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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2020

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

Crude Oil

Oil fell 15% over the last two months to just over $50/bl. The Forward Market for crude generally has lost a third of its value since the end of last summer. Today there is little doubt that markets are still spooked by the indeterminate spread of Covid-19 and the prospect of a sustained shutdown which may cut medium-term consumption of petroleum products worldwide. Whilst a demand downturn is already very apparent in South East Asia at least, the longer term demand prospects are much less clear. On the supply side, the signals would otherwise be quite bullish for oil prices. Lost in the fog of recent coronavirus events, exports from major OPEC producers have faltered. The region’s security of supply situation looks set to remain fragile amid worsening civil turmoil and increased terrorist activity in several key oil exporting countries. Such unrest is thwarting desperately-needed export infrastructure redevelopment in OPEC states such as Iraq and is actually impending exports of oil itself in others; the total volume exported out of Libya during this January was zero for example.

With the world’s population set to grow 2 billion between now and 2035, much of it within the North African and Middle Eastern region itself (the population of Egypt alone surpassed 100 million in February) and with more of OPEC’s oil output set to be consumed internally, it might be a mistake to bank on oil prices re-establishing themselves at the current $50/bl for long in spite of ‘carbon neutral’ efforts said to be made in some western economies.

Natural Gas

The Forward Year gas contract has now fallen some 40% since 1st January. Wholesale prices fell across the global market, hit by surplus LNG cargoes (unwanted by Asian buyers). Also European gas inventories are reported to remain stubbornly high just as we head into spring. Gas prices are actually now, in real terms, than they were after the UK gas market was liberalised in the early 1990s (under the infamous 90/10 Rule’ which obliged British Gas to sell 10% of its pre-contracted North Sea gas to establish the spot market we have today and below the Heren Index price in real terms, the bell-weather index as first reported in 1995.

However, there is no actual ‘security of supply’ concern in relation to gas. This commodity has an established and robust export network bringing long-term contract and spot supplies to Europe through well-maintained North Sea, Dutch, Russian, Algerian and LNG infrastructure routes. From a reserves perspective too, the gas supply outlook seems stable enough, with well over 250 years worth of forward supply cover, according to the reserves to production ratio published in the most recent BP 2019 Statistical Review. That said, unlike the case of oil whose reserves are held by various states and multi-nationals, over 75% of the world’s reserves of gas remain in the hands of two corporations: Gazprom Neft of Russia and NIOC of Iran. So looking long term, it will be important to consider both commodities through geo-political frames.  

Electricity

Base-load power prices continued sliding and the April Year 2020 contract fell another 25% to close at roughly £45/MWh. In real terms, power prices are only marginally higher now than they were in 1999 when the New Electricity Trading Arrangements (NETA) came into play. Most recently, the electricity price almost halved since the end-of-summer peak recorded on 1st October, 2019. But there has been no actual ‘step change’ in the UK supply or demand outlooks since then. There has been no positive news in respect of new-build gas or nuclear power stations. Both of which the UK must rely on, with all coal units now to come offline by 2023, one year sooner than originally planned. Sobering perhaps to recall in 1990 UK coal accounted for 71% of national power generation, compared with 2½% today. Question marks still remain over any commissioning date for the European Pressurised-water Reactor (EPR 1 design) at 3,200 MW Hinkley Point being built by investors EDF (56%), British Gas’s owner, Centrica (14%) and CNG of China (30%). No EPR1 has actually finished construction; the other two, in Finland and in France, have also been hit by delays. Hinkley’s investors secured a contract-for-difference (CFD) strike price (the CFD to be added to consumer bills) of circa £125/MWh in today’s money (under indexation terms for the headline £92.50/MWh Strike Price agreed in 2012). If we assume this new nuclear plant is commissioned and operates at 90% load, we can roughly predict the subsidy that will be added to domestic & business electricity bills over the 30 year CFD contract term. So the subsidy to be added to bills alone should amount to 0.9 x 3,200 MW x (£125 – £45) MWh x 24 x 365 x 30 = £60 billion circa in today’s money. This does imply rising power costs soon; also in the future considering the equivalent of 13 such-sized power stations will be needed to meet the UK’s expected 42 GW demand call by 2050. This one 3.2 GW nuclear plant will barely meet 7% of that quotient.

