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WHOLESALE ENERGY PRICES: JULY – AUGUST 2017:

In this article, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Forward and spot markets across energy commodities increased over the summer. This was led by crude, which rose over 7% with the futures market buoyed by reports of progress in quota compliance amongst OPEC and OPEC-Alliance producing countries. The geo-political concerns highlighted in July’s issue are also taking hold. Although Latin American tensions have eased, those in the Korean Peninsula remain foremost in peoples’ minds. Indeed, the oil market may be driven higher if more investors view hard commodities as a safe haven.

The refined products markets rose ahead of crude prices amid reports of increased military stocking (chiefly jet-kerosene). Meanwhile, US storms and emergency draws on the Strategic Petroleum Reserve, and also served to drive crude and petroleum products prices up.

Long term hopes for shale took a knock in confidence with an announcement from BHP Billiton that it was selling investments in the US to stem losses on its fracking venture. This news was compounded by comments by the CEO of Total, perhaps the one energy major with the most significant shale involvement, asserting that oil prices will need to stabilise well over $80/bl before any significant new investments can be justified.

Natural Gas

Gas finished the period up more than 3p per therm.

The spectre of North American refiners converging on the Rotterdam spot market drove up European prices for all petroleum products, notably middle distillates. This had a knock-on effect on gas, which is often contractually-indexed to heating oil. It is also a naturally interchangeable refinery product which is frequently blended with kerosene at refineries, hence the strong price correlation notwithstanding the supply basis. This factor and the rise in energy prices across the board perhaps best explains the recent run in gas prices, a market which is otherwise very well supplied, with talk of some LNG cargoes hitherto destined for South Asia now being diverted to European terminals.

Petroleum markets aside, the effects of the weakness of Sterling vs. the Euro, with the determining €/MWh price converting into p/therm, needs to be considered too. The North European gas market is essentially a single, inter-connected supply pool, with the UK price at the National Balancing Point (NBP) essentially ‘set’ by trans-European deliveries cleared in and out of the Title Transfer Facility (TTF) in Holland. A sustained or further weakening in Sterling could put upwards pressure on prices in the UK therefore, especially if regional European spot markets start to tighten once winter takes a hold or we see outages at key power stations requiring an uptake in gas or coal.

Electricity

Wholesale power prices saw the strongest gains of all, with the annual 2017 base-load contract and the spark spread rising 6% and 11% respectively.

Nuclear power stations in France and Benelux, which represent the backbone of the Continent’s supply, had come under increasing safety/decommissioning authority scrutiny, with considerable uncertainty and lack of information on the long-term future of key generators unnerving the forward market.

Industrial electricity prices in the United Kingdom, meanwhile, increased further, partly in unison with steep rises in domestic tariffs and rising input wholesale costs. The impending Energy Intensive Industry (EII) exemption surcharge will soon be affecting end-users on both new and existing long-term contracts from next April. There is some consternation amongst buyers, not just in relation to the justice of the tax itself (which exists chiefly to pay for a tax exemption for larger energy-intensive buyers) but to the uncertainty it is causing as well. Whilst the surcharge will apply from April 2018, buyers still remain in the dark as to what the actual tax rate will be – a case of Whitehall ‘delaying’ bad news, perhaps. Some suppliers have been offering premium-rated ‘insured tariffs’ in response to these end-user concerns.

But perhaps the real ‘elephant in the room’ is inflation. Not so much headline RPI or CPI, but leading-indictor of Producer/Factory Gate prices, with some industry trade associations telling us that such indices are already heading into double figures. Were this to be the case, there are contractual clauses and statutory measures in place to trigger automatic rises across wholesale, industrial and commercial prices. The same inflation-related factors affect the gas market, and in both cases, EUA carbon prices (up by more than 15% over the two month period according to Gazprom Research) could also chase industrial energy costs higher, unless such inflation can be kept in check.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues. 

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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FACTORS TO CONSIDER BEFORE INVESTING IN BATTERY STORAGE: PART II

This new series of blogs highlights the factors which a prospective end-user should weigh up before deciding whether and how to invest in electric storage.

