Spot contracts surge to five-month highs
Spot contracts surge to five-month highs
Short and long-term contracts experienced diverging trends in September. In the long-term market, gas contracts fell as supply agreements between Russian and Ukraine reduced the risk premium in the market. The moves shifted attention onto the high GB supply picture and a weak oil market. Seasonal gas contracts were down 0.5% on average over the month.
Crude oil and annual wholesale gas and power prices
In contrast, outages at storage withdrawal and Norwegian supply sites created a tight gas market in September, with day-ahead prices surging 20% higher, hitting a five-month high of 50.6p/th. The trends fed into short-term power contracts, as day-ahead power rose 14.5% to average £43.1/MWh.
Bearish commodities outweigh higher spot market as long-term contracts fall
Long-term power and gas contracts failed to follow a surging spot market, and the divergence was heavily influenced by bearish commodity markets in September. Historic lows were recorded for coal prices, which fell 3.1% over the month as China’s import ban on low grade coal sparked fears for additional oversupply in the global market. The annual API 2 coal contract fell to a new four-year low of $74.0/t on 30 September. New lows were also recorded for Brent crude oil as the month-ahead contract fell below $100/bl for most of the month and hit a two-year low of $96.4/bl.
Decreases were influenced by a strong US dollar and weak demand from China and Europe. Carbon prices were more stable; however, rumours of a delay to voting on market reforms at the end of the month helped prices fall 3% to average €6.1/t.
Spot power prices and temperatures
The month ahead: Improving Ukraine situation, worsening UK capacity margins
Despite uncertainty surrounding details of the recent Russia/ Ukraine gas supply deal, the agreement is a positive step towards securing gas supplies for the winter ahead. Continued de-escalation in tensions would help lower gas and power prices.
Following the extension of nuclear outages at Heysham and Hartlepool and a fire at Ferrybridge power station, National Grid has launched a tender for its Supplemental Balancing Reserve (SBR), a year earlier than previously planned. The move should help boost capacity for the winter ahead, but highlights the increasing risks of system stress in the UK.
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Annual gas prices
Long-term gas prices fell slightly in September, as ceasefire proposals in Ukraine and news of potential gas supply agreements with Russian reduced the risk premium in the market. Market focus shifted to the high GB supply picture, as well as weakness in oil markets.
Winter 14 gas dropped 0.7% to average 59.6p/th. The annual October contract fell 0.4% to average 57.51p/th and dropped to a two-month low of 55.2p/th on 29 September.
Spot gas prices
In contrast to long-term trends, the spot gas market spiked higher in September, with day-ahead gas rising 20.1% to average 48.4p/th.
Surging prices came on the back of a tight gas system as outages to storage withdrawal and Norwegian facilities reduced supply.
The month-ahead contract followed spot trends, gaining 2.8% to average 50.9p/th. Rises were dampened however by the high supply picture for the upcoming winter.
Annual power prices
Despite falls in their gas counterparts, long-term power prices rose in September as extended nuclear outages reduced capacity for the winter ahead. The nuclear sites in question are expected back online between October and December, and outweighed the impacts of lower coal and oil prices.
Winter 2014 power climbed 1.9% month-on-month to £51.0/MWh and hit a five-month high of £52.2/MWh on 16 September. Annual October 2014 rose 0.7% to £50.4/MWh.
Spot power prices
Spot power prices were up in September as large rises for day-ahead gas fed into the market.
Gas continued to dominate generation as gas-fired plant was needed to plug the gap left by nuclear outages and low wind generation. September saw the lowest monthly average for wind generation this year.
Month-on-month, day-ahead power averaged 14.5% higher in September at £43.1/MWh. The contract rose to a six-month high of £45.4/MWh on 16 September.
Key Market Indicators
Market reforms needed to boost market confidence: FSB
The Federation of Small Businesses (FSB) and consumer advocate Which? have teamed up to highlight trust failures in the non-domestic energy market and to call for radical reforms to business energy tariffs.
Transparency and regulation
The organisations have said that the reforms are needed in order to ensure fairness and transparency for small businesses, enabling them to easily identify and switch to the best possible deals in the market. The organisations said that achieving these objectives would involve publishing tariffs for small businesses – something that 81% of businesses surveyed said would help boost confidence in the market – regulated third party intermediaries, and an end to auto-rollovers.
The call for change follows the results of an FSB survey published on 12 September, which noted that distrust of energy suppliers had continued to rise. It found that over 80% of small businesses felt that their energy supplier did not care about them. Around two thirds (65%) also said it was difficult to switch energy supplier, with the biggest problems cited being unclear notice periods, complicated contract terms and the speed of the switching process.
