Annual Power Rises on Carbon, Coal and Gas
Annual Power Rises on Carbon, Coal and Gas
Rising commodity prices fed through into the wholesale power and gas markets during December. Long-term power contracts climbed on the back of an increase in fuel prices, especially gas and coal. Annual April 14 baseload power increased 1.4% to a monthly average of 53.1/MWh in December. Annual gas was pushed upwards by rising oil prices. Monthly average annual April 14 gas was up 1.7% to 68.2p/th in December. The contract reached an eight-month high of 68.5p/th on 18 December.Monthly average Brent crude oil climbed 3.1% to a monthly average of $110.7/bl over concerns about supply disruptions in Libya and South Sudan. The contract reached a two-month high of $112.8/bl on 4 December.
Carbon prices climbed 5% to a monthly average of 4.8/t in December, as the EU approved plans to back-load carbon allowances. On average coal prices rose 0.7% to $82.6/t in December as a result of restrictions on coal exports from the US and Colombia.
Milder weather and strong wind speeds reduce short-term power prices
Despite higher day-ahead gas prices, lower than expected demand and high wind output pushed short-term baseload power prices downwards. Month-on-month the day-ahead power contract fell 5.9% to average 49.7/MWh in December. The contract is now 14% higher than the 2012 average of 43.7/MWh.
In contrast, short-term gas prices increased during the month as a result of low LNG deliveries and outages at Norwegian gas facilities. Day-ahead gas prices climbed 1.9% to average 69.4p/th in December, compared to 68.1p/th in November.
Prices could fall if warmer weather remains
Weather forecasters are expecting the rest of the winter to be warmer than usual; this could lead to lower prices over the coming months. Warmer temperatures coupled with high levels in UK gas storage could mean price spikes seen at the end of last winter as a result of high demand might not materialise this year.
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- Annual gas prices saw upward movement over the month following rising oil prices.
- Annual April 2014 gas prices climbed to an eight-month high of to 68.5p/th on 18 December.
- The summer 2014 contract increased 1.2% to a monthly average of 65.1p/th.
- Spot gas prices rose over the month as a result of concerns about LNG supplies.
- Day-ahead gas prices peaked at 72.0p/th on 3 December.
- Month-ahead gas prices were down 1.8% to a monthly average of 70.9p/th.
- Annual electricity prices followed the rise in gas and coal markets.
- Annual April 2014 power climbed 1.4% to a monthly average of 53.1/MWh.
- The summer 2014 electricity contract rose 0.9% to an average of 51.2/MWh in December.
- Spot electricity prices were kept lower by mild temperatures and strong wind speeds.
- Day-ahead electricity prices fell to a yearly low of 41.4/MWh on Christmas eve.
- Month-ahead power prices dropped 3% to an average of 54.2/MWh.
Autumn Statement targets security and affordability
On 5 December, chancellor George Osborne delivered the 2013 Autumn Statement to Parliament.
Market shock prevention
As part of the Statement, which provides an update on the government's plans for the economy, Osborne explained that oil prices last year peaked at $117/bl in August. Although prices then fell back to around $108/bl, Osborne warned that risks remained. A commodity price shock, he said, had the potential to destabilise the UK economic recovery.
On this basis the chancellor suggested that it was important for the UK to explore the potential of its onshore gas resources. He confirmed the establishment of a new tax allowance to "kick-start" the development of shale gas. This will mean that companies exploring for shale gas will only have to pay half the normal rate of tax on early profits. The government hopes that this measure will provide a boost to the fledgling industry and, over the longer term, increase the UK's energy security by reducing reliance on energy imports.
Domestic energy prices to fall
Following on from its pledge to roll-back the cost of green and social levies, the government set out plans to cut around 50 from domestic energy bills mainly through reforms to its energy efficiency schemes. To ensure that the changes are "carbon neutral", the government will introduce new schemes worth 540mn over the next three years that will boost energy efficiency for home buyers, landlords and public sector buildings.
Osborne also reiterated the government's recent confirmation that there will be a review of energy market competition led by Ofgem, working in conjunction with the Office of Fair Trading and the Competition and Markets Authority. The first report is expected in the spring.