In terms of optimisation, such energy management can be done in-house or outsourced. Although there is no hard and fast rule, outsourcing can bring efficiency and expertise that can far out-weight its cost in commissioning. Fortunately, there are various ways of going about this task and the use of third party agents or an Agency Trader is fairy well established and several firms can offer Agency Trading services.

Although much of the financial model can be prepared by the user’s agent, supplier or prospective manufacturer, the question of intangibles comes up again. Only the user can really determine what the value of continuity and ‘security of supply’ to the business will be: the resilience value overall. It is important, therefore, for the user to be involved in the modelling process.

The cost of modelling varies, as does the quality of much of the work; not always in tandem. In some cases, the cost of modelling should be deducted from the cost of any purchase, if charged. Reputable manufacturers will also inform the prospective buyer of cheaper leasing options which they may have on offer, as well as other alternatives which the user may wish to explore if the financials begin to look marginal.

To clarify, the visible savings of a financial model should include:

  1. Reductions in annual electricity bills: potentially over 50% through Power Purchase Agreement (PPA) tariff reductions or under a bespoke Storage PPA agreed with the supplier.
  1. Future income from Frequency Response services to local distribution networks under private-wire agreements or, in the majority of cases, services to National Grid under reverse auctions.
  1. Optimisation using the battery: This task could be outsourced to an Agency Trader, e.g. a Big Six, independent generator or other energy merchant, who will optimise the battery through their own supply pool and access to the Elexon, OTC, Nord Pool, APX and other markets. This task is less complex than it may sound. Like the battery itself, once in place the process requires little resource from the user, and there are various energy merchants who already offer Agency Trading services, some paid on performance only.
  1. Peak Shifting: the ability of the user or embedded generator to ‘time’ their exports of the electricity they sell into the system and so attract higher ‘peak’ prices in trading markets. Again, an Agency Trader could facilitate if the end user does not wish to becoming involved in trading directly, as many may not.
  1. Enhanced Plant Efficiency: alleviating excess loads, avoiding ‘cold starts’ and mitigating other impacts to prolong the life and reliability of turbines, minimise wear on machinery and preclude erroneous reset of control systems which some ‘black box’ DSR systems might place at risk.

It is worth adding here that larger businesses have the option of a Guest Battery. The business will not buy the battery nor pay for anything related to it, but will simply make land available and allow the Provider to install and operate the Guest Battery. The user receives pretty much the same electricity bill savings outlined in paragraph 1 above and the Guest Battery also adds a valuable degree of ‘free resilience’ as well. To compensate the Provider for such benefits, which entail practically zero cost and zero risk, the user must agree to share any resultant cost savings with the Provider.

In evaluating the resilience benefit for the company, it is important to consider:

  • The cost to the business of any ‘worst case scenario’ occurring within five, ten or fifteen years without any emergency cover or 100% dependable back-up. These will include direct contractual losses and/or consequential damages relating to any power outage, whether it was caused internally or by an outside issue with the local distribution, high-voltage transmission grid or generator: be it human error, one of the cyber attacks targeting grids of late, a force majeure or any other unforeseen event, which may or may not lie within the user’s control but remain his financial responsibility.
  • The alternative cost of buying ‘critical loss’ cover or very high premium catastrophe insurance (if it is available) that may be sure to protect the business from damages resulting from short-term or prolonged outages.

Whether or not a battery is finally purchased or leased, the process of exploring this investment can be useful as it will focus attention on optimisation options for the plant itself. The exercise can serve as a ‘de facto’ energy heath check and is offered free by some providers. This exercise must also establish what battery chemistry is best suited for the user, the size and performance specification of any battery, as well as the exact type of long-term warranty on offer, with questions pertaining to its operational life, the number of complete and partial cycles; its flexibility, its depth of discharge, specified breeches and allowed tolerances that may void a guarantee.

The forward service provision is just as important as the battery itself. It is another key question which the agent, supplier or manufacturer will need to be asked.

