Energy Prices Remain Flat For March 2014
Energy Prices Remain Flat For March 2014
Breaking News: Ongoing Ukraine crisis has major impact on gas prices: The continuing political uncertainty in Ukraine is having a knock-on effect on UK gas prices because the country is vital in getting Russian gas across the continent to Western Europe. Gas contracts on the UK NBP and European TTF markets were 5%-6% higher this morning, Monday 3 March, compared to before the weekend because of developments in recent days.
Despite recent stormy weather, February continued this winter's trend of above-average temperatures. Demand for gas has been 20% below average levels this month, contributing to falls in short-term gas prices. These falls, combined with record wind generation, has suppressed power prices. Annual April 14 baseload power decreased 3.5% to a monthly average of 50.0/MWh in February. Annual gas was pushed downwards to an average 68.2p/th on high storage levels.
On the commodity front, monthly average Brent crude oil climbed 0.9% to a monthly average of $108.5/bl with increased cold-weather demand in the US and security concerns in Africa. Despite this, the contract fell to an eight-month low of $105.95/bl on 4 February on fears of an economic slowdown in China. Carbon prices climbed 32% to a monthly average of 6.5/t in February, with the fast-tracking of EU back-loading proposals announced for mid-March. The contract reached a 14-month high of 7.22/t on 24 February. On average coal prices fell 3.8% to $81.8/t in February.
Large falls in gas feed into power prices
Short-term gas prices saw sharp falls in February as mild winter temperatures combined with high LNG supplies. Day-ahead gas dropped 9.6% over the month to average 59.5p/th. The contract fell to an 18-month low of 56.6p/th on 24 February.
Short-term power contracts dropped following reductions in gas and record wind generation over the month. Wind generation peaked at 13% of the generation mix on 8 February. The day-ahead contract fell 14.7% month-on-month to average ?45.3/MWh.
Carbon to freeze but weather could warm?
Forecasters are predicting mild weather in Western Europe until mid-March. This could lower gas prices further by continuing to suppress demand for space heating, keeping storage levels high in the UK.
There is increasing speculation that the UK government may freeze the Carbon Price Floor from 2016 in next month's budget. Such a move would alleviate upward pressure on electricity and gas prices. This is already affecting 2016 contracts.
Annual gas prices
- Annual gas prices fell in February with the reduced need for summer storage injections.
- Annual April 2014 gas prices dropped 6.6% to 62.8p/th over the month.
- The summer 2014 contract decreased 7.2% to a monthly average of 58.8p/t. The contract fell to an 18-month low of 56.8 on 24 February.
Spot gas prices
- Spot gas prices tumbled in February with lower demand and high LNG supplies.
- Day-ahead gas prices fell to a 18-month low of 56.60p/th on the 24 February, but averaged 59.5/th over the month.
- Month-ahead gas prices were down 9% to a monthly average of 59.2p/th.
Annual power prices
- Annual electricity prices decreased in line with the falling gas contracts.
- Annual April 2014 power dropped 3.5% to a monthly average of ?50.0/MWh.
- Similarly, the summer 2014 electricity contract fell 4.9%, decreasing to a record-low of 45.7/MWh on 17 February.
Spot power prices
- Day-ahead power prices dropped month on month as a result of record wind generation, returning nuclear output and falling gas prices.
- Day-ahead electricity prices fell 14.7% to an average of 45.3/MWh. The contract reached a six-week low of 42.50/MWh on 24 February.
- Month-ahead power prices dropped 10% to an average of 45.8/MWh.
Ofgem plans changes to business contract renewals
The energy regulator is proposing reforms to automatic contract roll-overs and renewals in the business market. Ofgem is not looking to ban automatic roll-over contracts, but it is proposing to make a number of amendments to supply license conditions related to end of contract obligations. When a fixed-term energy contract is due to end, a business needs to provide notice of termination to its supplier in writing. Automatic roll-overs occur in the event that a business does not take action to negotiate a new deal or switch supplier, and is instead migrated to a new contract with their existing supplier. Business energy users that are not rolled over could be subject to higher charges known as out of contract (OOC) rates. Both of these contracts are likely to come with different terms to those previously agreed and could cost much more.
No ban on auto rollovers
While acknowledging that there had been calls to do so, Ofgem is not proposing to ban the practice of auto rollovers. The regulator believes that, if micro-business consumers are provided with the necessary information before they renew their contract, automatic rollovers could be a valid option for some, particularly those who do not have time to negotiate a new contract.
Under Ofgem's proposals, tabled on 14 February, all micro-business consumers would receive a renewal letter from their supplier around 60 days before a fixed-term contract ends.