In January, the same consortium bar Centrica asked the government to underwrite a second, same design EPR1 reactor Sizewell under an alternative RAB model (regulated asset base) to entail direct Treasury support, though no decision has been made yet. Whilst the lead-time, capital risk and construction costs are far less for equivalent sized thermal power stations, the outlook for gas-fired plants has, if anything, deteriorated recently with reports of even the very smallest (sub 5MW) gas flexing units encountering local or (visiting) opposition from eco groups and no government lead as to the role that new build gas-fired stations should play. Looking forward therefore the UK power market currently looks stuck between a rock and a hard place. As pointed out in past editions of Energy Highlights, interconnectors and renewables will not come close to reliably meeting this 42 GW demand call in front of us. So in spite of regulator Ofgem’s current Targeted Charging Review, which will reduce ability of end users to reduce Capacity charges through triad avoidance, Demand Side Response should still have a role to play in helping businesses to cut costs, be it on-site generation, battery storage, heat recovery and energy conservation, as well as load-shifting itself. These options along with energy purchasing strategies could each help to mitigate contract price-rises ahead, especially if we see any snap-back in commodity prices as well. For the time being however, prices across the board look like staying subdued by Corona-virus related uncertainties.   

About the Author

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.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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WHOLESALE ENERGY PRICES: JULY – SEPTEMBER 2019

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

Crude Oil

Brent prices soared in the aftermath of recent attacks on Saudi oil facilities. Spot prices saw their biggest one day increase since the start of the first Gulf War in 1991, only to give up all gains inside three days and close the quarter down 5% just below $60/bbl.

In such times, one might expect to see a higher risk-premium factored in prices, along the curve. However, this has not been the case. Indeed, the speed of the price reversal may reflect the market’s main pre-occupation, the global economic outlook, or equally a continuing shift towards ‘short-termism’, perhaps as a consequence of AI/robot trading and the exit of ‘liquidity providers’ issues discussed in the last issue.

Meanwhile, the Saudi oil ministry has warned that further attacks that do succeed in halting production significantly would lead to “$300/bbl oil”. That figure may look headlining grabbing, although the statement is perfectly serious.

Saudi Arabia may hold 18% of global oil reserves and provide just 12% in terms of consumption. However, its seven producing fields still make up circa 75% of the world’s marginal supply. No other producer can make the numbers stack up. In fact, the world’s reliance on this swing producer has not changed significantly, despite the emergence of shale and frontier oil production outside the Middle East, typically with much higher development costs. With no early rest-bite to troubles in the Persian Gulf in prospect, the oil market looks set to stay jumpy for the time being at least. 

Natural Gas

The gas market held firm, falling back just one per cent over the last quarter. The Forward Market took in its stride news of the accelerated retirement of Groningen in the Netherlands, by far Europe’s largest producing gas-field, as well as concerns that Russian exports will be cut amid the spat with Poland in the European Courts of Justice.

This ruled that exports through the OPAL pipeline must be halved, just as winter 2019/20 sets in. On the demand front, various meteo-office reports suggest that this winter could be a severe one for the UK and across Europe. Gas storage and heating oil inventories on the Continent are reported to be very high at the moment and this will explain the market’s reaction. However, April Year 2020 gas prices could rise significantly above the 50 p/th mark once again if demand goes on to exceed expectations.

On the home front, it was confirmed that all remaining UK coal units will shut permanently by 2024. Theoretically, any shortfall here could be offset by gas-fired generators. There are several stalled projects in the pipeline. However, even if (and a big ‘if’ at that) a government policy shift were to see a limited renaissance in gas-fired generation, the timelines suggest that the power market could still come under stress, long before any gas cavalry arrives on the scene. The generation market looks unlikely to be the engine for any step increase in future gas prices therefore. However, the Forward Market could still creep higher for a variety of other supply questions over trans- European supplies and North Sea infrastructure.   

Carbon prices, meanwhile, were fairly resilient, with the traded EUA contract heading back towards €25/tCO2. The nominal Spark Spread finished more or less unchanged at £17.50/MWh. This nominal profit margin may look promising. However, the spark spread reduces sharply once eco taxes, levies and limits are factored in.   

Electricity

Forward base-load prices finished the quarter almost unchanged. However, the Prompt Market was jolted higher by concerns over output at five principal nuclear units in France. These were temporarily but very suddenly closed under orders of the National Safety Authority. No other EU countries have meaningful nuclear development plans of their own and many will remain reliant on French nuclear exports to balance their systems.

However, France’s reactors are clearly showing their age now. Significantly, they are almost all of identical design and they were built fairly quickly after one another; part of a hitherto successful national security of supply programme initiated by President Giscard d’Estaing in the aftermath of the 1973/74 oil crisis and continued by President Mitterand. But the worry now is of safely or other technical shortcomings found in group of reactors which will manifest themselves at other plants before long. There is no obvious ‘Plan B’ if enough reactors do have to shut early because renewables alone will not make up the numbers. 

