Quarterly Insight Q1-2018

Wholesale Market Changes

Gas
p/therm 29 Sept 17 29 Dec 17 Change
April 2018 12M 44.36 48.92 10.3%

 

Power
£/MWh 29 Sept 17 29 Dec 17 Change
April 2018 12M 44.11 47.63 8.0%

Source: ICE

UK gas and electricity prices were bullish in the lead up to Christmas, as colder temperatures boosted the potential gas demand from heating and gas-fired power generation. During the same period, supply concerns squeezed supply margins. A major outage at the North Sea Forties oil and gas pipeline saw a sudden 40 mcm/d drop in gas flows into the UK system, while the number of LNG cargoes arriving in Britain during Q4-2017 was also fairly low.

Over the holiday period, however, the flows through the Forties pipeline returned to normal allowing Medium Range Storage to inject gas at a rapid pace in preparation for higher demand during Q1-2018. Despite this, gas prices still ended the quarter 10.3% higher at 48.92 p/therm, with electricity prices also up 8.0% to £47.63/MWh.

Brent crude oil prices rose to their highest level since mid-2015 amid large anti-government rallies in Iran and ongoing supply cuts led by OPEC and Russia. Six days of protests in Iran have left at least 20 people dead, escalating tensions in oil-rich Iran. As a result, the benchmark Brent crude contract increased 16.3% to $66.94/bbl quarter-on-quarter.

Outlook: Prices are expected to hold around their current levels during January, but are likely to signal a gradual decline after the forecast cold weather has ended during February. Despite earlier supply risks Centrica is expected to continue withdrawing cushion gas from Rough Storage until the end of March 2018, leaving the UK gas system potentially oversupplied even when heating demand is high. Prices for the April-2018 12-month contract may be volatile during January. However, we expect prices to ease towards the end of the winter period. Energy users that have not already secured their volume with April or October starts, may wish to hold fire.

Quarterly Energy Insight Q1-2018
Source: ICE
Quarterly Energy Insight Q1-2018
Source: ICE

Electricity Cost Breakdown

Quarterly Energy Insight Q1-2018

Overall electricity costs estimated to rise 1.44 p/kWh from Apr-17 to Apr-18

There is no doubt that the introduction of new schemes to support renewable generation growth and security of supply have played a major role in the increasing cost of non-energy charges in electricity bills in recent years. In particular, the most significant non-energy cost increases from Apr-17 to Apr-18 are forecast to be:

  • Renewables Obligation (RO) Û35 p/kWh
  • Contracts for Difference (CfD) Û20 p/kWh
  • Capacity Market (CM) Û22 p/kWh

One of the biggest planned changes to the energy tax landscape over the coming years is coming in April 2019, when the CRC scheme (a huge administrative and cost burden on participating businesses) is abolished. In its place, businesses will see a significant increase to the CCL rate (see below).

A full breakdown of electricity costs is available on the last page of this report.

Network Charges

  • Winter 2017/18 is the first season when CM payments has been made to the majority of generators. CM payments will continue to rise over the next few years as subsidies are increasingly paid to power operators maintaining and building new grid-scale generation needed when renewables are not available.
  • However, National Grid has been able to secure lower CM payments for the recent T-4 auction. This means that while the majority of CM contracts have secured a price of between £18-22.50/kW for capacity from 2018-21, CM payments from 2021-22 will only be £8.40/kW.
  • Ofgem is undergoing a legal challenge to its decision to cut payments to smaller power generators that export during peak demand periods. The main element, the TNUoS residual (or Triad payment), was set to be cut from £45/kW to between £3-7/kW over three years from April 2018, which Ofgem says could potentially save consumers up to £7bn by 2034.

