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 mightexpect 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 reflectthe market’s main pre-occupation, the global economic outlook, or equally acontinuing shift towards ‘short-termism’, perhaps as a consequence of AI/robottrading and the exit of ‘liquidity providers’ issues discussed in the lastissue.

Meanwhile, the Saudi oilministry has warned that further attacks that do succeed in halting productionsignificantly would lead to “$300/bbl oil”. That figure may lookheadlining 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 marginalsupply. No other producer can make the numbers stack up. In fact, the world’sreliance on this swing producer has not changed significantly, despite theemergence of shale and frontier oil production outside the Middle East,typically with much higher development costs. With no early rest-bite to troublesin the Persian Gulf in prospect, the oil market looks set to stay jumpy for thetime being at least.

Natural Gas

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

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

On the home front, it wasconfirmed 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 ingas-fired generation, the timelines suggest that the power market could stillcome under stress, long before any gas cavalry arrives on the scene. Thegeneration market looks unlikely to be the engine for any step increase infuture gas prices therefore. However, the Forward Market could still creephigher for a variety of other supply questions over trans- European suppliesand 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 pricesfinished the quarter almost unchanged. However, the Prompt Market was joltedhigher by concerns over output at five principal nuclear units in France. Thesewere temporarily but very suddenly closed under orders of the National SafetyAuthority. No other EU countries have meaningful nuclear development plans oftheir own and many will remain reliant on French nuclear exports to balancetheir systems.

However, France’s reactorsare clearly showing their age now. Significantly, they are almost all of identicaldesign and they were built fairly quickly after one another; part of a hithertosuccessful national security of supply programme initiated by President Giscardd’Estaing in the aftermath of the 1973/74 oil crisis and continued by PresidentMitterand. But the worry now is of safely or other technical shortcomings foundin group of reactors which will manifest themselves at other plants beforelong. There is no obvious ‘Plan B’ if enough reactors do have to shut earlybecause renewables alone will not make up the numbers.

Meanwhile, design andconstruction problems are dogging the introduction of the next-generationEuropean Pressurised Reactor (EPR). Just three EPRs are being built at themoment. All have experienced delays. Hinkley Point C being the latest tomark-up construction costs last month. This plant may now be delayed furtheralthough this is not confirmed officially.

With all nuclear plantsbar Sellafield due to close during the next decade, the UK’s cushion ofreliable peak-shaving capacity in the system might look precarious to somepeople. 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 arealso long and in other cases the final supply prices are somewhat higher thanheadline figures may suggest. Interconnectors with Iceland, Scandinavia andContinental Europe (albeit French nuclear or coal generation) may preclude partof any future ‘imbalance’ but possibly not all of this.

The ‘Climate ChangeEmergency’ environment may well be making it difficult for governments tosanction a general relaxation for gas-fired plant development. This may beneeded to avoid repeats of the late summer incident when blackouts occurredafter just one renewable project at Hornsea and a comparatively small, 650 MWgas station at Little Barford tripped at the same time, resulting in anintra-day price surge to £375/MWh at one point. The may or may no be an omenfor the decade ahead of us. But in balance, the power market should still braceitself for bumpy times ahead.

About the Author

DominicWhittome 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 ofTrading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant,Dominic has also advised government clients (including the UK Treasury, MetOffice and Consumer Focus) and private entities on a range of energyorigination, strategy and trading issues.

ProspectLaw is a multi-disciplinary practice with specialist expertise in the energyand environmental sectors with particular experience in the low carbonenergy sector. The firm is made up of lawyers, engineers, surveyors and financeexperts.

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