Meanwhile, design and construction problems are dogging the introduction of the next-generation European Pressurised Reactor (EPR). Just three EPRs are being built at the moment. All have experienced delays. Hinkley Point C being the latest to mark-up construction costs last month. This plant may now be delayed further although this is not confirmed officially.

With all nuclear plants bar Sellafield due to close during the next decade, the UK’s cushion of reliable peak-shaving capacity in the system might look precarious to some people. Wind power developments will continue and we saw some ‘record low’ strike prices in the last offshore auction, below £70/MWh in some cases. However, in volume terms the numbers are still small. The time horizons are also long and in other cases the final supply prices are somewhat higher than headline figures may suggest. Interconnectors with Iceland, Scandinavia and Continental Europe (albeit French nuclear or coal generation) may preclude part of any future ‘imbalance’ but possibly not all of this.

The ‘Climate Change Emergency’ environment may well be making it difficult for governments to sanction a general relaxation for gas-fired plant development. This may be needed to avoid repeats of the late summer incident when blackouts occurred after just one renewable project at Hornsea and a comparatively small, 650 MW gas station at Little Barford tripped at the same time, resulting in an intra-day price surge to £375/MWh at one point. The may or may no be an omen for the decade ahead of us. But in balance, the power market should still brace itself for bumpy times ahead.

About the Author

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. 

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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DIGEST OF UK ENERGY STATISTICS: LOW-CARBON SOURCES OF ENERGY

The new edition of the Digest of UK Energy Statistics (DUKES) for 2019, published by the Department for Business, Energy and Industrial Strategy (BEIS) on 25 July 2019 showed that in 2018, and despite outages, nuclear retained its place as the largest source of low-carbon electricity. This continued the trend from 2017, when it contributed 20.8% of all electricity generated, and low-carbon sources of electricity generated 50.1% of all power in the UK.

This is consistent with the findings reported in the Energy Trends: March 2019 Special Feature Article, which stated that in 2018 nuclear accounted for 18.7% of total electricity supplied to the grid, with fossil fuels supplying 47.7% and renewables 33.6%. The authors of this special report noted that the UK’s energy mix has changed completely since 1995, when nuclear contributed 25.3% and fossil fuels 72.5%.

The reports constitute recognition of the continuing need for, and contribution from, nuclear energy as a low-carbon ‘always available’ fuel and a vital part of the energy mix, essential to the UK’s commitment to net zero carbon emissions by 2050.

However, they also note that seven of the eight existing nuclear plants are due to be retired by 2030, and that despite the plans for plants at Sizewell and Bradwell, only the new reactors at Hinkley Point C are presently under construction. More needs to be done to reduce the costs of both construction and decommissioning. It is therefore significant that BEIS launched a new consultation on 23 July 2019 on a Regulated Asset Base model for nuclear financing.

About the Author

William Wilson is a specialist environmental, regulatory and nuclear lawyer with over 25 years experience in government, private practice and consultancy. He worked as a senior lawyer at the UK Department of the Environment/DETR/Defra, and helped to build up the environmental and nuclear practices at another major law firm. William has experience of all aspects of environmental law, including water, waste, air quality and industrial emissions, REACH and chemicals regulation, environmental protection, environmental permitting, litigation, legislative drafting, managing primary legislation, negotiating EU Directives and drafting secondary legislation.

Prospect Group is an award winning Multi-Disciplinary Practice combining the legal services of Prospect Law with the consultancy services of Prospect Advisory. Our lawyers and technical experts provide a single point of reference for clients involved in energy, infrastructure and other development projects.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: MARCH – JUNE 2019

Crude Oil

Having eclipsed the $70/bbl mark at one stage, the Brent contract fell back to finish the second quarter 8% down, as fears of an US-Iran war eased for at least for the time being. Nevertheless, the Persian Gulf remains a tinderbox, one which could cause crude oil prices, and petroleum product prices in particular, to snap upwards at some point. If recent history can tell us anything, perhaps it is that military campaigns in the Middle East can last longer and have far further-reaching consequences than initially imagined. So this latest stand-off with OPEC’s second highest oil producer in terms of proven reserves, could equally affect the forward markets for gas and electricity, not just prompt prices.

Natural Gas

In this context, Gazprom of Russia and NIOC (National Iranian Oil Company) together hold some 80% of global gas reserves which are economically-recoverable at current prices. Although no Iranian gas to speak of is exported to Europe in significant volumes, certainly not yet, conflict with the US could have all sorts of impacts across energy commodities markets.   

