Power and gas prices have risen from recent lows
UK Energy prices climb to three-month high
Power and gas prices have risen from recent lows as underlying international energy prices provided buoyancy. Oil, coal and carbon prices all rose in August, helping prices surpass those seen in early July and back towards highs seen in late May. Nevertheless annual gas and energy prices are still 12% and 13% lower than they were in 2011, and they remain 8% below recent peaks seen in the first quarter of 2012.
Continuing Middle East Tensions Pressure Energy Costs
Annual power prices rose to £49.0/MWh on 20 August, while annual gas prices rose to 64.0p/th.
Oil prices were driven upwards by increasing tensions in the Middle East and concerns about North Sea oil production shrinking. Month-ahead Brent crude oil reached a three-month high of $116/bl on 16 August.
Striking miners in Columbia, a major coal exporter, pushed coal prices upwards with the average annual API coal price reaching $101/t, 4% higher than last month. Despite this rise, coal remains a more attractive fuel for power generation compared to gas.
Carbon prices followed the wider energy market upwards; 2013 EU ETS carbon allowances rose 5% to a monthly average of €7.2/t.
Short-term prices down
Higher oil prices drove the longer-term contracts upwards, but shorter-term contracts saw the opposite trend month-on-month. This was a result of warmer temperatures causing lower demand and plentiful gas and power supplies as a result of LNG deliveries and good nuclear availability.
Average day-ahead gas prices dropped 3% on average in August. The contract hit a 10-month low of 52.0p/th on 20 August. Average day-ahead baseload power also slipped, down 4% month-on-month, to a monthly average of 40.8/MWh. It bottomed out at an eight-month low of £40.0/MWh on 10 August.
Outlook lower for power
GB gas and power markets have been well-supplied over the year, but the market may now be turning. There is scope for power and gas prices to reduce before the next year, as coal prices remain cheap and gas supply stays comfortable as a result of pipeline imports from Norway and LNG imports from Qatar. But there is the possibility of further increases in oil prices if problems in the Middle East escalate, which will drag gas along in its wake. Increased Asian demand for LNG could also draw cargoes away from our shores; if this occurs gas prices will need to increase in order to attract LNG cargoes.
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Annual gas prices
Annual gas prices rose to three-month highs as a result of increasing oil prices. The annual October 2012 gas price moved to a three-month high of 64.7p/th on 23 August. The contract is approaching the 65.0p/th threshold, last seen on 4 May.
Spot gas prices
The day-ahead gas prices dropped 3% on average in August, as a result of lower demand caused by warmer weather. The contract hit a 10-month low of 52.0p/th on 20 August. In contrast, the month-ahead gas rose to a three-month high of 58.2p/th on 23 August.
Annual power prices
The annual October 2012 baseload electricity price rebounded from a 27-month low in July to reach a three-month peak of £49.5/MWh on 21 August. The contract is now only 8% below peaks seen in the first quarter of the year.
Spot power prices
Day-ahead baseload power prices fell during August. The contract slipped 4% month-on-month to a monthly average of 40.8/MWh; it bottomed out at an eight-month low of £40.0/MWh on 10 August.
Government identifies green growth potential
Early investment in research and development across low-carbon generation and electricity networks could result in tens of billions of pounds of benefits for the UK.
The claims are made in the recently published Technology Innovation Needs Assessments (TINAs), which analysed three key technologies: marine energy, electricity network and storage, and carbon capture and storage (CCS).
Issued on 16 August by DECC, the TINAs suggest electricity networks and storage could play an important role in the future energy system, supporting the uptake of renewable electricity generation, renewable heat, electric vehicles, and other low-carbon technologies.
But critically the report says these technologies will do so more cost-effectively than traditional methods of grid reinforcement and fossil-fuel powered system balancing capacity. It estimates innovation in these technologies could save the UK £4bn–£19bn to 2050 and could help create UK-based business opportunities that could contribute £6bn–£34bn to GDP in the period up to 2050.
