Price Risk Report - 1 March 2019

Last Month Summary

UK gas and electricity prices fell overall during February. Gas prices ended the month 4.0% lower at 1.76 p/kWh after temperatures in Britain was particularly mild for this time of year, significantly reducing gas demand for heating. Rising output from nuclear power plants in the UK, France and Belgium also reduced the demand for gas to be used in power generation.

A decline in carbon allowances also made the overall cost of burning gas and coal for power generation less expensive, driving wholesale electricity prices down 3.2% to 5.37 p/kWh. However, further out EDF’s decision to close its 2,000MW Cottam coal-fired power plant on 30th Sept limited price declines as the loss of power capacity could be a risk during winter months.

Brent crude oil prices rose 9.0% to $66.31/bbl, hitting their highest level in four months, lifted by OPEC-led supply cuts, U.S. sanctions on Iran and Venezuela, and hopes that the China-U.S. trade dispute may soon end. OPEC and some nonaffiliated major producers like Russia, agreed late last year to cut output by 1.2 million bpd to prevent a large oversupply from growing.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø If temperatures across Northwest Europe continue to climb during March, power demand for heating could be lower ahead of the summer months.

Ø The added power supply capacity of the 1,000MW Nemo Link interconnector between the UK and Belgium will add supply during times of peak demand during Winter 2019/20.

Ø Growing expectations that the UK and EU will delay Brexit until 2021 is having a positive impact on the value of the Pound, making energy imports less expensive.

  Ø Rising crude oil prices are likely to be a key driver for forward gas and power prices, driven primarily by OPEC production cuts.

Ø The end of production at EDF’s 2,000MW Cottam coal-fired power plant in September could add to Britain’s supply risk heading into Winter 2019/20.

Ø Despite recent volatility, the start of the Market Stability Reserve is expected to gradually drive the price of carbon allowances above €25/tCO2,.

 

Recommendations: With temperatures currently below seasonal normal levels, supply risks continue to diminish, and are not expected to pose much of a threat over the next couple of months. However, rising crude oil and carbon prices could still drive prices higher later in the summer.

As a result, energy users renewing later in 2019 or early 2020 should considering starting their renewal processes as soon as possible, to make sure all energy contracts are locked in before the end of June. It is possible that prices may decline in July, but the possibility of major gas or power outages driving up prices this close to Winter 2019/20 means the risks of waiting this long outweigh the potential benefits.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 March 2019
Source: Beond Analysis, Reuters

EDF Energy to close its two coal-fired station at Cottam in September

EDF Energy has announced that generation will end at its 2,000MW Cottam coal-fired station on 30 September 2019. EDF’s decision reflects the challenging market conditions over the last few years and the context of the drive to decarbonise electricity generation. As a result, Cottam’s French operators determined that the coalfired power plant will not be economically viable beyond the end of September 2019.

The closure of Cottam will leave EDF with just one remaining coal-fired station in operation. EDF’s 2,000MW West Burton A, has Capacity Market agreements in place for three of the four units until September 2021. EDF Energy said it will review the future of that station beyond that date.

Oil hits highest level in four months, reflecting ongoing OPEC supply cuts

Brent crude oil prices jumped 9.0% to $66.31/bbl, hitting their highest level in four months, lifted by OPEC-led supply cuts, U.S. sanctions on Iran and Venezuela, and hopes that the China-U.S. trade dispute may soon end. Oil prices have been bolstered by a tightening market because of supply cuts organized by OPEC and some nonaffiliated major producers like Russia. The group of producer countries agreed late last year to cut output by 1.2 million bpd to prevent a large oversupply from growing. According to OPEC, 2019 oil demand growth is forecast to rise to 100 million bpd, from 98.76 million last year. However, much uncertainty continues regarding trade matters between the US and China.

Britain and EU expected to agree Brexit extension to avoid “hard-Brexit”

The Pound Sterling has risen to a 22-month high on reports that the European Union is considering a Brexit extension whereby the UK will have to agree to remain in the EU until 2021. Replacing the 21-month transition period with extra time as a member state would allow the UK and the EU to develop their plans for the future relationship with the aim of making the contentious Irish backstop redundant. Brussels is determined to avoid offering a short extension only to have to revisit the issue in the summer when the government again fails to win round parliament.

Progress as the U.S. and China agree to postpone further trade tariffs until further notice

U.S. President Trump ruled out the possibility of meeting the Chinese Premier before the trade-truce deadline of 1st March. However, Trump has agreed to push back the deadline for the imposition of higher tariffs on Chinese imports by at least 60 days.

The tariffs on the huge swath of Chinese goods had been set to rise from 10% to 25% but changes to import tariffs will now be postponed until further notice.

E.ON files planned acquisition of Npower’s owner Innogy with EU Commission

German utility E.ON has submitted its application to the European Commission to acquire innogy. The latter company is a renewable energy business, with RWE as the controlling shareholder currently.

Although it will not happen overnight, it is expected that innogy subsidiary Npower would eventually be merged with E.ON reducing the ‘Big Six’ UK energy suppliers to five.

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Disclaimer: These views and recommendations are offered for your consideration and Beond makes every effort to ensure that the data and information in this report is accurate.   However, due to the volatile and unpredictable nature of the energy markets, Beond cannot guarantee the accuracy of both the information and the recommendations provided.  Beond does not accept any responsibility for errors or misstatements, or for any direct, indirect, consequential or other loss arising from any use of this information and/or further communication in relation to this information.