Leaving geo-political issues to one side, it may be worth looking at the supply & demand fundamentals. In particular, consensus industry estimates of the break-even (long-term marginal cost (LRMC)) of bringing new gas supplies to the European border over the next decade, as existing 25 year gas and LNG contracts (many signed in the late 1990s) expire.

One of many expressions bandied in trading circles is the one that “the market is well supplied”. By itself, this statement is perfectly true. The day-ahead market always clears after all. But it is not so much prompt market availability which affects wholesale or industrial gas prices. It is the ‘break-even cost’ (LMRC) of mobilising new gas supplies and bringing them to market.

The consensus industry estimates now put the LRMC for new gas supplies, those destined for North West Europe over 2020-2030, at between $8.00/MMBTU (for West African, Siberian and low-case North American shale) and $10.00/MMBTU (including Frontier LNG and high-case North American shale). Even were we to assume the lower-case eight dollar MMBTU figure and assume gas is delivered at or close to the break-even price (so no risk-premium and low supply margin), then at current exchange rates the UK wholesale gas price could still rise past 70 p/th, i.e. a third higher than today with the Annual Contract just closing the second quarter up 6% at 49 p/th.

So, notwithstanding Climate Change Emergencies and Zero Net Carbon 2050 targets set in Westminster, no demand side reduction or perceived ‘abundance’ will altar what the financials are suggesting: that gas prices may not fall far from here and even if they do it will not be for very long. No major producer will export at a loss. So, if our ‘cost plus’ valuation is accepted, then gas prices could start to rise as more legacy long-term contracts expire, replaced by higher-cost/ LMRC supplies.

For all its merits, renewable electricity does not offer reliable base-load supply. And it actually increases relative demand for peak-load generation. Given that all 14 operating reactors in the UK bar two at Sizewell will be decommissioned over the next ten years, today’s ca. 80 TWh demand call from gas-fired power stations looks very unlikely to fall. Indeed the share of gas in the UK’s generation mix may need to rise at some point. The combined domestic heating & industrial quotient for gas is much higher, at circa 250 TWh and there are measures to phase out use of gas in homes past 2025. However, this demand tail-off will be gradual. As the economics stand (and are unlikely to change) an impending deficit in flexible/peak-load electricity looks very plausible. Perhaps it can only be properly addressed by new forms of fossil generation, be it domestic gas-fired generation or brown- coal generation, imported from Poland or Germany through interconnectors. Either way, the consensus LMRC figures suggest in future, Forward Market gas prices will be higher.

Electricity

Base-load power prices followed natural gas, rising 5% over this last period April to July.  There was also the announcement that, for the first time in the UK’s industrial history, ‘clean electricity’ had exceeded fossil generation.

Amid the fanfare, it needs repeating that the Whitehall’s definition of clean electricity includes nuclear power. And while last month may have been a trailblazing one for renewables, the tail end of June saw day-ahead power prices spiking up to £375/MWh or 38 p/kWh. This was partly attributable to cloudy skies and low-wind speeds which severely cut renewable generation. More ominous perhaps (since such imports are being relied on more to fill any supply gap) was the wanting performance of Nordic and Northern Europe inter-connectors. The general reliability of such cables was discussed in recent editions of EH. In the event, it was domestic gas-fired generation that the system ultimately had to fall back upon on, come the day itself Monday 24th June.

This tale relates as much to nuclear power as it does to gas. The mainstream political parties remain opposed to any new-build gas programme and with no new-build nuclear reactors bar Hinckley on the horizon, the UK power market does appear to have a forward supply & demand picture that doesn’t stack up – or certainly the consensus in the Energy Highlight bunker just now. What this could mean is two fold. First, perhaps we should brace ourselves or hope for some change in government policy. Even it no change is announced any time soon and this can has been kicked many times before. Inter-connectors alone, even if/when the power supply is firm, will not compensate for GW output lost by retiring UK reactors. Second, it we assume there is no government money left for significant new subsidies and limited stomach either for new levies on households, then our energy authorities may well feel inclined to sit back, watch the market mechanism do its work and see wholesale power prices rise and so quell the energy demand to help the UK reach the new and somewhat fiercer ‘Zero Net Carbon’ emissions target announced last month.

Looking short term, power prices could rise if French, Benelux or German reactors shut due to lack of cooling water from reservoirs amid the European heat-wave. On the downside, renewables output is currently strong and across energy markets generally there are concerns over the global economy which may dampen both gas and electricity demand.

About the Author

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. 