CCS in the power sector has tremendous potential to help the UK, and the world, effectively meet greenhouse gas and energy security targets, according to the report. Although the key technological components of carbon capture, transport and injection have already been demonstrated at commercial scale, the cost of components and efficiency penalties remain high and uncertain. But the report says innovation across the CCS technology chain could reduce UK energy system costs by £10bn–£45bn by 2050. If additional challenges related to full integration are tackled through innovation, the report also estimates a new CCS industry could be worth £3bn–£16bn to the UK economy by 2050.
Marine energy generation could also make an important contribution to the UK energy mix from around 2025. But the cost of energy generated will need to fall to around £100/MWh by 2025 for these technologies to be competitive with other technologies.
The report acknowledges this pathway is ambitious, but possible, with significant innovation. The report further estimates that, if successful, marine energy could save £3bn–£8bn by 2050 in energy system costs.
Although the payback could be huge, the latest TINAs stress significant levels of innovation are still required for the emerging technologies to achieve their full potential. Although it says significant private sector investment in innovation, catalysed by public sector support where there are market failures, can deliver the bulk of these benefits with strong value-for-money.
The reports were released as part of a wide-ranging programme designed to identify where innovation is required to make key low-carbon technologies commercially viable. The work has been undertaken by the Low-carbon Innovation Co-ordination Group, which is made up of a range of different bodies including the government’s energy and business departments, the Carbon Trust, the Energy Technologies Institute, the Technology Strategy Board and the Scottish government.
Further TINA studies on industrial energy efficiency, heat, domestic buildings, nuclear power and hydrogen are expected over the coming months.
The government will use these assessments to decide where to target public funds.
Energy regulator reports on demand-side response in non-domestic sector
Increased deployment of demand-side response (DSR) measures in non-domestic buildings will offer benefits for the electricity system, according to an Ofgem-commissioned report by Element Energy.
The report estimated the potential for demand reduction from DSR measures in non-domestic buildings to be between 1GW–4.5GW. Wider benefits would include increased efficiency of asset utilisation, and the greater penetration of renewables on the grid.
But despite a “reasonable” level of awareness among business energy users, uptake of DSR measures in non-domestic buildings remained very low. This was partly owing to a perception of low financial incentives and a lack of simple DSR offers available to the target audience. But the “principal” barrier restricting uptake was concerns over detrimental impacts on service levels. Organisations consulted for the report said they would require “firm guarantees” no impact in this area would be necessary for the uptake of further DSR measures.
Retail, education, and commercial offices were found to be the three sub-sectors offering the most significant opportunities for savings, and the report recommended they be “prioritised” for DSR measures. The two sub-loads contributing most to peak demand were lighting and heating, but demand could be reduced over the following years through the installation of low-energy lighting with advanced controls. The report also recommended the development of a range of indicative time of use strategies, from which there could be a further 1GW-4GW of peak demand reduction.
The regulator will seek to address several of the key barriers to development through the work it is currently undertaking on smarter markets.
DECC confirms improvements to business energy abatement scheme
The government has confirmed the Environment Agency has been appointed as Climate Change Agreement (CCA) administrator.
In its role the organisation will manage an electronic registry, establish eligibility and enter into agreements, assess performance against targets, and operate a new buy-out mechanism. It will also operate the penalty regime for infringements against agreements.
The Environment Agency has also been granted discretion in imposing penalties. The government has decided against a cap to enable the fine to be proportionate to the infringement. A minimum fine of £250 will be imposed for minor offences (reduced from a £500 fine originally proposed). The government will not terminate agreements for a participant’s failure to meet targets; instead the current approach of decertification will continue.
A charging scheme to recover the costs of administering the scheme from participants will be also be run by the Environment Agency. The final charging scheme will be contained in the administrative rules of the scheme. The finer details of the buy-out fee payments and the charging scheme for cost recovery will be contained in the administration rules, set to be published in the autumn.
To enact its decision DECC published the Climate Change Agreements Draft (Eligible Facilities) Regulations 2012. The regulations should come into force from 1 October.
