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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

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WHOLESALE ENERGY PRICES: MAY 2016 – JULY 2016: PART II: ELECTRICITY

In this series of articles, Dominic Whittome covers wholesale energy prices between May and July.

Firming prices for coal, the buoyant gas market and some concern over the timing of infrastructure projects after Brexit helped base-load power prices surge a further 15% over the period. The notional spark spread (undiscounted for carbon prices) increased 21% to £13.50/MWh.

Any future rises in base-load power prices may underplay the final PPA contract price rises for industrial users as the gap between base and peak load prices widens. Elexon’s maximum System Reserve Price is slated to increase to an unprecedented £5,000 MWh (£5/kWh) within two years. The main jump (to £3/kWh) was instigated last year. Although Cash Out prices will seldom reach such levels, forthwith Ofgem will allow such prices to happen. This shows how the balancing market will value peak-plant and storage-flex capacity in future. Further, the decision (made before the Brexit result) by National Grid to stick to half-hourly trading windows after all and not adopt a European-style 15 minute regime will, if anything, maintain the pressure on peak prices, with Elexon left to keep the system balanced over the existing, longer balancing period.

Brexit could conceivably affect the outcome of the proposed 3,200 MW reactor at Hinckley Point, whatever that may be, as this may depend on the new administration in Whitehall, given the political capital invested and still required by this project. Most of the focus has been on the £20bn + construction cost, underwritten by the taxpayer under a Treasury loan guarantee. There has been less focus on the Contract for Difference subsidy – a totally separate form of project support. This potential cost is underwritten by end users, reflected in their electricity bills.

Assuming a Forward Year Baseload price of £45/MWh and the CFD ‘s Strike price (£92.50 MWh at the time of signing +  accumulated price indexation to the present day) of £100/MWh i.e. both in today’s money, then the value of this subsidy can be calculated 3,200 MW x £55/MWh x 24 x 365 x 35 = £ 54 bn. This estimate is a speculative one. It will only fall if power prices increase rise relative to the inflation-indexation of the Strike Price.  This £54 billion figure represents the cost of the subsidy only. The electricity volume itself still has to be purchased by consumers in the normal way.

The estimate calculated should be close to the mark, provided our CFD contract assumptions are correct and Baseload power prices not rise substantial in real terms. It is worth noting that it is Peakload rather than Baseload generation which is generally recognised as the commodity that the system has in short supply. If new-build nuclear projects planned for Wylfa, Sellafield and Bradwell command similar subsidy terms, then combined support cost for all four new nuclear power plants could surpass £200 bn.  One effect of Brexit therefore could be to bring these financial considerations into the spotlight. Possibly rekindle the debate over the future of coal and gas generation, if the imminent Westminster government uses the Leave vote as a moment to revisit energy policy.                                         

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: MARCH 2016 – MAY 2016: PART II: ELECTRICITY

In this new series of articles, Dominic Whittome covers wholesale energy prices between March and May 2016, discussing issues such as fluctuations in the price of Brent crude, falling shale production and decreasing prices across Europe’s gas and electricity exchanges, as well as the possibility of these rising again in the future.  To read Part I, click here.

Baseload power prices, like gas prices, fell, by 5% to just under £35/MWh with the spark spreads unchanged. The carbon market was also soft, with the EU Allowance trading fractionally, if stubbornly, below €5/tCO2 as initial excitement after the Paris Convention gave way to falling prices across Europe’s gas and electricity exchanges and OTC platforms.

However, while there is no obvious shortage of baseload power or surplus (if sporadic) renewable projects, UK and European grids are facing potentially significant shortages of flexible, peaking electricity to keep their networks stable. It is this market which will be weighing on Industrial & Commercial market prices and electricity bills in the domestic sector too.

The prospect of extreme electricity balancing market prices (now uncapped up to £3,000/MWh) may feed back into gas prices, especially if gas becomes the dominant marginal price setter and CCGT/gas’s share of the generation mix rises further. In response to the network balancing & generation margin problem, the government has said it will amend the Capacity Market, changes which will hopefully be clarified very soon.

With gas and coal plants closing in recent months, even preferring to pay a release penalty to get out of stand-by generation contracts, it is clear that the sub-£20/GW capacity prices payable under the existing STOR program have not galvanised this new flexibility/storage supply ‘sector’ in the way policy makers had hoped. Perhaps the most probable outcome to the latest government consultation will be a series of short-term, piecemeal measures.

These changes are anticipated to include higher, longer-term payments for spinning reserve generation under the Capacity Market and possible regulatory incentives (e.g. grid access) and financial incentives (e.g. reduced transmission & distribution tariffs) for private wire interconnector, smart grid/micro-generation, large scale batteries and other storage/modulation projects which help local networks to keep their grids in balance.

Prospect Law and Prospect Energy provide a unique combination of legal and technical advisory services for clients involved in energy, infrastructure and natural resource projects in the UK and internationally.

This article remains the copyright property of Prospect Law and Prospect Energy 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 Energy.

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 01332 818 785 or by email on: info@prospectlaw.co.uk

For a PDF of this blog click here