This letter would include a comparison between prices under the current fixed-term contract and those that would apply if the business did not terminate the contract before a specified date. Consumers would have the right to provide notice to terminate their contract at the end of the fixed-term, any time up to 30 days before the contract expires. If the customer did decide to end its contract, suppliers would be required promptly to acknowledge receipt of termination notice.
Ofgem is not proposing to provide additional guidance or to prescribe a methodology for calculating OOC rates. But the consultation identifies a number of areas in which suppliers could improve their processes. These include: the consistent use of terminology for deemed and OOC terms by all suppliers; publishing deemed and OOC contract terms on supplier websites; and reviewing deemed and OOC terms regularly and notifying customers promptly when terms change.
Responses to the consultation are requested by 11 April. If approved, the rollover and renewal changes could take effect from 31 August 2014.
Ofgem's objective is to give micro-business consumers the best opportunity and information to engage effectively with the market, without restricting consumer choice.
To varying degrees all of the Big Six have already acted on auto rollovers five of them (the exception being EDF Energy) have started offering contracts without an auto rollover option for micro-business consumers. We are expecting this to change.
Regulator plans TPI Code to protect businesses from misselling
Ofgem has set out plans to protect small businesses from misselling by energy brokers, through the creation of a new Code of Practice (CoP) for the sector.
As part of its Retail Market Review, Ofgem committed to reviewing the practices of non-domestic third party intermediaries (TPIs) also known as brokers. Over the last year or so, Ofgem has been developing a draft CoP for these businesses. The draft CoP includes a range of measures that seek to ensure that accredited non-domestic TPIs act in a "fair, honest, transparent, appropriate and professional manner". It also encourages best practice on issues such as the provision of information before and after any agreements are made between the customer and the TPI, as well as training and complaint handling.
On 14 February, the energy regulator issued a consultation on the development of a regulatory framework for the draft CoP. Four options were put forward: to leave non-domestic TPIs to be governed by existing legislation; introduction of a voluntary CoP; creating a TPI CoP underpinned by a licence condition on suppliers to work only with TPIs accredited to this code; and licensing of non-domestic TPIs.
The regulator's preferred option is a CoP underpinned by licence condition on suppliers who will be obligated only to use accredited agents. It considers that this approach would strike the right balance between protecting consumers and allowing for innovation and the development of an effective market for TPIs. Ofgem acknowledged that its preferred option would result in implementation costs. But it argued that any costs passed onto consumers as a result of implementing the requirements will be outweighed by the consumer benefits, in the form of clear and enforceable TPI standards of service. Responses to the consultation are due by 9 May. Ofgem intends to consult on its final proposals in the autumn and to have the CoP and licence conditions in place by the end of the year. TPIs are an important route to market for non-domestic consumers as the majority of energy contracts are negotiated through them. But it is vital that businesses relying on a third party to negotiate on their behalf have trust in that organisation and the wider market. Introduction of a CoP will go some way in helping here.
Government reinforces Green Deal cash-back scheme
The government announced on 18 February a number changes to its Green Deal cash-back scheme.
The amount of money that consumers can receive back on certain measures has been increased: up to ?4,000 is now available for solid wall insulation (up from ?650), up to 1,000 for "room in roof" insulation (increased from ?220), and up to ?650 for double glazing (up from ?320).
The period available for households to apply for money back on energy efficiency measures has also been extended from 31 March to 30 June, with energy improvements to be installed, and vouchers redeemed, by 30 September.
Manufacturers call for increased compensation for energy costs
Chancellor George Osborne must use his upcoming Budget to "mount an all-out attack" on rising energy prices, according to manufacturers organisation EEF.
In its Budget Submission, issued on 24 February, EEF said that energy prices were a key driver of business costs. The organisation highlighted the government estimates that suggest that climate change policies will increase industrial electricity prices by 50% by 2020. It warned that, without urgent action, by the end of the decade many of the UK's heavy industries would likely relocate to countries with less stringent environmental protections and lower energy costs.
Extend compensation package
EEF called on the government to extend, through to 2020-21, all measures in the current compensation package for energy-intensives. But it also said the package should be expanded to exempt heavy industries from costs arising from the Renewables Obligation and Feed-in Tariff schemes.
The trade body further argued that the government should freeze the Climate Change Levy (CCL), and increase the relief rate of CCL for gas from 65% to 75% for sectors that have Climate Change Agreements. EEF repeated its call for the Carbon Price Floor to be frozen and then reduced, arguing that it had become ?superfluous? to the aim of incentivising low-carbon investment.