CCAs allow energy-intensive industries to obtain a 65% discount from the associated Climate Change Levy, provided they meet targets for improving their energy efficiency or reduce their carbon emissions under CCAs.
Meanwhile, in its response to a consultation on proposed changes to the scheme, published in July, the government also confirmed the CCA scheme will be extended out to 2023. The Climate Change Levy (CCL) discount will also increase from 65% to 80% from April 2013, in-line with the announcement made in the 2011 Budget.
The response also drew attention to the closure of the UK Emissions Trading Scheme on 15 December, which will be replaced with the buy-out mechanism for scheme participants to account for any shortfalls against targets. Buy-out payments will be made to the Environment Agency if the participant wishes to retain its CCL discount.
There are no major changes here, but we have to wait until autumn to see more details on the buy-out mechanism and cost recovery payments.
CRC is "costing businesses billions"
The Carbon Reduction Commitment (CRC) Energy Efficiency Scheme is placing undue financial burdens on businesses, a recent report by the public spending watchdog the National Audit Office (NAO) claims.
In its review of the scheme, issued on 3 August, the watchdog said changes to the scheme since it was launched in April 2010, in particular the decision to scrap its revenue-recycling element, had meant the costs to companies had increased significantly. In particular, it noted the cost to government of administering the scheme was far outweighed by proceeds from allowance sales. It estimated these sales are likely to exceed £700mn in 2011–12, but said this comes at significant costs for businesses.
On the current baseline these costs could total £5.75bn over the next two decades, according to the NAO.
Ofgem examines electricity balancing arrangements
The energy regulator has opened a review of arrangements in the real-time electricity balancing market, seeking to address concerns that existing inefficiencies are costing customers. Launched on 1 August, the Significant Code Review lists a range of policy options for amending the existing arrangements so they incentivise market participants to balance their supply and demand. These include a more marginal “cash-out price”, single or dual cash-out prices, and changes to the prices of energy balancing services.
Ofgem has also published a draft decision on the gas cash-out arrangements that could see the regulator allow prices to rise at a time of supply shortage, so gas shippers have price signals to invest in capacity or to set up emergency arrangements such as interruptible contracts with large end-consumers. The new arrangements would, Ofgem says, transfer the risk of short gas supplies from consumers to shippers.
Government targets £400mn saving by cutting red tape
The government is set to scrap 86 regulations and a further 48 improved regulatory regimes as part of a drive to cut red tape burdens for businesses. The overall reform package is estimated to deliver businesses savings worth around £400mn over the next 20 years.
Specific proposals, issued on 7 August, include updating procedures for resolving disputes regarding overhead power lines and streamlining requirements for the use of chemicals by the offshore energy industry. But policies including the Climate Change Act 2008 and the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme will be retained, although the government has already announced plans to reform the CRC.
Rising energy prices leave businesses fearing for the future
UK businesses believe they face closure or major reforms of how they operate due to the escalating cost of energy.
A new report by the Aldersgate Group suggests 10% of businesses would expect to cease trading if energy prices were to rise 25% a year for the next few years. Over 20% said they would need to transform the way they do business to stay competitive.
The price of energy has increased nearly 60% since January 2010, and the report claims over 60% of businesses expect energy prices to be higher in the UK than competitor economies in 2015. Only 5% of respondents expected the UK to offer lower prices than competitors, and fewer expected energy prices to fall over the next two years.
Carbon Trust guides businesses towards energy savings
The Carbon Trust has launched two updated guides designed to help businesses take control of their energy spend and reduce carbon emissions.
Published on 21 August, the Better Business Guide to Energy Saving provides advice on how to conduct an energy walk round, identifying where waste is occurring, and what savings could be made. It also details how to use energy bills and meter readings to monitor energy use.
The Making the Business Case for a Carbon Reduction Project guide provides detailed recommendations on how company decision-makers can be convinced to implement energy efficiency projects, it includes advice on assessing costs, managing risks, and arranging finance.