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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NET ZERO: THE UK’S CONTRIBUTION TO STOPPING GLOBAL WARMING

The UK Committee on Climate Change ‘CCC’, established by the Climate Change Act 2008, has been recommending 5 yearly carbon budgets and seeing them enacted as law by the constituent Parliaments of the UK for 10 years.

In May 2019 the CCC, reflecting on the latest science from the Intergovernmental Panel on Climate Change, and perhaps sensing a shift in the tectonic plates of public opinion on climate change, produced a new report for the Parliaments of the UK, Wales and Scotland – ‘Net Zero – the UK’s contribution to stopping global warming.’

The CCC has now proposed that the UK can end its contribution to global warming within 30 years, by setting an ambitious new target to reduce greenhouse gas emissions to zero by 2050. It proposes that Scotland could reach net zero emissions by 2045, with Wales achieving 95% reductions by 2050.

Introducing the new recommendations, the CCC said –

“The CCC’s recommended targets, which cover all sectors of the UK, Scottish and Welsh economies, are achievable with known technologies, alongside improvements in peoples’ lives, and should be put into law as soon as possible.”

This target, and the political will to meet it, will create major and immediate challenges, whilst also opening up major new opportunities, across many sectors including –

  • The automotive sector
  • Construction
  • Manufacturing industry
  • Carbon Capture and Storage technology
  • Low carbon hydrogen
  • The waste industry
  • Aviation
  • Shipping
  • Farming
  • Low carbon power
  • Banking, finance and insurance

In fact, of course, as the CCC has said, this will affect all sectors of the economy. In an article for the Guardian in April 2019, Mark Carney, Governor of the Bank of England, Francois Villeroy de Galhau, Governor of the Banque de France, and Frank Elderson, Chair of the Network for Greening the Financial System, wrote that –

“The catastrophic effects of climate change are already visible around the world. From blistering heatwaves in North Africa to typhoons in south-east Asia and droughts in Africa and Australia, no country or community is immune…

Carbon emissions have to decline by 45% from 2010 levels over the next decade in order the reach net zero by 2050. That requires a massive reallocation of capital. If some companies and industries fail to adjust to this new world, they will fail to exist.”

Major changes in environmental and other laws and regulations will be needed at the UK level and in each of the devolved Parliaments, and we expect to be involved in advising some of the many businesses and industries affected by the changes.

About the Author

William Wilson is a specialist environmental, regulatory and nuclear lawyer with over 25 years experience in government, private practice and consultancy. He worked as a senior lawyer at the UK Department of the Environment/DETR/Defra, and helped to build up the environmental and nuclear practices at another major law firm. William has experience of all aspects of environmental law, including water, waste, air quality and industrial emissions, REACH and chemicals regulation, environmental protection, environmental permitting, litigation, legislative drafting, managing primary legislation, negotiating EU Directives and drafting secondary legislation.

Prospect Group is an award winning Multi-Disciplinary Practice combining the legal services of Prospect Law with the consultancy services of Prospect Advisory. Our lawyers and technical experts provide a single point of reference for clients involved in energy, infrastructure and other development projects.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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WHOLESALE ENERGY PRICES: JANUARY – FEBRUARY 2019

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

Crude Oil

Dated Brent has risen some 25% in two months, in a crude market rattled by deepening geo-political tensions worldwide and continuing worries about medium-term supply from embargoed Venezuela. There are also concerns over Iran, which is subject to US sanctions, whilst there are threats of upheaval in Nigeria and Sudan.

New US sanctions and talk of military pressure to remove President Nicolás Maduro have contributed to oil production falling below 1 million barrels a day, down from circa 2.5 million barrels just four years ago.

Venezuela only recently overtook Saudi Arabia to become OPEC’s largest player in terms of proven reserves. A well publicised ‘re-newel of vows’ or closer military accord with Russia will only have stoked tensions further. While global petroleum prices have had a good run, they have potentially further to go, especially if we see investor flight into hard commodities. Dated Brent remains well below its most recent $85/bl peak in October last year.

Natural Gas

Short-term market changes and the geo-political situation may have caused a breakdown of gas price correlation to oil, with Forward Year prices down by eight per cent. Seasonal gas demand slipped back last month and the market has been well supplied to date.

Gas prices followed electricity down, for here the price convergence between these two commodities increased over the last year. On 1st Jan, 2018 forward gas prices stood at 46.60 p per therm, with electricity trading at £44.85/MWh versus 54.47 p and £56.18 today. One factor at play here is the carbon market. The second half of 2018 saw struggling nuclear output and renewable electricity both fuelling demand for fossil generation. This was chiefly offset by rising gas and coal-fired plant. Indeed fairly extensive new-build coal programmes are already underway in Poland and Germany.