Manufacturers are unlikely to have all their requests answered at the Budget, but there may be an adjustment to the Carbon Price Floor?s trajectory.
Replace business rates with new energy tax: BRC
The Business Retail Consortium (BRC) has called on the government to reform how business rates are paid, and consider taxing companies based on their energy usage.
Published on 18 February, the Consortium's report, Business Rates: Road to Reform, suggested the current business rates system is "no longer fit for purpose" because it "disincentivises expansion and investment in property and creates an upwardly spiralling burden of costs for those in physical premises".
The report recommended the introduction of a tax on energy use rather than taxing property. It claimed that this would be a more "responsive" way to tax businesses. In addition it would increase energy efficiency, be simpler to deliver and would support the government's commitment to increase the proportion of revenue raised by environmental taxes.
The retailers' group believes this change could be delivered by amending the current Climate Change Levy (CCL). But the report said that the design of the tax should reflect the existing exemptions and reliefs built into current business rates and the CCL, so that impacts can be appropriately targeted.
The report called on the government to reward employment through the introduction of discounts to business rate bills based on a value per employee, incentivise successful business with discounts based on corporate tax payments and introduce a simplified, banded revaluation system.
Higher transmission charges add 1% to power bills
Although the presentation of electricity bills varies from one company to another, they are uniformly compiled by applying separate charges within the supply chain. These charges include those involved in the transportation of electricity and gas across the country.
Electricity transmission network use of system (TNUoS) charges, which pay for the use of the high-voltage electricity transmission system, vary by region, and peak demand is used as a short-hand way of assessing the amount of capacity that has to be provided through the wires to accommodate their maximum power requirements. TNUoS charges up 10% On 31 January National Grid published its final Transmission Network Use of System (TNUoS) tariffs for 2014-15, confirming increases averaging 10% plus. While TNUoS charges for customers in Scotland are much lower than those of the South, the increases for next year are much higher in Scotland ? up to around a 40% increase in Northern Scotland, compared to a 11%-15% increase in Southern England. The increases are estimated as adding around 1% to total delivered power costs. National Grid blamed a reduction in the demand base, arising from energy efficiencies and customer behaviour, and higher allowed revenues for network owners, for the rise. Exactly how TNUoS charges are collected by suppliers depends on contract terms; costs can either be ?passed through? as itemised rates or incorporated in all inclusive prices. But regardless to how these charges are paid, there is a clear long-term trend of higher costs; 2014-15 is no exception. National Grid
MPs to investigate network costs
An influential committee of MPs has confirmed it will undertake an inquiry into energy network costs.
In a statement, published on 12 February, the energy and climate change select committee said that questions remained over how transparently current and future network costs were determined. It also raised doubts regarding Ofgem?s effectiveness at monitoring and scrutinising the charges and profits of network companies.
Views are being sought on the impact that the government?s low-carbon ambitions have on network costs, the scope to adjust profit gains over regulatory periods, and to what extent different consumer groups are charged different network rates.
Responses are invited by 2 April.
Commodities & Energy - Electricity & Gas Profiles
This is an outline of the electricity and gas commodities discussed.
- Carbon: EU Emissions Trading Scheme carbon is quoted as over-the-counter (OTC) latest opening prices. All carbon prices are in euros per tonne (€/EUA).
- Coal: Coal is quoted as OTC latest opening prices. All coal prices are in US dollars per tonne ($/t).
- Electricity: UK electricity power base-load and electricity peak-load are quoted as OTC latest opening prices. All UK electricity prices are in pounds per megawatt hour (£/MWh).
- Gas: UK National Balancing Point (NBP) gas is quoted as OTC latest opening prices. All UK gas prices are in pence per therm (p/th).
- Oil: Brent crude oil is quoted as OTC latest opening prices. All Brent crude oil prices are in US dollars per barrel ($/bl).
Energy Language and Terminology
A selection of the language and terminology used.
- Bearish: A bearish market shows a general decline in prices over a period of time.
- Bullish: A bullish market shows a general increase in prices over a period of time.
- Curve: A graph of forward prices over a future time period.
- Margin: The indicated UK imbalance of a given settlement period. It is the difference between the sum of the indicated generation available, and the national demand forecast made by National Grid.
- Over-the-counter (OTC): The trade of a commodity directly between two parties, often on standardised terms.
- Spark/ Dark spread: The theoretical net income of a gas-/ coal-fired power plant from selling electricity having purchased the necessary fuel. The clean spark/ dark spread is this net income adjusted for the cost of carbon.
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