This article has analysed the visible savings a financial model should include, and has also introduced factors to take into account when evaluating the resilience benefit for a company. Click here to read Part I, which discussed the importance of valuing benefits, visible and intangible, and including them in a financial mode.

By Dominic Whittome 

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

Click here for a PDF of this blog

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WHOLESALE ENERGY PRICES: MAY – JUNE 2017:

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Crude Oil

Brent crude fell $51.75 to $48.85/bbl amid concern that OPEC and OPEC Alliance states have still been struggling to remove the slack from the oil market, also rising exports from Libya (adding over 1 mbd) and from Nigeria (over 1.7 mbd) to world supplies. Neither oil producer is covered by the production accord.

Oil prices fell by just over 5% which seems a comparatively modest fall put in perspective and against recent newswires and headlines on the subject.  Looking at the price upside, markets will be concerned at growing global oil consumption, notably in the automotive sector, the prospect of faltering supplies and the possibility of deeper OPEC Alliance cuts, which may well happen if it is now clear that the existing cuts do not go far enough.

On the downside, the market will be looking at future output increases in Libya, Iraq and North America. Shale exports are clearly having an impact, although longer-term questions about the sustainability and commercial viability of sub $80/bbl production projects outside Africa and the Middle East  are likely to remain. Ongoing political troubles in South America and the South China Sea may also rattle petroleum markets in the weeks ahead. Furthermore, with derivatives now accounting for most of the open positions in the forward markets, physical prices may  be very sensitive indeed to general shifts in perception, even if the market looks calm at the moment with the 15 Day Brent contract seemingly stuck between the same £45/bbl  ‘floor price’ and £55/bbl resistance level mentioned in the last edition of this update.

Natural Gas

Gas prices barely moved over the period, up just 2%. The main news last month was the announcement that Centrica will permanently shut its Rough facility. This is a converted North Sea gas field which, as most articles reported, accounts for 75% of the UK’s storage  capacity. While that percentage is perfectly accurate, in terms of the ‘high-space/low-deliverability’ storage (i.e. the type the market needs to balance on a seasonal basis and to provide cover for prolonged emergencies) the true percentage cover  which is provided by Rough is even higher, possibly over 90%.

The closure of such a strategic asset should be a concern therefore.  The last 15 years have seen new investment in onshore salt-caverns, although these are generally ‘low-space/high-deliverability’ assets. Although they are more flexible, the emergency cover they can provide is limited. They are also likely to be more expensive, certainly once competition hitherto provided by Rough is withdrawn.  The closure of Rough may therefore expose the UK gas balancing market to  technical and market developments relating to these smaller storage facilities, the LNG market and inter-connectors.

Consequently the risk-premiums in I&C contracts may rise (due to higher balancing risks), as will valuations of swing flexibility in North Sea gas sales agreements. From a North European perspective, the gas market does look well enough supplied for now. However, the Russian-Ukraine corridor, South East Asian LNG supply, demand and geo-political developments all need watching in the weeks ahead, as well as the oil market itself.

Electricity:

The forward baseload contract finished the period unchanged at £43.00/MWh.  New delays were  announced for the proposed 3,200 MW Hinkley Point C  nuclear power station and the plant now looks unlikely to generate at full capacity until 2027, by which time all of the UK’s remaining reactors, bar Sellafield, may have closed.

Progress on the next new-build site, the 3,600 MW Moorside plant, looks to be in jeopardy altogether, with primary shareholder Toshiba facing  possible insolvency and minor partner Engie (formerly Gaz de France) pulling out of the project altogether.  Power prices are being held down by low oil and gas prices for the time being but the long term outlook is less clear. To ensure the system has adequate volume, National Grid and central government have  embarked on quite an extensive portfolio of new inter-connector projects to import from grids on Continental, Scandinavian countries and potentially Iceland, which has a 1,500 MW wire hoping to get the go-ahead soon.

There are already eleven major inter-connectors, rated between 1,000 MW and 2,000 MW, planned under construction or already live. But whilst the system may have the capacity spare, this is no guarantee that sensibly-priced electricity itself will be available to fill any short-fall. The UK’s price-dependence on European and Nordic power exchanges looks set to increase. The landscape will be different with the current inflation-adjusted Strike Price for the first new-build reactor at Hinkley Point C already weighing in at £110/MWh, much higher than the existing baseload market prices.

