate for the installation of energy saving materials (ESM) in residential accommodation. The European Commission took the first steps towards legal action against the UK for the reduced rate in June, arguing it should be raised to the standard 20%. The Commission claims there is no specific provision in EU law for such a measure, and the regulations on which the UK relies as the legal basis for the rate only apply where introduced as part of a “social policy”.

But the government has accepted the Commission’s view that the 5% rate is not permitted for the installation of ESM in charitable buildings, and this will be withdrawn as part of Finance Bill 2013. The government is requesting views by 20 October on whether the proposed date for the withdrawal – 1 August 2013 – will pose any particular problems, and if there are factors the government needs to take into account when making the change.

Corporate ambition lacking on climate change

Few companies are setting the targets or making the investments required to seize the strategic opportunities offered by acting on climate change. This year’s Carbon Disclosure Project Global 500 Climate Change Report said corporate emissions reduction efforts failed to reflect the agreement reached at last year’s climate summit in Durban, which aimed to limit global warming to 2°C.
Although 82% of companies have set absolute or intensity emissions targets, only 20% have set targets to 2020 and beyond. In addition only 40% of respondents to the survey believed that the decrease in their emissions was exclusively attributable to emissions reduction activities. Others claimed cost-cutting measures and even staff redundancies had resulted in lower emissions.
But despite the economic downturn, the survey found that climate change was not being neglected at board level. Over nine in ten (96%) of respondents said they still had board or senior executive oversight on the issue, while 78% had integrated climate change into their broader business strategy.  

EU lawmakers approve binding energy efficiency rules

Members of the European Parliament have voted in favour of a new EU directive on energy efficiency, which includes binding measures to help the EU meet its goal of boosting energy efficiency by 20% by 2020.

The new Energy Efficiency Directive, approved on 11 September, requires all large businesses to undergo an energy audit. These audits will need to start within three years of the directive’s entry into force and must be carried out every four years thereafter. To avoid implementing undue costs on small- and medium-sized enterprises, these businesses will be excluded from this obligation.

The Directive also includes a requirement for EU energy suppliers or distributors to deliver energy savings of 1.5%/year compared with business-as-usual across their customers from 2014 to 2020.
Measures are also included in the Directive to ensure national governments take the lead on energy efficiency.

In the vote, 632 MEPs voted in favour with 25 against. This vote now means the law just needs formal ratification from national governments before the European Commission moves ahead with implementation of the new rules.