Business costs to rise
The price of allowances under the Carbon Reduction Commitment (CRC) energy efficiency scheme was also confirmed.
The CRC is a mandatory scheme aimed at improving energy efficiency in over 2,000 large public and private sector organisations. Allowances in 2014-15 will be priced at 15.60/t in the forecast (F) sale and 16.40/t in the buy-to-comply (BtC) sale.
The rate of the Climate Change Levy, which places a tax on energy delivered to non-domestic users, will also rise from April. Data centres will be able to benefit from a Climate Change Agreement giving them a discount on the levy in return for meeting stringent carbon reduction targets.
CBI director general John Cridland said the statement was a missed opportunity to support [..] businesses which are also struggling with rising costs".
Alexander Jackman, head of policy at the Forum of Private Business, added: "There are some positive measures to help reduce the costs of doing business [but] other issues [are] not addressed directly today, but upon which work is ongoing. Top amongst these is energy prices."
While measures to boost the security of energy supplies should be welcomed, there is little here to comfort businesses struggling with rising energy costs.
Energy Bill gets Royal seal of approval
The Energy Bill became law on 18 December after receiving Royal Assent and being passed as an Act of Parliament.
The Energy Act 2013, as it is now known, will allow the government to reshape the electricity market, with the aim of incentivising 110bn of investment in the UK's energy sector. It will do this by implementing the government's Electricity Market Reform (EMR) package.
The market for energy reduction
One of the most significant components of the package is the capacity market. This mechanism aims to ensure that there is sufficient electricity available at all times to meet projected levels of demand, as more intermittent renewables come online. It will do this by providing payments for generators to increase power production or for large energy users to curb energy use.
A series of auctions, to take place four-and-a-half years ahead of the relevant delivery year (or one year in advance for demand reduction capacity), will be held. Bidders " either owners of idle power plants or large energy users" will then be paid for offering capacity at critical times. The government hopes to hold the first of these auctions later this year.
The legislation will also implement a new system of financial incentives " known as contract for difference (CfD) feed-in tariffs (FiTs) " designed to ensure that low-carbon forms of electricity generation can compete in the marketplace.
The CfD "tops-up" any shortfall between the price the generator receives for each unit of electricity and a pre-defined "strike price". If, on the other hand, the strike price is exceeded by the wholesale price, the generator is required to pay the surplus amount back. The result is that low-carbon generators neither suffer nor benefit from price volatility in power markets, and funding raised from consumer bills is used in the most cost-effective manner.
The capacity market could be a key driver in establishing demand side response market in the UK. But how this mechanism will work in practice remains unknown as the real detail will be set out in secondary legislation.
Energy market competition framework unveiled
The energy regulator (Ofgem), the Office of Fair Trading (OFT) and the Competition and Markets Authority (CMA) have jointly unveiled the framework for how they will assess competition in energy retail markets.
The framework, published on 19 December, confirmed that the regulators will examine the market share of the Big Six, how vigorously they are competing and how easy it is for new entrants to enter the market. It will also look at how the vertical integration of suppliers affects competition and how well suppliers engage with consumers.
The framework will draw on Ofgem's knowledge and expertise in energy markets and competition, as well as the OFT's wide-ranging experience of assessing competition in a range of different markets. The CMA will become the UK?s lead competition and consumer body from April 2014.
The first annual review of the market is expected in March this year.
CRC registration deadline looming
Business should be aware that the next registration deadline for the Carbon Reduction Commitment (CRC) energy efficiency scheme is fast approaching.
Register or face fines
The CRC is a mandatory scheme aimed at reducing carbon emissions from large commercial and public sector organisations. Organisations required to participate must monitor and record emissions arising from their use of electricity and gas, and purchase allowances to cover each tonne of carbon emitted.
If an organisation was supplied with at least 6,000MWh of qualifying supplies of electricity through settled half hourly meters during the year ended 31 March 2013 it must register for the next phase of the scheme (2014-19). Government departments are also required to take part.
The deadline for registration is 31 January. If an obligated organisation fails to register it may face a fine of 5,000, with a further fine of 500 per working day until it registers up to a maximum fine of 45,000.
