THE CIU TEAM TAKE A LOOK AT THE CURRENT ENERGY MARKET CONDITIONS
Speaking at the Future of Utilities Summit on Monday, Ofgem’s CEO Jonathan Brearley made the following observation: “Russia’s illegal war in Ukraine continues to drive extremely high prices and volatility in the international gas market. Our best assumption, at least for the medium term… is that this will continue.” In this month’s Energy Market Narrative, we review the very latest on policy and pricing, with a focus on the Energy Bill Relief Scheme (EBRS), and commodity pricing through winter-22 and beyond.
Policy
In last month’s edition, we reviewed the initial tranche of EBRS discount data, which has been published weekly since. The Chancellor’s Autumn Statement extended the energy price guarantee for domestic customers, but saw nothing new for business energy customers, heightening concern regarding a 31st March “cliff edge” for expiring support. You can view the latest EBRS data file here, or contact your BMU account manager if you have any questions regarding the scheme.
Elsewhere, Ofgem wrote to non-domestic energy suppliers last week to remind them of their obligations to treat customers fairly. Among eight issues highlighted was concern regarding some suppliers unreasonably increasing standing charges to coincide with roll-out of the EBRS, suggesting the scheme was being used to facilitate excessive premiums. Here at CIU we are also aware of suppliers experiencing challenges with billing the EBRS discount and have already picked up numerous issues via our invoice validation service. Again, please feel free to contact us should this prompt any questions for your business.
Natural Gas Prices
Gas prices have gradually softened across the last month as temperatures in northern Europe held well above seasonal norms for the period, and LNG imports remained strong. Until the end of last week when temperatures dropped, we hadn’t seen any notable withdrawals from storage. There are 14 vessels expected to deliver LNG to UK shores by early December, and Friday saw confirmation from the US Freeport LNG terminal that they should resume normal operation by mid-December.
The effect on commodity prices for this winter has been pronounced, with December falling by around 75 p/Th in the last month and Q1-23 by almost 60 p/Th. However, there remains a premium on prices for Q1-23 as the UK will be reliant upon imports from the continent across these peak heating months.
Looking ahead to winter-23 and beyond, we have continued to see a steady reduction of prices down the forward curve, although downward momentum has stalled somewhat in the last month, as highlighted in the following graph:
At time of writing, winter-23 is trading at around 320 p/Th, with summer-23 pricing only slightly lower at 313 p/Th, reflecting the sentiment that there will be a challenging gas injection season as we emerge from this winter.
In other news, this weekend saw Swedish investigators discover traces of explosives at the site of the leaks in the Nord Stream pipeline, fuelling speculation that Russia may find other means to weaponise gas across this winter.
Power Prices
The below graph highlights a similar pattern with UK power prices as was discussed above for gas. This reflects the inevitable gas-for-power demand through peak winter months, and Q1-23 continues to trade at a premium. However, the Q1 price has fallen significantly in the last month, now trading at £393/MWh, down from the £645/MWh which we reported last month.
This movement has been driven by the gas market factors discussed above, which has resulted in gas storage across Europe remaining at almost 95% of capacity heading toward December, a far better situation than many had anticipated.
There remains risk, with the French nuclear fleet again revising forecasts for when they will increase capacity. And, although temperatures are expected to be above seasonal norms in early December, this of course remains a huge unknown for the second half of winter.
In Summary
Combined Cycle Gas Turbines accounted for around half of the UK’s electricity generation yesterday as the temperatures dropped. This only serves to tell us what we already knew – we remain far too dependent upon natural gas for our power generation. Despite Centrica reopening the Rough storage facility this winter, we still only operate around one ninth of the gas storage available in Germany, forcing us to import gas in Jan-Mar. Increased wind generation is expected from tomorrow through to the 28th, which is fantastic, but not dependable. This is why we saw the Chancellor reaffirm backing for the new nuclear plant at Sizewell C in his Autumn Statement.
On 3rd November the International Energy Agency published a report, stating that Europe could see a shortfall of gas for injection to storage in summer-23, of up to 30 billion cubic metres. The IEA went on to confirm expectations that European gas markets will remain tight until at least 2025, with much increased dependency on LNG imports to replace absent Russian supplies. Indeed, Germany expect to complete the build of three new LNG terminals by the end of this year.
Experts agree the UK will need further investment in infrastructure to ensure energy security. Rishi Sunak stated at the COP27 summit in Egypt this month that “Climate security goes hand in hand with energy security…” and “…rising energy prices across the world…are a reason to act faster.” This now needs to be backed up with a programme of investment, because the EBRS is a short-term and very expensive sticking plaster, without which UK business is set to feel the pinch from 1st April.
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.