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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