Barring a renaissance in gas-fired or other indigenous generation, forward power prices look poised to shift higher. Significant increases in trend are perhaps most likely in the balancing market prices rather than baseload, with the latter fast becoming ‘the residual’ commodity by comparison. As we go to wire, there are reports that half of France’s nuclear power plants are in shut down. It is not clear why or when plants will re-start. Twenty units offline cannot be explained by maintenance although there is a host of possible reasons to explain what has happened and no report yet of any sharp movement in European power prices.

By Dominic Whittome

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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FACTORS TO CONSIDER BEFORE INVESTING IN BATTERY STORAGE: PART I

This new series of blogs highlights the factors which a prospective end-user should weigh up before deciding whether and how to invest in electric storage.

The decision whether or not to invest and, if so, exactly which type of package to go for, will depend on a host of factors. These include the nature and configuration of any embedded generation, the user’s demand profile and the value of ‘security of supply’ to his business.

We should split the ‘all in’ value of electric storage in two parts.

  • Visible benefits: these include the added value to the business through reduced annual power bills; enhanced micro-generation efficiency; improved power quality; energy efficiency and additional plant income, such as Frequency Response revenues from grids or other customers. Each Visible benefit should be quantified and included in the financial model.
  • Intangible benefits: these cover security of supply or ‘resilience’, i.e. the added value to the corporation in the form of ‘business continuity’, ‘catastrophe avoidance’ amongst other liabilities a plant manager may hold responsibility for.

In each case, especially the first, it is important to avoid double counting when valuing benefits and including them in a financial model. For example, if a user employs a battery to sell a specific service to a third party, like a high-flexibility Frequency Response service to National Grid, this could conflict with other uses the battery may be needed for in the event. Fortunately, there are now twenty-seven different Frequency Response categories which National Grid is inviting through its 2017 reverse-auction process, i.e. these include cheaper, less flexible types of service, precisely to address such conflicts and to encourage storage users to free up and sell them any surplus capacity they may have to spare.

Above all, the commercial payoff of a battery will ultimately depend on how well it is specified and installed and how well it is optimised subsequently, both on-site and out in the marketplace.

Some batteries installed recently operate profitably as ‘standalone projects’. Here the visible benefits alone justify the expenditure; resilience is just a bonus. The main benefits involve Frequency Response income and/or annual electricity bills savings of circa 50% to 60% by virtue of an effectively flattened demand-profile, avoiding the Climate Change Levy, TRAID and Red Zone capacity payments to the system.

Other batteries might only be considered worthwhile once visible and intangible benefits are considered together, chiefly in cases where ‘business continuity’ is seen as critical and so resilience becomes the principal value that a battery will provide.

The visible benefits may be of secondary importance. This value still needs to be evaluated separately and be viewed as a way of subsidising the battery.

Financial modelling relies on detailed user profile, power market data and complex forecasting techniques. The storage arena is relatively new and highly sophisticated, even by power generation industry standards. However, some robust financial models have been developed, prepared by a prospective end user’s own agent, battery supplier or manufacturer. Although not perfect, certain models should give a prospective buyer a good ‘feel’ of the investment return they can expect, also flag up whether or not storage itself is a sensible option, and if not what alternative optimisation or Resilience options may be worth looking at.

This article has discussed the importance of valuing benefits, visible and intangible, and including them in a financial model. Part II of this series will analyse, in greater detail, the visible savings a financial model should include, and will also introduce factors to take into account when evaluating the resilience benefit for a company.

By Dominic Whittome 

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 7947 5354 or by email on: info@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2017: PART II: ELECTRICITY

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Electricity 

Baseload prices finished the period down 7% as weak demand and firm supplies across the board of generation took hold. Storage is becoming an increasingly key feature in the market. It is thought that the perceived ‘low’ £22.50/kW clearing price in the last Frequency Response/capacity market auctions may be leading to a future ‘Mexican stand-off’ between storage investors and National Grid Transmission, with developers wary of investing in ventures offering only them quite modest returns but significant exposure to the market risk once their auction contracts expire, in 4 years or even less in some cases.