Environmental Taxes & Levies

  • A planned levy exemption for Energy Intensive Industry (EII) from the cost of Renewables Obligation (RO) and Contracts for Difference (CfD) schemes is expected to go live from 1 April 2018. Rather than a rebate, the change will directly exempt EIIs from 85% of the cost of RO and CfDs. However, the Feed-In Tariff (FIT) scheme will remain compensation-based until further notice. The majority of consumers who do not have an EII exemption, will have to pay a combined 0.161 p/kWh uplift (included in the estimates above).
  • The CRC scheme is being abolished from April 2019 to coincide with a significant rate increase of the CCL. Businesses who were previously required to report on their emissions via the CRC scheme will see a net cost benefit, as the higher rate of CCL will be below the combined rate of CRC and CCL that will run until March 2019. However, businesses not involved in CRC should be careful to budget for the increase in total electricity supply costs.

What’s coming up?

Electricity:

  • Companies that fall under the remit of the Carbon Reduction Commitment (CRC) scheme should ensure to plan for any 2018 deadlines.
  • The Government is reviewing responses from a consultation on options for controlling the costs of biomass conversions and co-firing units under the Renewables Obligation. Current criteria could lead to significant under-forecasting of biomass conversions and co-firing under the RO, resulting in additional costs estimated at £110 million to £195 million per year. The changes would apply from 1 April 2018.
  • From 1 April 2018, regulation DCP 161 will be in force. DCP 161 is a new Ofgem measure to ensure HH electricity supplies that exceed their assigned availability capacity will pay significantly more. It might still be six months away, however firms are actively engaging with energy suppliers and Distribution Network Operators to review the agreed availability capacities of their impacted HH electricity meters.
  • It was confirmed in December that the Renewables Obligation element of EII will become exemption-based from April 2018. The FIT scheme will remain compensation-based until further notice. Widening eligibility for EII exemption schemes is still under consideration. A consultation on this will be launched early in 2018.
  • Ofgem has confirmed the allowances of some of Britain’s electricity distribution network operators (DNOs) will be reduced by around £200 million. The reduction is expected to result in lower network charges on energy bills with effect from 1 April 2019.

Economics & Financial Markets:

  • Following the decision by the Bank of England to raise interest rates from 0.25% to 0.5% at the start of November 2017, the BoE’s Monetary Policy Committee is not widely expected to increase the base rate again in the near term.
  • According to a Financial Times survey of more than 100 leading economists, the UK’s economy will slow further in 2018 as business investment remains on hold, interest rates creep up and indebted consumers curb their spending. They predict that the UK economy will grow by around 1.5% in 2018.

Gas:

  • Centrica is expected to continue withdrawing approximately one-fifth (0.868 bcm) of the remaining ‘cushion gas’ in Rough gas storage facility until the end of March 2018. The additional gas during the winter period will provide an additional source of gas supply and flexibility when heating demand is high. However, the question remains whether Britain has sufficient sources of gas to meet demand without prices spiking.
  • British shale gas companies have said fracking in the UK will finally begin in earnest in 2018, after another year passed without serious progress amid strong opposition. Cuadrilla in Lancashire and Third Energy in North Yorkshire are vying to be the first company since 2011 to frack in the UK. Early in the new year, both are expected to begin pumping water underground at high pressure to fracture rocks and test how much gas flows out.

Oil:

  • OPEC’s next meeting is not taking place until late June 2018. However, member states are likely to discuss plans to phase out production cuts after the agreed deadline at the end of 2018.
  • However, Iran’s Oil Minister Bijan Namdar Zanganeh has warned that the group risks overheating the oil market as crude prices head toward $70/bbl.

Geo-Politics:

  • Germany’s federal elections were held in September 2017. However, Chancellor Angel Merkel’s CDU party will need to reach a coalition agreement with other parties before a new government can be formed. The CDU is most likely to partner with the CSU and SPD parties.
  • Iran’s civil protests have been causing unrest in the Middle East, with serious divides in public opinion escalating tensions in the region. Tension in the Middle East often results in disruptions to energy production in the oil-rich region, boosting global prices.
  • Tensions between Russia and Europe are likely to continue during Q1-2018, although recent reports suggest that European politicians do not see eye-to-eye with the United States on plans to extend and deepen sanctions.

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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.