In the short-term, elevating coal-fired plant further up the generation stack has served to increase demand for carbon permits. This contributed to soaring carbon prices on the EU Emissions Trading Scheme. In 2018, the prices of traded EUAs soared by over 400% at one point, from circa € 7.50/ tonne CO2 in January 2018 to current trading levels closer to €20. The carbon factor has increased the running cost of gas-fired plants in the UK, paradoxically undermining the economics of new-build plants which the country may need to maintain supply cover ahead, a point we can look at now.

Electricity

In January, Hitachi cancelled its planned 2,900 MW nuclear power station project destined for Wylfra in Wales from 2027, hot off the heels of Toshiba’s own aborted 3,400 MW project in Cumbria.

Given the very price swap/Contract-For-Difference subsidies involved, it is perhaps tempting to think that the termination or suspension of any more nuclear plants will alleviate the pressure on future prices. However, the reality is probably much more sobering, because the non-fossil alternatives may well prove equally or more expensive, certainly in the electricity volumes which may needed.

The Forward Market may well be even more reliant on potentially expensive imports via interconnectors. These entail an additional security of supply risk. Although the UK has a healthy-looking pipeline of new interconnector projects, the existence of new cables is no guarantee of supply.

The cross-Channel interconnectors, new 1 GW and 2 GW wires from Holland, Belgium, Denmark and the six espected from France may each be subject to competition from Continental buyers when it comes to peak demand days. Although Norwegian and Icelandic exports may be dedicated to the UK mainland, the technical issues will remain here too, with volumes being exported over longer distances and at very high voltages to minimise transmission losses. Sub-sea networks generally involve sophisticated equipment which can fail, even with state of the art technology. Hence, this is simply a new element of risk which the UK market may have to grapple with, together with competition for supply.

Taking a far-forward look at commercial power prices, it is worth considering the demand effects of government legislation. These became more apparent last month, with Whitehall confirming measures to phase out all domestic gas use, starting with new-build homes after 2024, on top of government targets set for electric vehicles. The numbers are still being crunched as we speak. However, our initial calculations suggest that to meet current Whitehall targets for domestic gas reduction and electric vehicle uptake by 2030, new supply volumes of 40 TWh/y and 160 TWh/y will be required, which could increase existing national demand to 520 TWh/y compared its 320 TWh/y level today.

In fact, any demand figure above 500 Terra Watt hours would look challenging given the current grid and generation constraints ahead. With all of the UK’s existing nuclear power stations bar Sizewell due to be retired well before then, it will be interesting to see how the government, grid companies and generators may work together to square this circle, without some shift in energy policy or without causing some consternation in the Forward Markets.

About the Author

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. 

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way. 

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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THE ENERGY STORAGE QUESTION: SPINNING FLYWHEELS, PUMPED HYDRO AND COMPRESSED AIR

Introduction:

E-ON recently completed a 10MW lithium iron battery, designed to hold roughly the same amount of power as 100 family cars, at the 30MW Blackburn Meadows biomass plant near Sheffield. (https://www.eonenergy.com/about-eon/media-centre/eon-completes-uk-first-battery-installation-at-blackburn-meadows-biomass-power-plant/).

The unit has been hailed as a breakthrough in the switch towards greener energy and the development of energy storage solutions capable of holding energy generated by wind farms and gas power stations, for release in times of excess demand.

The Issue of Energy Storage:

The National Grid is tasked with producing enough energy to meet supply. Excess energy from one source, such as solar, will prompt the grid’s operators to switch off another.

Currently, renewable energy can only make intermittent contributions to the grid’s output. As the sun does not shine 24/7 and some days are windier than others, the renewables sector eagerly awaits technology capable of storing energy.

There have been numerous suggestions as to how the energy storage conundrum may be solved.

Spinning Flywheels:

Through storage of kinetic energy, a flywheel operates like a mechanical battery, with some designs now able to spin at rates of up to 60,000 revolutions per minute. Although early models were generally very heavy, modern carbon fibre flywheels have the ability to contain twenty times more energy then a steel wheel (http://www.economist.com/node/21540386).

A spinning flywheel will speed up when it receives electrical energy, and slow when there is a need to release the energy that it stores, at which point the kinetic energy will be transferred back into electrical energy.

Flywheels are an efficient method of storing energy. Round Trip Efficiency is generally 85% – 90%, meaning a spinning flywheel only wastes a seventh of the energy it absorbs. In comparison, coal and gas generators are half as efficient.

