Ample supplies outweigh continuing security fears
Ample supplies outweigh continuing security fears
Increased volatility characterised the market throughout July, as oil and gas prices spiked following announcements of further sanctions on Russia. Despite this, gas and power contracts continued to fall, as the GB gas system remained well supplied. Further LNG deliveries, low demand and higher UK production helped gas storage reach record highs. Annual October 14 gas was down 3.7% over the month to average 55.2p/th.
Crude oil and annual wholesale gas and power prices
Gas continued to dominate electricity generation as excess gas supplies fed into the power market. The annual October 2014 power marker declined 2.7% in July to average £47.8/MWh, falling to a new record low of £46.5/MWh on 11 July.
Commodities fall, but risks remain
Volatility in the GB market was caused in part by fluctuating Brent crude oil contracts, which showed a $6/bl range for the month. But contracts decreased 2.9% overall to average $108.5/bl, as returning supplies from Libya and Iraq outweighed risks surrounding Russian oil. The month-ahead contract fell to a three-month low of $106.2/bl on 10 July. Coal prices also fell over the month. Global oversupply continued to hamper the market, and prices dropped to a four-year low of $77.3/t on 17 July.
Spot power prices and temperatures
However, carbon prices followed an independent trajectory to much of the movement elsewhere. EU ETS prices rose 7% over the month to average €6/t.
The month ahead: Security of supply continues to influence
Weather Services International has suggested the “confluence of events” that drove the mild winter last year will not be in place this year. Colder weather, combined with Ukraine supply fears and recovering Asian LNG demand could drive gas prices higher in Europe.
Despite record high supplies in the US and improving production amongst OPEC nations, Brent crude oil price remain relatively high ($106/bl-$110/bl). Prices are likely to remain at these levels with security of supply issues persisting in Libya, Iraq and, following recent sanctions, Russia. Rises could feed into GB gas prices.
Catalyst Commercial Services’ independent approach enables clients to manage their exposure to energy price risk, while at the same time benefiting from a first class service from a range of major and independent suppliers. Catalyst Commercial Services’ procurement solutions make it simple, so contact a member of the team to discuss requirements.
Annual gas prices
Despite a surge in prices following news of further sanctions on the Russian economy, the GB market remained well supplied for the winter-ahead, and prices continued to fall. The annual October 2014 marker dropped 3.7% to average 55.2p/th over the month. As storage levels reached 93% in July, winter 14 gas lost 4.2% to average 57.0p/th. The contract dropped to a record low of 54.9p/th on 11 July, 23% below its level a year earlier.
Spot gas prices
Short-term gas prices also dropped on the combined impacts of low demand and further LNG imports, which increased with weaker demand in Asia. Day-ahead gas fell 6.9% over July to average 37.1p/th. Prices were volatile over the month however, with escalating tensions in Ukraine and Russian sanctions sparking security of supply fears for European markets.
Annual power prices
Annual electricity prices followed declines in gas, coal and oil and were also influenced by falling power demand predictions. Annual October 2014 power dropped by 2.7% to a monthly average of £47.8/MWh. The winter 2014 contract also fell 3.1% to average £47.4/MWh, and ended the month 10% below its level last year.
Spot power prices
Falling gas prices meant the fuel continued to dominate electricity generation through July, and lower prices subsequently fed into the power market. The day-ahead contract decreased 3.9% to average £35.4/MWh over the month and fell to a new four-year low of £34.0/MWh on 17 July. Demand predictions remained low for power, pulling the month-ahead contract down 7.2% month-on-month to average £35.1/MWh.
Key Market Drivers
Government pilot to “unlock” power demand reduction potential
The government has launched a new initiative that could encourage businesses to install more efficient energy-saving devices.
Can I apply?
Under the Electricity Demand Reduction (EDR) pilot, which was launched on 29 July, businesses will be able to compete for funding for projects that reduce electricity demand, saving money and reducing stress on the national electricity grid.
Participants must present a project plan that outlines the savings they can deliver and how electricity demand reductions will be achieved, measured and verified. Proposals can include one or more technologies but these must provide lasting savings that are relevant to winter peak times – weekday evenings between November to February. There is no set maximum limit to project size but all projects must be located in GB.
Projects that reduce demand by switching to an off-grid supply, by reducing economic output or by implementing behavioural change will not be eligible to receive funding under the pilot. Projects already receiving funding under alternative schemes will also be unable to participate.
