Even by commodity market standards, 2021 was certainly a tumultuous year for the over the counter (O.T.C.) gas and power markets. Their annual supply prices rose by 280% and 240% respectively with the ‘bell-weather’ April Year Electricity contract closing at a record high of £191/MWh. To put things into further perspective, wholesale electricity for industrial consumers is almost 20 times more expensive today than it was exactly 20 years ago.
Oil and Gas Prices
Gas prices were driven higher by the rising cost of petroleum products worldwide.
Oil prices increased by 55% and ended the year just over $80/bbl amid a sustained recovery in global demand.
Gas in particular was affected by supply constraints in various major producing regions including Russia, which has limited exports of gas and heightening tensions surrounding The Ukraine have stalled the start-up of the Nord Stream 2 export pipeline into Germany.
There are now reported to be unseasonably low gas storage inventories across Europe with many sites operating below 50% with the most difficult part of the winter to come.
Despite rising steadily last year, annual gas prices fell back significantly, down by a third in the final fortnight of 2021 from a record 270 p/th to 180 p/th by the New Year.
Electricity prices continued climbing as the market grabbled with materialising concerns over nuclear plant availability and panic buying by the same nuclear generators scrambling to cover their long term contractual arrangements, much of this volume at eye watering prices as things transpired.
The market has seen a succession of reactor closures, at Hunterston in Scotland this month and major sites across Germany, Benelux and France.
Looking back over the last 18 months, the electricity market stood out the most perhaps; its annual base-load contract rising fourfold in value. Having treaded water for most of 2020, trading within a deceptively tight range of £40/MWh to £60/MWh, forward prices broke out that October and they have exhibited a parabolic rise since. Only in the past 15 days or so have prices ticked back.
Gas prices might have further to fall, especially if Russian exports are forthcoming. But this doesn't look likely at the moment, and no political resolution over the Nord Stream 2 looks imminent.
New exports are always, technically, possible. Russia’s state press agency is reporting that Nord Stream 2 has attained the critical pressure required for gas deliveries to commence. However, the geo-political climate has actually worsened recently.
Prices of hard commodities (traditional safe havens at times of inflation or geo-political fears - and today we see both) have been climbing internationally. This has caught the UK power market in a pincer movement; sharply-tightening supply on one side and commodity speculators on the other and rising demand to boot. The timing couldn't be more awkward for utilities and electro-intensive users looking to buy before the April Year 2022 contract buying round draws to a close.
Depending on the hedging strategies, operators of gas-fired power plants should in theory be seeing dividends.
Spark spreads currently stand at their highest levels ever recorded. This implied profit margin has risen substantially and it recently eclipsed £65/MWh. However the soaring price of carbon credits will have muted most of the financial gains and may itself prove a further disincentive to invest.
Perhaps one consolation of charging power prices is that fact that the new Hinkley Point power station’s strike price (originally struck at £92.50/MWh now circa £130/MWh after CPI indexation) is below the current market price. Something that was perhaps unthinkable to many people just two years ago.
Meanwhile an identical reactor design to Hinkley at Olkiluoto in Finland is finally due to come online this month following years of delay.
EDF and China Nuclear General Corporation now see Hinkley coming online by 2025. But this timetable could slip and it is perceived optimistic in industry circles.
The early performance of the Olkiluoto reactor may yield a clue here. Either way, this new UK capacity when it comes will be principally base-load electricity, unable to offset sudden system imbalances attributable to wind or solar generation.
The extra 3.2 GW involved will make a comparatively small final contribution to UK electricity demand, which is set to exceed 42 GW come 2030 according to some high case predictions. Demand would be driven higher by a mass take-up of electric vehicles, the electrification of households and commerce and large-scale hydrogen production. It is not clear yet how the impending supply gap will be filled.
The period 2025 to 2030 will see all existing UK nuclear power stations (bar Sellafield) shut down for good, leaving two nuclear power stations behind and residual gas-fired units closing. Looking at the alternatives, the UK saw just half of percent (0.4% to be precise) added to aggregate renewable generating capacity over the course of 2021.
The forward supply picture is certainly not looking especially encouraging for consumers at the moment. As well as the problem of ageing nuclear reactors across Europe, it also previously highlighted the UK’s increasing reliance on inter-connectors and their unreliability. All these factors together are driving up the risk premium built into forward electricity prices.
In the absence of a policy change to prolong North Sea gas production or to extend the lifespan of the gas-fired fleet, the difficult price environment for UK consumers looks set to remain.
Looking further afield, one should not pin too much hope either on ‘quick-build’ or ‘modular’ nuclear power stations, certainly within the 2025 - 2030 timeframe.
Much has been written about the Moltex reactor. But no commercial molten-salt reactor design even exists yet. Likewise, the Rolls Royce and (more developed) GE Hitachi modular reactors sound promising. But again, no commercial sites exist, mini nukes are years away. Further, whilst the advantages of mini-reactors may prove overstated, the corporate, logistical and security risk problems associated with their roll out is probably understated.
A Closing Point on Hydrogen
Hydrogen is an energy carrier, best thought of perhaps as a large battery made out of gas. Hydrogen is not an electricity generation source. Indeed if hydrogen is to be green and mass-produced via electrolysis (which is highly electro-intensive) as opposed to steam methane reforming then its mass production may add to, not subtract from, the energy generation deficit. The hydrogen cycle will always be chemically inefficient. In terms of transport for example, the energy value losses are of the order of 60 to 70%. Hydrogen may yet have a useful role to play in terms of energy storage. However manufacturing hydrogen will not help to address the potential supply & demand imbalance, which is ultimately driving the power market we see in front of us.
** STOP PRESS - 20th January 2022
Annual O.T.C. gas and electricity continued to soften slightly.
The April Year contract for gas now trades fractionally above 160 p/th while base-load power now sells for circa £170/MWh.
But oil prices rose with Dated Brent inching past $90/bbl and the general state of alertness across all three markets remains high.