FSB national chairman John Allan said: “We want fundamental reform of the energy market to enable businesses to easily identify and switch to the best possible deals. These changes would finally force energy firms to set the most competitive and transparent packages possible for all their customers.”
“Price to beat”
Which? also published the results of a similar survey in the domestic sector. It found that just 18% of respondents believed that their energy suppliers were giving them the best deal, with only a quarter rating their supplier as “good” at offering them a fair price. It also found that more than half of consumers considered that it was difficult to compare energy prices Only around a quarter (24%) felt that competition between energy companies was helping to drive prices lower.
Which? said that simpler pricing was needed to help people attain the best deals, and advocated the introduction of a “price to beat” benchmark for domestic consumers.
Lack of trust in the energy market is not a new dilemma. It is hoped that the Competition and Markets Authority’s investigation into the market will resolve some of these issues identified by consumers.
Lib Dems target green revolution
The Liberal Democrats have set out a “green” manifesto, with plans for five Bills to protect the environment.
In its pre-election manifesto, which was published on 1 September, the party confirmed that, if elected at the next General Election, it would introduce a Zero Carbon Britain Bill. Among other measures, the Bill would decarbonise the power generation sector by placing a limit of emissions from power stations and increasing the target for levels of renewables generation in the energy mix. The Bill would expand the powers of the Green Investment Bank, increasing its capitalisation, expanding its remit, and allowing it to raise funds independently.
A Green Transport Bill would be introduced to boost the use of electric and low-emissions vehicles, while a Heating and Efficiency Bill would legislate for a national programme to raise energy efficiency standards in homes and businesses.
In addition a Nature Bill would be put forward to improve air and water quality and a Zero Waste Britain Bill to cut waste sent to landfill sites.
Political parties urged to prioritise a greener Britain
As the 7 May 2015 election draws closer, stakeholder groups have begun setting out their wish-lists and manifestos.
Target the big issues
In its manifesto, published on 8 September, the CBI said “politicians have got into the habit of putting off big decisions until they’re overdue. We need action now”. It called on policy-makers ensure that energy and climate change were a priority for the next government. Above all the market needed investment and stability, the lobbyist said. To achieve this, the CBI said that politicians must successfully deliver the Electricity Market Reform package, ensure a “swift and thorough” conclusion to the Competition and Markets Authority’s review into the GB energy sector and ensure there was a “renewed push” on energy efficiency in the next parliament.
The CBI also advocated the creation of an independent infrastructure planning organisation. This “architect” would give investors the confidence to finance and build the infrastructure of the future and the public confidence that the right issues were being tackled.
Meanwhile, renewables trade bodies, including the Renewable Energy Association, RenewableUK, and the Solar Trade Association, have urged party leaders to do more to support renewables energy. In their Action for Renewables manifesto, published on 7 September, the group called on party leaders to commit to setting a new UK renewables target of 30% for 2030, extend support for renewables heating installations past 2016, back global efforts to tackle climate change and help usher in reform of the EU Emissions Trading Scheme.
Green campaigners also called on politicians to include key environmental pledges in their manifestos. In their Greener Britain report, published on 1 September, the groups – which included WWF-UK and Greenpeace UK – urged parties to commit to setting a 2030 power sector decarbonisation target, expand the Green Investment Bank’s role, and improve energy efficiency.
Energy is already a hot topic in the run up to the General Election.
RHI awareness low in non-domestic sector
A government-commissioned study has suggested that almost eight in 10 businesses are unaware of the government’s Renewable Heat Incentive (RHI) scheme.
The non-domestic RHI was launched in November 2011 to help the UK meet its 12% EU renewable heat target by 2020. But the Ofgem-administered scheme has got off to a slow start, with just 586 units installed during the scheme’s first full year.
Published on 29 August, the survey found that 79% of organisations were unfamiliar with the RHI. Even those who were familiar with the scheme – which tended to be larger industrial consumers – expressed confusion about its relationship with other government programmes such as the Green Deal and feed-in tariffs. In addition, the report said that many businesses lacked a clear understanding of the technologies eligible for the RHI subsidy.
But the latest figures from the energy regulator on installations under the scheme suggest that the number of business claiming the subsidy has more than doubled in the past nine months. Published in early September, Ofgem’s latest statistics showed that 5,659 business and public sector installations were accredited under the non-domestic RHI, compared with the 2,727 installations accredited at the end of November 2013.
Scotland “no” vote to keep costs down, says analyst
Energy sector stakeholders have welcomed Scotland’s decision to vote against independence, saying that it will help to minimise energy costs across the UK.
Much of the political debate in the weeks before the 18 September vote centred upon the future of the energy sector – and particularly the long-term potential of the oil and gas industry, with the “Yes” and “No” campaigns disagreeing over the economic contribution that this could make in an independent Scotland.