An auction will be held to determine the projects that represent best value for money for consumers. The successful business or businesses will receive a one-year contract with 50% payment on installation and 50% on the proof-of-savings report. The measures must be installed within nine months of the auction and must have a payback period of two or more years.
The first EDR Pilot auction is for a total of £10mn and is being held in January 2015. The government has said over 300 organisations as diverse as hospitals, airports and supermarket chains have already come forward to indicate they are considering participating in the auction.
Formal expressions of interest are invited by 30 September. Those who qualify will then be invited to submit a bid for the auction by 12 January.
The government has estimated that investment in energy efficiency could result in electricity savings of 196TWh in 2020, equivalent to 22 power stations. However, many businesses struggle to find the funding to invest in energy saving technologies. The EDR pilot scheme can provide businesses with an exciting set of opportunities to kick-start their energy efficiency ambitions.
EU raises energy efficiency ambition
The European Commission has proposed an energy saving target of 30% for 2030. In a Communication published on 23 July, it said it was confident that the ambition, which is beyond that required to deliver the proposed 40% emissions reduction target, would reduce bills and improve security of supply. It suggested that for every 1% of additional energy savings, EU gas imports would fall by 2.6%, and that significant new opportunities would be created for businesses.
But the Communication suggested that member states would likely fall short of the 20% energy saving target set for 2020, and were instead likely to reach 18%-19%.
Longer-term wholesale power prices to remain stable: Moody’s
Increased energy efficiency, lower gas prices and increases in renewables generation should keep UK wholesale electricity prices close to their current levels until 2020, rating agency Moody’s has claimed.
Stable landscape to keep prices flat
Published on 1 July, a report by the organisation questioned some of the key drivers of the view that power prices would be significantly higher in 2020. It suggested that wholesale power prices would, through to the end of the decade remain within a range of £48/MWh-£53/MWh. Prices, the report said, would be kept down by relatively low gas prices, increasing levels of spare electricity capacity, and reductions in electricity demand resulting from increased energy efficiency.
Capacity margins to widen
In its recent Electricity Capacity Assessment Ofgem claimed that the introduction of EU pollution prevention rules and the closure of power stations that have reached the end of their lives could result in the amount of spare capacity available on the system falling as low as 2% in winter 2015-16 – increasing costs for power.
While accepting this possibility, Moody’s said that, from 2016, the margin would begin to widen again, reflecting a significant increase in renewables generation – particularly offshore wind. The agency also predicted that a number of the UK’s existing gas-fired power stations were likely to stay online in anticipation of earning revenues under the new capacity market.
And more energy efficiency
Increased energy efficiency would also exert downward pressure on prices during the coming years, Moody’s said. But the agency warned that rising consumer energy bills, continued debate about the increasing cost of living and next year’s General Election meant that political and regulatory risk for UK utilities remained real.
Moody’s analysis only examines the wholesale cost of power. Final energy bills also include charges for the use of energy networks and the costs arising from government energy policies. As there is little doubt that these costs are on the rise, flat wholesale power prices will only act to limit price rises.
More businesses to benefit from redress scheme
The government has confirmed that it will amend legislation so that 150,000 more small businesses could benefit from access to compensation arrangements.
Licensed energy providers who supply domestic and micro-business customers are already obligated to join a redress scheme operated by the Ombudsman Service: Energy. This enables those customers to access redress in the event that they are unable to resolve a complaint directly with their energy supplier. To date this scheme has only been available to companies that spend up to £5,000 per fuel in a year. But in a bid to extend protections to a wider number of businesses, on 3 July the government said it would change the definition of micro-businesses so that it incorporated companies with higher consumption levels.
This would mean that small businesses that typically spend up to £10,000 for gas and electricity would be given access to the same form of redress arrangements as those businesses already covered by the scheme.
Energy debate hampered by misinformation: CBI
The time is right to have an “honest conversation” about long-term energy cost trends, business lobbyist the CBI has said.
At its annual energy conference on 17 July, the lobbyist launched new polling that showed that while businesses and households are largely aware of the energy challenges faced by the UK, many do not understand the drivers behind rising energy bills.
Price driver confusion
In its report Business and Public Attitudes Towards UK Energy Priorities the CBI found that under half (47%) of businesses identify wholesale costs as a key driver of energy price rises, while the same was true for slightly over a third (35%) of households.
Over half of business respondents (53%) and more than six in 10 (61%) of domestic users said that rising energy company profits were largely responsible for energy price rises. Green levies were regarded as accountable for price increases by 40% of businesses and 29% of households.
