THE CIU TEAM TAKE A LOOK AT THE CURRENT ENERGY MARKET CONDITIONS
Last week the UK experienced its first cold snap of this winter. In this month’s Energy Market Narrative, we reflect on how markets have reacted and what may be in store for UK businesses into 2023 and beyond.
Natural Gas Prices
In last month’s edition, we reported a gradual softening of wholesale gas prices across the preceding month, largely driven by temperatures remaining above seasonal norms throughout northern Europe. Since then, we have seen prices holding within the same range for several weeks, despite last week’s cold snap, until beginning to fall again from Friday 16th Dec. This latest fall is driven by temperatures forecast above seasonal norms to the end of the year, plus a strong schedule of 14 LNG cargoes expected to berth in the UK in the same period.
In further positive news for European markets, Germany is expected to commission their first floating LNG import terminal this week. Germany is Europe’s largest gas consumer and had previously been heavily reliant upon Russian imports. Completion of their first Floating Storage and Regasification Unit (FSRU) is being heralded by some as a landmark moment, and will enable import of sufficient LNG to supply an estimated 80k households. They expect to deliver a further three terminals before the end of 2023.
Closer to home, this week Tata Steel has committed to interrupting production intra-day at times of peak demand across this winter, removing some demand-side pressure on the system. And UK gas storage remains around a healthy 72% heading toward Christmas, with most of northern Europe above 85%.
The below graph tracks movement further down the curve and shows recent dips in winter-23/24 contracts, corresponding with the easing of concern over this winter:
Power Prices
Power prices have softened in the last week, broadly aligned to the movement reported above in gas markets. This is again largely attributable to the forecast warmer weather. However, there remains some concern regarding the continued delays to the return of French nuclear generation, with EDF announcing last week there would be further delays into Feb and March for two 1.5 GW reactors.
Last month we reported a significant reduction to the Q1 2023 baseload price, which had fallen to £393/MWh. Today the same contract is trading around £310/MWh. And reductions are not constrained to the front months with further softening of prices on the forward curve. The below graph broadly mirrors the equivalent gas contracts with winter-23 and 24 starting to shed value as we move toward the festive period.
Wind generation is forecast to exceed seasonal norms this week, further undermining gas prices due to the reduction in gas-for-power demand.
In Summary
Following an incredibly challenging year for energy consumers, recent market reductions will be viewed as much welcome news. Compared to previous unprecedented spikes in pricing earlier in the year, the period since early September has seen relative stability return to the markets. However, we must remind ourselves that we continue to live in uncertain times, and several threats remain to energy markets in 2023 and beyond.
Although the war in Ukraine has slipped from the front pages, the fallout from this conflict continues to be the single biggest driving factor of UK energy prices. Even if the conflict should end soon, which most analysts don’t believe is on the cards, it seems unlikely that Russian gas could play a role in European markets as it did prior to Putin’s troops invading Ukraine. And there are other signals to pay attention to. Oil prices rose again at the start of this week after China relaxed Covid-19 restrictions earlier this month (and the US bought back oil for national reserves). China had previously seen significant falls in energy demand following strict lockdown protocols, but this is no longer expected to be as impactful this winter.
As we edge closer to 2023, UK business will be increasingly concerned regarding the potential “cliff edge” caused by the Energy Bill Support Scheme ending on March 31st. Without a continuation of the scheme, year-on-year energy prices are currently forecast to rise by an estimated 25-30%. These estimates increase for customers coming out of longer-term contracts. CI Utilities is here to support with an array of services designed to minimise the impact and stress of your energy renewals, so do contact us on 01484 506 412 if you need some help, or drop us an email to info@ciutilities.co.uk
If you'd like more information about current market conditions or would like advice with your specific business needs, please don't hesitate to get in touch with us.