Industry body Oil & Gas UK said that the debate had demonstrated the crucial role the sector continued to play in the UK economy. But it argued that, in order to safeguard the industry’s future, the Westminster government now needed to progress fiscal reforms, and to implement the recommendations made by expert Sir Ian Wood as part of his review of the UK oil and gas sector. “The industry must not delay either in a cross-sector effort to bring its escalating costs under control”, the statement said.
Ernst & Young said the vote was significant in allowing the “established dynamic” in the UK energy market to continue on its current course. Head of power and utilities Tony Ward said: “The UK markets have developed ever-closer and more integrated systems and ways of operating that serve to reduce, then smooth cost burdens across all users.” This integration also enabled investment choices to be made on system-wide merit and to help achieve a degree of energy security “that can often be taken for granted”, Ward added. However, a trio of Scottish academics from Aberdeen’s Robert Gordon University insisted that there needed to be a re-think on energy policy despite the vote against independence. Peter Strachan, Ian Broadbent and Alex Russell warned that the government’s Electricity Market Reform programme was causing a hiatus in investment in offshore renewables and that more powers on the issue should be devolved to Holyrood.
The vote removed an important cause of uncertainty and nervousness in the markets.
MPs warn on smart meter costs
The government must ensure the costs of the smart meter roll-out do not spiral, a committee of MPs has warned.
The government has set out plans to roll-out 53mn smart meters to homes and small businesses across GB by 2020. It is hoped that the scheme will lead to a reduction in energy demand, driven by increased awareness of energy use.
But in a report published on 10 September, the energy and climate change select committee raised concerns that the roll-out, which will ultimately be paid for by consumers, could prove too costly to offer significant bill savings. While acknowledging that savings of up to 2% on energy bills could be realised, concerns were raised that these savings were dependent on consumers becoming more “savvy” in making decisions about energy use. The report also warned there was a danger that the technologies currently being developed as part of the programme could quickly become obsolete.
The committee recommended that the government closely monitors progress, costs and benefits during the roll-out, so as to identify whether changes were needed to secure the delivery of smart meters at minimum cost to consumers.
Energy costs major concern for businesses
Spiralling energy costs have become a primary concern for the UK manufacturing industry, a recent survey by technology manufacturer Siemens has found.
Published on 1 September, The Future of Energy: the UK Manufacturing Opportunity suggested the impact of rising energy costs and the positive social impacts of increased energy efficiency meant that energy management was now being discussed at board level in the vast majority (89%) of businesses.
The survey found that the UK’s manufacturing industries were increasingly turning to energy efficiency to reduce costs, cut emissions and attract new businesses, with 79% reporting energy as a business critical issue in the year ahead. More than two thirds (68%) of those surveyed said they were planning to increase investment in energy during the next 12 months, particularly in renewables and on-site generation technologies.
MPs urge action on Green Deal “failure”
The government has “wasted” the first 18 months of the Green Deal energy efficiency scheme owing to inefficient funding, bad communication and poor implementation, an influential committee of MPs has said.
In a report published on 15 September, the energy and climate change select committee said that rather than facilitating access to energy efficiency measures, the scheme had caused “frustration and confusion” for consumers and supply chain companies. The MPs called on the government to consider whether it was being too cautious in its application of the scheme’s Golden Rule, and suggested that further financial incentives – such as stamp duty discounts and variable council tax rates – should be considered as a means to boost uptake of the scheme.
“Incoherent” environmental policies pushing up bills, says think tank
“Confused” interventionist policies in the energy market are increasing household bills, according to the Institute of Economic Affairs (IEA).
The think tank’s Low Pay and the Cost of Living report, published on Thursday 25 September, said that schemes such as the Renewables Obligation and the feed-in tariff were “akin to industrial policy” in the energy generation market, “with government seeking to second guess what will be the most efficient way to reduce emissions”.
The report argued that such policies had resulted in relatively cheap ways of reducing emissions being “crowded out” by more costly ones, with the UK’s 2020 renewables target helping to “warp investment into economically unfeasible sources”.
EU sets out plans for “energy union”
New European Commission president Claude Junker has confirmed his intention to “reform and reorganise” Europe’s energy policy.
Speaking on 10 September, Junker said that he would seek to create an “Energy Union”, geared towards reducing the high import dependency of several member states while also strengthening the share of renewable energy. “We need to pool our resources, combine our infrastructures and unite our negotiating power vis-à-vis third countries”, Junker explained.
As part of the plans, Junker has decided to merge the portfolios for climate action and energy under commissioner Miguel Arias Canete. He said that the two areas were “mutually reinforcing”, and that the development of low-carbon energy was not only a matter of responsible climate policy but also an industrial policy imperative, if Europe were to have an affordable energy supply in the medium term.