But, noting that only around 20% of the costs on energy bills were controlled by companies, the CBI said that businesses and households were aware of the limitations of competitive forces in reducing prices.
Less than half (47%) of businesses told the survey that improving competition was the most effective way to ensure that prices remained affordable, while less than four in 10 (38%) of domestic users felt the same.
The CBI argued that a focus on energy efficiency remained the best strategy for managing future price rises, a view shared by slightly over a third of businesses (38%) and households (35%).
The CBI is right to highlight the extent to which misunderstandings on the causes of energy price rises is adding fuel to the wider energy debate.
Businesses call for universal energy label
The government should introduce an electricity label for energy tariffs, a report commissioned by the Aldersgate Group has suggested.
Enable the Label: The Case for Electricity Labelling in the UK, which was published on 9 July, notes that a lack of clarity in the differences between regular and green electricity tariffs has meant that consumers across the UK are shying away from green tariffs. Introducing a universal electricity label, clearly displaying the quantity and carbon content of electricity sold on each customer’s bill, will bring much-needed transparency and improved communication, the report said. It argued this would encourage the development of new sources of low-carbon power, while delivering transparency in corporate reporting and clarity in purchasing decisions. It concludes that an electricity label could increase the purchase of low-carbon electricity in the commercial sector four-fold.
Separately the energy regulator has set out plans to improve transparency of green tariffs. It is seeking views on proposals to ensure suppliers are clear about whether or not green energy tariffs provide environmental benefits.
Fallon and Barker replaced at DECC
Two ministers have left the government’s energy and climate change department (DECC) following a Cabinet re-shuffle on 15 July.
Greg Barker stood down as climate change minister, having served in the role since the coalition was formed in May 2010. Barker, who was shadow minister for climate change between 2008-10, will resign as an MP next year. He led the government’s work on programmes such as the Green Deal and the Renewable Heat Incentive. Meanwhile, Michael Fallon has left his dual ministerial roles, covering business and energy, to take up a cabinet position as defence secretary.
Fallon’s roles, which largely focus on security of supply issues, will now be undertaken by West Suffolk MP Matt Hancock, who has served as skills minister since October 2013. Amber Rudd (MP for Hastings and Rye), who has worked as parliamentary private secretary to chancellor George Osborne since September 2012, will take on responsibility for the issues previously covered by Barker.
Government urges “bold” carbon trading reforms
The EU Emissions Trading Scheme (EU ETS) needs “bold reforms” to ensure it is fit for the future, energy and climate change secretary Ed Davey has said.
The carbon trading scheme, which aims to encourage low-carbon investment by increasing the price on carbon, applies to the electricity generation sector and to the EU’s energy-intensive industries, which collectively account for around 43% of the UK’s total carbon emissions. But the price of allowances under the scheme has fallen significantly, leaving the market with a surplus of over 2bn allowances. In a report published on 16 July the government said this “glut” of emission allowances has “thrown the system off course”, putting economic growth and climate change targets at risk.
The report called for the immediate cancellation of the 2bn surplus allowances ahead of 2020. Over the long term it urged policy-makers to better direct the provision of free allowances towards those businesses most in need of them.
Energy efficient buildings could save billions: SEA
Refocusing energy policy onto buildings could deliver net savings to the economy of over £12bn/ year through to 2050, the Sustainable Energy Association (SEA) has claimed.
In its manifesto, published on 7 July, the organisation, which represents a number of UK businesses, claimed the government is lacking an overarching plan for energy in buildings. It called on the government to implement an ambitious insulation programme and to encourage the use of smart technologies and on-site power generation.
The SEA estimates that these measures will be relatively “cheap”, with small scale-energy efficiency costing an estimated £91/MWh and large-scale power generation costing on average £108/MWh. The potential benefits, according to the SEA, could equate to around £189 a year for every UK consumer.
CMA confirms scope of energy market inquiry
The Competition and Markets Authority (CMA) published on 24 July the Issues Statement for its investigation of the energy markets.
The paper details initial theories on factors that might adversely be affecting competition and the resulting effects for consumers. Four high-level theories of harm are described, which will be the focus of the CMA’s investigation into GB energy markets. These were: opaque prices and/ or low levels of liquidity in wholesale markets; vertically-integrated companies harm the competitive position of non-integrated firms to the detriment of customers; market power in electricity generation; and weak incentives for suppliers to compete on price and non-price factors in retail markets.