Compressed Air:

Compressed Air Energy Storage is currently the second biggest method of energy storage, and works by transferring electrical energy into high pressure compressed air that is stored underground

In times of short supply, the compressed air will be heated and expanded to drive a turbine generator.

Currently there are two CAES plants in operation; one in Huntorf, Germany, and another in McIntosh, Alabama (http://www.powersouth.com/mcintosh_power_plant/compressed_air_energy).

Aquifers and porous rock are generally the ideal sites for CAES systems. Underground salt domes, which have long since been used to store natural gas, have also been used in the past, and are generally found at coastal sites where the potential to generate a lot of wind energy is high.

Geographically, there is thought to be good potential for CAES systems across Europe, including in Great Britain.

Pumped Hydro:

Pumped Hydroelectric Storage requires an upper and lower reservoir, and works by using excess energy to pump water to the higher reservoir, for storage as gravitational potential energy.

In times of short supply the water will be allowed to flow down to the lower point through a turbine and generator, transferring back to kinetic and then electrical energy in the process.

Whilst PHS schemes have been considered the best mass energy storage solution, they can only be installed at very specific terrains. The largest PHS scheme is currently near Dinorwig in Snowdonia National Park, one of four across the UK, and has become something of a tourist attraction (http://www.electricmountain.co.uk/Dinorwig-Power-Station).

It is thought that the hydroelectric facilities across Europe are now able to hold roughly 5% of the continent’s electrical generating capacity.

Conclusion:

Renewables provided nearly 30% of UK Energy Generation between April and June 2017, and it is thought that the UK will need to be able to store around 200GWh of electricity by 2020.

E-ON’s unit at Blackburn Meadows, designed to offer the grid energy in less then a second, comes as National Grid recently released a tender with a view to helping it manage supply and demand.

There is clearly as yet no clear answer to the energy storage question, but battery storage appears to have become very topical.

Other energy firms are developing similar projects to the one at Blackburn Meadows. EDF Energy is developing a 49MW plant at West Burton Power Station, Nottinghamshire, whilst Centrica are developing a project of the same size at a site in Barrow-on-Furness, Cumbria (https://www.centrica.com/news/centrica-start-construction-new-battery-storage-facility-roosecote).

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

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.

For more information please contact Adam Mikula on 020 7947 5354 or by email on: adm@prospectlaw.co.uk.

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THE IMPACT OF BREXIT ON THE UK NUCLEAR AND RENEWABLE ENERGY SECTORS

Brexit has become reality. No member of the EU has ever decided to leave, so the process of withdrawal is untested, although the vote for Brexit is only the start – not the end – of a process which may or may not, result in complete withdrawal. The position of the UK at the end of this process is as yet unclear.

It is important to understand that until the process of withdrawal is complete the UK continues to be a full member of the EU and remains subject to EU law.

The Main Question: Trading Relations and the Single Market
The main questions to be resolved between the UK and the EU will relate to trading relations. The extent to which applicable law will be capable of change depends on whether the UK wishes to enter the European Economic Area, with continuing reciprocal market access. This question was not a matter for the referendum and will be decided by Parliament following negotiations with the continuing states. The degree to which EU laws and regulations will need to be unpicked depends on those negotiations.

It is the trading relationship between member states and the UK as a non member state that will determine the extent to which the UK is required to maintain current EU legislation.

It is too early to have any view as to the likely relationship that the UK will have with the EU and, while it is possible to draw parallels between the EU’s current arrangements with states outside the EU, none of these can be said to offer a precedent. No indication has been forthcoming from the EU as to what terms may be on offer, and indeed there will, inevitably, be differing views between members states each of which hold a veto.

Fundamentally, if open access to the EU market is to be maintained through membership of the EEA / EFTA, the UK will have to agree to the free movement of goods, services and, in theory at least, labour – a compromise which, if carried through to reality, would seem to perpetuate the primary concerns of those who have recently voted to leave the EU.
Against this developing background we have sought to consider some of the issues likely to be relevant to those working in the nuclear and renewable energy sectors in the UK.

Nuclear Energy
The nuclear sector is most affected by safety and environmental law, which is governed by a number of layers. International treaties, conventions, EU directives, EU regulations, and laws established by the devolved administrations. Withdrawal from the EU will not mean automatic repeal of these various layers.

International treaties, such as the Paris and Brussels Conventions, and the domestic enabling legislation, the Nuclear Installations Act, are independent of EU legislation and will continue unchanged.

The Euratom treaty is also an independent legal treaty which, although entered into at the same time as the Treaty of Rome creating the EEC, remains independent from the subsequent Maastricht and Lisbon Treaties. The Euratom treaty is however, administered by the European Commission on which, following withdrawal, the UK will cease to have representation. The UK and the remainder of the EU will undoubtedly wish for the UK to remain subject to Euratom and therefore this is an area for future discussion.