However, the Grid will broaden the range of different Frequency Response services which developers can bid for. This wider choice of contract terms could help underpin the storage market from now on. Last year’s low clearing price may have been partly the result of lower-than-normal bidding by developers. Having been given their batteries by the manufacturer at a concession, some may have bid low, keen to bank any positive margin to ensure they would at least break-even.

If price sweeteners are a one-off event, for that reason too we could see storage auction prices firmer next time around, even if it is modest. So talk in some industry circles of sustained sub-£20/kW prices look wide off the mark perhaps. Looking further ahead, significant demand growth is anticipated for electricity storage across Europe according to virtually all government and industry forecasts made on the subject.

On the power generation front, the lack of investment in peak capacity will only intensify demand for load-shaping tools, batteries and demand-side response in the future. With new-build nuclear plans reported to be stalling, NuGen’s 3,800MW Anglesey reactor of recent concern, the UK’s generation margin could tighten further over the next 10 years.

While it is true that Whitehall secured significant capacity in its ‘T4’ capacity market auctions last year, centrally planned economies and markets come at a cost. On which question, the current strike price for the 3,200 MW Hinkley Point power station has passed £105/MWh on account of inflation, as agreed when the deal was struck at the outset when it stood at £92.50/MWh. Comparable CFD strike prices can be expected for the other new-build reactor due over the next ten years and a benchmark may gradually become established.

Meanwhile the spark spread is still falling, down 2% over the two month period. This low margin is a continuing disincentive for developers to build new gas-fired plants or to prolong the UK’s remaining coal stations. Grid batteries and Demand Side Response may help in the future. However, storage is only good for short bursts and cannot cover for prolonged outages.

The commercial incentives to build un-subsidised plants will stay weak unless UK energy policy shows signs of change. One future key plant scheduled, the 1,500 MW gas station at Trafford, has been delayed again amid financing issues, so significant that it has even had to surrender its capacity market concession.

The bright spot perhaps has been the steady development of interconnectors, which may redress some of the imbalance as existing nuclear reactors and other plants are retired over the coming years. These include a second 1 GW cable to France and a second Norwegian 1.5 GW link interconnector to bring hydro electricity to the UK market and double-up Statnett’s North Sea Link project. Landsnet’s IceLink cable will bring 1.5 GW of geo-thermal electricity from Iceland and further 1 GW cables are planned to Holland and Belgium.

However, as the UK market experience with the Gas Interconnector flagged up almost a decade ago, the mere presence of a subsea pipeline is no guarantee of supply when it is needed most. Volumes will no doubt eventually arrive, although at prices which the power market will determine.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this blog click here

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POWER MARKET LIQUIDITY – COME BACK ENERGY MERCHANT BANKERS, ALL IS FORGIVEN

As far as market efficiency is concerned, perhaps energy users should be missing the energy merchants more than many actually are?

These banks have played their part in providing market liquidity. The annual wholesale prices quoted out on the curve represent ‘bell weather’ markers for industrial buyers to assess where the market is at any one time: forward traded over-the-counter contracts devoid of seasonal effects and actively traded.

Manipulate this market or (more to the point) allow this market to become so illiquid that it essentially manipulates itself – by sending distorted incentives to traders, making the curve even more illiquid – and opaque pricing will set in very soon, replacing efficient supply and demand reflective pricing that their presence in the market hitherto offered. This also leads to greater volatility and high risk-premia which are embedded into the price of PPAs. The same market distortions meanwhile can undermine market liquidity further, leading to further market exit and the cycle then becomes self-reinforcing.

This is the main reason why the exit of many investment banks is not good news for utilities, industrial buyers or households even. Both European level and national level legislation has piled layer upon layer of compliance cost onto the energy trading desks across the merchant banking industry. That extra burden, coupled with (certainly until very recently) low oil prices has rendered many energy trading desks at financial institutions ‘non-commercial’ in the eyes of internal restructurers.