Costs set to rise
Participants should also budget for the costs of complying with the CRC to increase from April. It was confirmed as part of the Autumn Statement that the cost of CRC allowances will rise from 12/t to 15.60t (in the forecast sale or 16.40 in the buy-to-comply sale) from April.
Businesses should now be analysing whether they will need to participate in the next phase of the CRC and register if required. Participating companies should also be prepared to see the cost of taking part in the scheme rise from April.
Businesses missing out on energy efficiency benefits, report warns
The government must act urgently to help UK businesses to improve their energy efficiency if "huge" economic benefits are not to be missed, according to a report issued on 27 November.
Published jointly by the Westminster Sustainable Business Forum and think-tank Carbon Connect, the study warned of a widespread lack of understanding of the advantages of increased energy efficiency. It also noted that one "barrier" that stands in the way for many businesses is a lack of available upfront capital to invest in energy efficiency.
While the report noted that the non-domestic Green Deal energy efficiency scheme was technically "open for business", it suggested there was a lack of awareness about the scheme. It recommended it was re-launched through a targeted "street by street" campaign. It also urged the government to use the Green Investment Bank to fund a commercial subsidiary of The Green Deal Finance Company to offer low-interest loans to businesses.
The report also called on the government to "clampdown" on commercial landlords failing to meet minimum energy efficiency standards. The first step, it said, should be to increase financial penalties for those failing to produce Energy Performance Certificates and Display Energy Certificates for their buildings.
Labour sets a 10-point plan to fix "broken" energy market
The Opposition has pledged to take a series of "key actions" to restore consumers trust in the energy market, if elected in 2015.
The Labour Party published its Green Paper, Powering Britain: One Nation Labour's Plans to Reset the Energy Market, on 29 November. The paper details how the party will tackle rising energy prices at the same time as reducing greenhouse gas emissions and increasing security of supplies.
The paper features Labour's commitment to freeze energy prices, in both the domestic and non-domestic sector, for 20 months and to abolish and replace Ofgem with a "tough new energy watchdog". It also sets out plans to make energy profits and trading more transparent, by breaking up the retail and wholesale businesses of the largest energy companies. Generators would be forced to sell all power produced into an open pool. Labour said its policies would create a "genuinely competitive market". Views are welcomed until 31 March.
Government ups support for green heating technologies
The government has announced that it will be expanding the scope of the non-domestic Renewable Heat Incentive (RHI) scheme to include additional technologies.
The RHI aims to increase the proportion of the UK's heat generated from renewables by providing subsidies for each unit of heat generated from eligible sources. But to date take-up of many technologies has been low. The government hopes that by expanding the scope of the scheme and making the subsidies more generous an additional 6.4TWh of renewable heat will be installed by the end of 2015-16. It was confirmed on 2 December that support will be provided for biomass with combined heat and power, biogas plants under 600KWth, geothermal energy and some types of heat pumps. Tariffs for ground source heat pumps, some biomass and solar thermal installations will also be increased to incentivise investment in these technologies.
Businesses missing out on energy saving opportunities
Workplaces across the UK are missing out on 300mn a year in savings that could be achieved through encouraging employees to reduce energy use and waste, the Carbon Trust has found.
The research, published on 19 December, suggested that while nearly all (92%) of workers are concerned about the cost of energy at home, fewer than half (47%) are concerned about the cost of energy for their employer. The report also found that less than a quarter of UK employees (23%) have been asked to help save energy at work and just slightly more than one in 10 (13%) had been rewarded for doing so. The report concluded that by encouraging staff to take action on energy consumption, travel and waste, employers can help deliver significant reductions in operational costs and carbon emissions.
MEPs support EU ETS back-loading
Plans to freeze the auctioning of a portion of allowances available under the EU Emissions Trading Scheme (EU ETS) were approved by the European Parliament on 10 December.
Under the plans, the European Commission will be able to make one adjustment of the allowances available up to 2020, covering a maximum of 900mn allowances. The Council of Ministers also approved the plans. The first allowances are likely to be withheld in the second half of 2014.