EU directives are directly applicable in states and require domestic legislation to implement them, whereas EU regulations apply once in force. The domestic legislation implementing EU directives is made under specific legislation which can be repealed. There will have therefore, to be an evaluation exercise as to whether EU laws should be replaced by similar laws or repealed.

Renewable Energy
The UK commitment to the Kyoto protocol and the Climate Change Act 2008 is unlikely to be revoked and so, policies to encourage the generation of power through low carbon sources will continue.

It will be difficult for the UK to have substantially different policies to the remainder of Europe on global issues such as decarbonisation and cross border energy distribution if any trading relationship is to be maintained.

One area of concern is energy subsidy, where EU funding has provided an element of the financing for ROC and FIT. These will need to be covered by the UK government if continuity of projects currently under development is to be maintained.

Conclusion
At present, without further clarity being provided as to either the timetable for or the actual extent of the planned UK withdrawal from the EU, it is difficult to offer precision in relation to the effect of Brexit on these sectors. We are monitoring developments and will begin to prepare regular bulletins as to how clients should consider protecting themselves.

Introduction to Prospect Energy and Prospect Law
This article is not intended to constitute legal advice and Prospect Law and Prospect Energy accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

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.

For more information please contact Edmund Robb on 01332 818 785 or by email on: er@prospectlaw.co.uk

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SUBSIDIES UNDER ATTACK? APPARENT RISE IN SHORT TERM OFGEM AUDITS

Since the fundamental changes to the Feed-in Tariff that have been introduced over the last 6 months it would appear that OFGEM has now moved its focus onto existing members of the scheme. We have noticed a significant increase in the number of OFGEM audits in the last few months investigating generating stations with existing full accreditation under the scheme, in many cases to be carried out by consultants Black & Veatch.

These audits look to be comprehensive, and investigate all aspects of the generating station’s compliance with the underlying requirements of the FIT scheme, including the specifics of commissioning, the ‘site’ of the generating station, the metering arrangements and the information provided in support of the accreditation application.

We have seen such audits issued to a variety of technologies, including Solar PV, Onshore Wind, Anaerobic Digestion and Hydro and across a wide range of installation sizes, so it would appear that this round of audits is extensive.

The audit letters request the provision of detailed information and documents prior to the date of the audit, and are often requested at short notice.  These requests may prove problematic for generating stations that have, since commissioning and accreditation, been sold on to long term investors who were not necessarily involved in the initial development and construction phase. We are working closely with our clients to assist in responding to these OFGEM audit requests.

Given the perceived assault on renewable energy schemes over the past few years there is a feeling in the industry that now that entry into the FIT scheme has been significantly reduced the Government is seeking further savings by looking for generating stations to remove from the scheme on technicalities, and this is causing a level of anxiety for some holding renewable generation assets. Where it was once the view that, having achieved full accreditation, an investment was safe, this feeling of long term security is currently under threat.

It is hoped by many that these audits are simply looking for obvious abusers of the scheme, however given the history of the renewables obligation and FIT schemes there is certainly a fear that this is an attempt to remove as many as possible from the scheme.  The underlying rationale for these audits will become apparent in time, however we would be surprised if at least a few of these audit outcomes did not end up before the courts.

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 is not intended to constitute legal advice and Prospect Law and Prospect Energy accepts no responsibility for loss or damage incurred as a result of reliance on its content. Specific legal advice should be taken in relation to any issues or concerns of readers which are raised by this article.

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.

For more information please contact Jonathan Green on 01332 818 785 or by email on: jng@prospectlaw.co.uk

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SAUDI ARABIA INVITES EXPRESSIONS OF INTEREST FOR DEVELOPMENT OF TWO 50MW PV FARMS

The state owned Saudi Arabian electricity company has announced two tenders for the development of PV farms, each one to be 50Mw.

Although the contracts are sizeable, the announcement marks a significant scaling back of the Kingdom’s original plan to develop 41,000 megawatts. Whereas early targets reached 50%, Renewable sources are now only expected to account for about 10% of the Kingdom’s total power capacity. However, even this represents a large development programme still thought to be 9,500Mw. The Kingdom is now expecting that an increased output of natural gas will help cut its reliance on crude oil.

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.

We have been involved in the development of both nuclear and renewable power in the Kingdom for many years and would be happy to discuss this tender with any party that is interested in bidding for it. For further information please contact Edward de la Billiere on edlb@prospectlaw.co.uk

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