Consequently, the banks concerned have quietly wound down or withdrawn their energy trading operations altogether, and with it the liquidity-providing role they had to play. To be fair, no single piece of legislation, European or national, is solely blame. However, EMIR, the EU European Market Infrastructure Regulation (which covers all and very broadly-defined over the counter trades and considers all of them as derivative contracts) can arguably claim to be the archetypal ‘straw that broke the camel’s back’.

In theory, EU Regulation No 648/2012 should have enhanced stability, transparency and efficiency in the forward gas and electricity purchasing (in EU eyes:  ‘derivative’) markets.

Although the new cost burdens which EMIR has imposed on the banks (and the utilities too) has ultimately lead to a significant reduction in long-dating trading by the energy merchants, merchant banks and some of the major utilities too. It has caused liquidity to contract which may paradoxically have led to a market efficiency situation in energy which is precisely the opposite of what – for all its good intentions – EMIR had set out to avoid.

The finer details of EMIR and other primary legislation including the EU Market in Financial Instruments Directives (MiFID I and MiFiD 2) are too wide and complex to condense into one short article. However, the ‘de facto’ prohibition of cross-commodity clearing is widely recognised as having curtailed the commercial viability of forward gas and power trading operations within financial institutions. For example, merchant banks can no longer benefit from the operational efficiencies they once enjoyed by way of cross-netting positions across different commodities desks funnelled through a single account, with profits and losses pooled and efficiently offset against one another. That practice also bestowed significant economies of scale to the wider banking operation across all commodities and traded derivatives. So, whereas before, a merchant bank could centralise and net-out trades across, say, natural gas, gold bullion, Forex or interest-rate swaps through one internally-offsetting account, they are now required to operate  separate trading desks each with separate books, reporting and accountability in order to meet EMIR’s technical standards regarding the format and frequency of trade reports to trade repositories.

In the aftermath of the financial crisis (which hasn’t necessarily gone away anyway) it was generally accepted that stringent EU legislation was required and more circumspect policing required for trading managers and – key here – the individual traders reporting to them. All this extra regulation – ‘not before time’ some might say – sounds all well and good. But in terms of effect, its long-term impact on liquidity and forward gas and electricity prices may be negative for UK energy buyers. So, has the EU “thrown the baby out with the bathwater” or not?

We can’t answer this yet. So let’s simply fast-forward to the market today. Calendar gas and power prices have risen roughly 20% over the past three months alone. The higher prices and notably higher market volatility will undoubtedly drive up renewal prices for industrial gas and electricity buyers as the April 17 round approaches.

To be fair though, there are underlying supply-and-demand factors that would at least partially explain the price rises witnessed in recent weeks. And given the spectacular power price gyrations we’ve seen very recently on Elexon for example – one could equally make the case that the Forward Curve hasn’t moved more than could have, if the forward market was supposed to be this inefficient and jumpy.

But as fellow former traders will testify, never be fooled by a headline price. The screen just gives you the cost – not the volume or intent actually behind it. The forward prices can change significantly in the blink of an eye, especially once any ‘feeler prices’ or ‘phantom trades’ have been posted or executed.

But the main conclusion must be that no person, no formula, and no machine can actually say ‘what would have been’: how the market would have turned out had EMIR, MiFID and other legislation not been introduced. The jury is – and is likely to remain – still out on this chestnut. But even so and perhaps above all, it is hard to see how the exit of merchant banks and other players who bring liquidity and competition to the wholesale market will help the interests of energy utilities or end-consumers in the long term. Indeed the only winners here may turn out to be the incumbents and large players who are still in the market, now each with a greater slice of the marketplace to themselves. The effect is hard to ascertain just now although a shock of cold weather or supply disruption could yet give us an inkling of what to expect.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Dominic Whittome is a private consultant and a former utility trading manager who has worked in the oil, gas and electricity trading market since 1990. 

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this article click here

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WHOLESALE ENERGY PRICES: SEPTEMBER – NOVEMBER 2016: PART II: ELECTRICITY

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Electricity

Across Europe’s power exchanges, prices surged as officials ordered a third of France’s nuclear plants be shut temporarily for safety checks, sweeping over 6 GW off the market and throwing the UK into export mode to the Continent across both the IFA and BritNed cables. Recent outages at UK nuclear and coal power stations added to shortfall concerns.

The French reactors concerned should come online again early next year. However, this case serves to illustrate how the UK’s reliance on inter-connectors is a two-way sword, with  equal propensity to drive prices higher. This effect has been reinforced by the weakness in Sterling; peak-load volumes traded in €/MWh looking comparatively cheap to Continental buyers.

Six further nuclear plants in France, believed to account for 4.5 GW, have also been placed ‘under watch’ by France’s Nuclear Safety Authority, though they do remain open. One  perhaps unreported concern is that of the Benelux countries, whose reactors are similar in age and some identical in design to those under investigation.

Over the period, forward year prices increased by 18%, ending just under £50/MWh. But this ‘modest’ price rise belies the price gyrations in the balancing market and sharp rises in forward month prices.  Such factors will affect I&C prices as the April round approaches, as power purchase agreements add in a forward market risk-premium, which rises with volatility.

The doubling of coal prices this year to $75/tonne has heaped further pressure on  power prices. The forward market did not over-react however and forward curve is still in backwardation; calendar 2019 volumes trading at a significant £5/MWh discount to 2017.

That said, the market is not liquid. It is becoming even less liquid today as energy merchants depart due to uncertainties, higher trading compliance costs and, until recently, very low energy prices. Although prices have stabilised recently, the market could turn on a sixpence if outages enforced at nuclear plants look they could be prolonged and renewable supplies struggle to make up the shortfall amid the colder weather reported to be on the way soon.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: SEPTEMBER – NOVEMBER 2016: PART I: BRENT CRUDE & NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Brent Crude

September started strongly for the crude market amid hopes of an early OPEC production cut, linked to a production sharing accord with non-OPEC producers. However, dated Brent subsequently fell back below $50/bl as a deal proved elusive and traders grew weary of another false dawn.

Production limiting accords between the cartel and non-OPEC countries (including Russia, even Norway on one occasion) are not unprecedented and have been sustainable for quite long periods in the distant past, so this topic shall remain on the market’s radar. Oil prices could be supported further if European refiners restock and delayed winter weather increases demand for middle distillates on the Rotterdam spot market, which has already had a strong few months.

Crude ended the month period 7% higher although prices have drifted downwards again quite recently.  The market is unlikely to  rise far above its current support level, discussed at around $45/bl, unless we see some concrete signs of progress in Vienna in the coming weeks.

Natural Gas

The low, sub-$35/bbl crude oil prices witnessed earlier in the year have mostly dropped out of pricing formulae in Norwegian, Dutch and Russian long-term contracts.

Gas traders are also believed to be cautious about the delicate supply and demand balance and a late start to winter. The consensus of longer-range meteo offices seems to embody a higher degree of uncertainly versus last year and generally they point to a colder than normal winter.   This, together with the blight in LNG imports into the UK, has supported the gas market. Short term prices meanwhile ticked up as Centrica confirmed delays to bringing its Rough platforms back on stream, the UK’s principal gas storage facility.

Gas withdrawals are  now  planned to resume during December although any further delays may coincide with extreme demand periods and cause prices to spike.  Additionally, the rampant price volatility on the electricity balancing and prompt markets has driven gas prices upwards. Consequently the forward market has bounced with the April 2017 contract ending the period over a fifth higher. The market will be vulnerable to further increases should we see any unscheduled interruptions to North Sea or trans-Continental supplies, although the supply side has been holding up fairly well over the past few weeks.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk.

PFor a PDF of this blog click here

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WHOLESALE ENERGY PRICES: SEPTEMBER 2016: PART II: ELECTRICITY

In this new series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Electricity

The delay in Hinkley Point was expected as suggested in the July issue. However, this is not necessarily the last word on the project or a new plant in Somerset. Notwithstanding the very high price subsidies involved and the Faustian dilemma over China’s involvement which the new cabinet has inherited, a future fleet of nuclear plants remains on the cards, but none early enough to address the immediate supply concerns.

If China is denied the chance to build a Thorium reactor at Bradwell, they may see no incentive to invest money in any ‘limited profit’ venture at Hinkley. If so, development of this EPR project could cease or be delayed further. Regardless of how this saga pans out, no new-build reactors are likely to come online for another ten years.

Meanwhile, solar and onshore wind developments are being delayed by new 3 year moratoriums introduced by distribution network operators in charge of lower-voltage, sub-132kV regional grids.

With no reprieve in sight for coal-fired generation, much of the base-load and almost base-load the system needs will have to come for gas. Consequently, we may yet see a 4th ‘dash for gas’ evolving in years ahead, certainly in respect of rapid-response and balancing volumes.

The shortage in peak shaving capacity is partly reflected in rising grey market and prospective Grid auction prices for frequently response or reactive power volumes, reported in excess of £40/kW. Calendar base load did soften 8% over the period. But this price fall probably belies potentially shortfalls in short term volumes, which renders the prices vulnerable to greater shocks than before. It is this that will concern industrials and contingency buyers as we move into winter.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk. 

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WHOLESALE ENERGY PRICES: SEPTEMBER 2016: PART I: OIL AND NATURAL GAS

In this series of articles, Dominic Whittome covers recent changes to wholesale energy prices.

Oil

Crude drifted down, declining just over 10%. However, some traders are beginning to talk of a possible price accord between Russia and OPEC. With the market fairly tightly balanced anyway, we could see oil prices climbing back over $50/bl as we move into autumn and OPEC’s next meeting in Vienna approaches on 30th November. Amid ‘the end of oil’ stories abound and rumours of Chinese refiners dumping strategic stockpiles onto the spot market, the actual fundamentals have been fairly stable and on the supply side they may have firmed slightly.

Non-OPEC supplies will anyway require prices sustained over $70/bl to maintain output even at current levels, although the firming US dollar over the past six months will assist producers. But the cost of most of the replacement oil production remains at or well above current prices.  Even if expectations of an OPEC accord later this year are dashed, it is still doubtful we will see a return, certainly any sustained one, to the sub $30, sub $40 even, prices witnessed earlier this year. Although the world economy remains fragile, the market will be sensitive to signs of stabilisation or any pick-up in global industrial demand: a prospect that is believed to have been behind the recent rally in metals and hard commodities over the past few weeks.

Natural Gas

Warm weather and abundant supplies saw natural gas following the crude prices market down, closing the period 8% lower.

LNG deliveries into UK terminals were reported steady whilst the apparent worsening of Russia-Ukraine relations had no adverse impact on through-deliveries to the European buyers. However, like the power market, the outlook for gas modulation and peak volumes is much less settled than any calm that the forward markets may suggest. The UK does have a shortage of gas storage whilst Centrica’s Rough gas storage facility in the southern gas basin remains offline. With the earliest date for resumption of supply next March, the market will be more vulnerable this winter than the last to any run on short term volumes in the event of any European cold snap. Further out on the curve, ‘the tail’ of low oil prices earlier this year built will be moved out of price indexation formulae soon. Although the majority of Europe’s gas by volume is no longer indexed to either oil or petroleum products, many of the larger long-term contracts with swing and take-or-pay flexibility still are. Therefore the price-effect of the crude market cannot be discounted yet. Higher oil prices if we see them this winter will still have an effect on the gas market, where short-term balances will be less able to self-correct than last winter.

Prospect Law and Prospect Advisory provide legal and business consultancy services for clients involved in the infrastructure, energy and financial sectors.

This article remains the copyright property of Prospect Law and Prospect Advisory and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

Prices quoted are indicative and may be based on approximate or readjusted prices, indices or mean levels discussed in the market. No warranty is given to the accuracy of any view, statement or price information made here which readers must verify.

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and various private entities on a range of energy origination, strategy and trading issues.

For more information please contact us on 020 3427 5955 or by email on: info@prospectadvisory.co.uk

For a PDF of this blog click here