Quarterly Insight Q1-2019

Wholesale Market Changes

Gas
p/therm 28 Sept 18 31 Dec 18 Change
April 2019 12M 66.44 57.50 -13.5%

 

Power
£/MWh 28 Sept 18 31 Dec 18 Change
April 2019 12M 62.33 59.21 -5.0%

Source: ICE

UK gas and electricity prices fell during Q4-2018, as lower gas demand in Asia and rising production of global liquified natural gas (LNG) increased the volume of LNG arriving in the UK and Continental Europe.

Several unplanned nuclear outages across Belgium and France also came to an end, adding supply capacity to the electricity grids in Northwest Europe.

It was also announced that the new 1,000MW Nemo subsea power interconnector has started commissioning. The project will enable trade of electricity between the UK’s National Grid and Belgian transmission system operator Elia when it becomes fully operational in Q1-2019, helping supply the UK grid during times of peak demand.

As a result, gas prices for April 19 to March 20 ended the quarter 13.5% lower overall at 57.50 p/therm, with electricity prices down 5.0% to £59.21/MWh also driven by falling crude oil, coal and European power prices.

Brent crude oil prices fell 35% to $53.80/bbl quarter-on-quarter as planned output cuts failed to ease fears about a global economic slowdown. The latest falls come after a difficult year for oil markets, as prices continue to plunge amid fears of a slowing global economy and record production in the United States and Iraq. OPEC and Russia have both pledged to cut output for the first six months of 2019 in a bid to stabilise prices.

Outlook: With gas storage facilities now predominantly filled across Northwest Europe, supply risks are now lower than they were at the start of winter. OPEC’s decision to reduce crude output may also reduce the oversupply in the global oil market, boosting energy prices. However, any unscheduled major supply outage or high winter demand caused by cold temperatures during Q1-2019 could cause volatility in electricity and gas prices.

Quarterly Energy Insight Q1-2019
Source: ICE
Quarterly Energy Insight Q1-2019
Source: ICE

Electricity Cost Breakdown

Quarterly Energy Insight Q1-2019

Overall electricity costs expect to rise 1.59 p/kWh from Apr-18 to Apr-19

It’s not long now until one of the biggest changes to the energy tax landscape takes effect. From April 2019, the CRC scheme (a huge administrative and cost burden on participating businesses) will be abolished, benefiting ≈1,800 large UK organisations:

  • Carbon Reduction Commitment (CRC) decrease 0.56 p/kWh

However, businesses not involved in CRC should be careful to budget for the increase in total electricity supply costs.

In its place, all businesses will see a significant increase to the Climate Change Levy (CCL) rate. Along with CCL, the cost of schemes to support renewable generation growth and security of supply continue to play a major role in the increasing cost of non-energy charges in electricity bills:

  • Renewables Obligation (RO) increase 0.21 p/kWh
  • Contracts for Difference (CfD) increase 0.13 p/kWh
  • Climate Change Levy (CCL) increase 0.27 p/kWh

However, the biggest increase in overall electricity costs is from wholesale costs, which are estimated to rise 1.31 p/kWh.

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

Network Charges

  • The UK’s Capacity Market (CM) scheme for ensuring the National Grid has sufficient power supplies during the winter months has been suspended after a ruling by the European court of justice that it constitutes illegal state aid. All payments to energy firms with CM agreements have been halted until the government can win permission from the European Commission to restart it. Many suppliers will opt to exclude CM from fixed-priced electricity quotes, and pass-through any costs if the scheme is reinstated. Our analysis includes CM as government policy is to resurrect it.

Environmental Taxes & Levies

  • The UK Government will end the Feed-in Tariff (FiT) scheme, closing it to new entrants. The FiT Scheme pays renewable energy generators and exporters for electricity they produce for the grid. The plans propose a strict cut-off date of 31 March 2019, with no special provisions for projects in oversubscribed areas. The FiT scheme closure should see costs to consumers plateauing.
  • The exemption for energy intensive industries (EIIs) is now in place for both the CFD (since Nov 2017) and RO (since April 2018) schemes, with non-EII businesses picking up the EII costs. 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). Rather than a rebate, the change will directly exempt EIIs from 85% of the cost of these schemes. An exemption from FIT remains on track to be completed in 2019, subject to State Aid approval.

What’s coming up?

General Regulatory:

  • Ofgem is consulting on new rules to put energy suppliers through a series of financial tests before they are allowed to enter the market to ensure that firms have sufficient financial resources to meet customers’ expectations. Ofgem said the tests, which are to be in place by spring 2019, should ensure new entrants are robust while encouraging competition and innovation in the market.

Electricity:

  • Nemo Link, the 1,000MW subsea power cable that will connect the UK and Belgium is expected to begin full operations by the end of Q1-2019. The project will increase security of supply by increasing electricity trading between the UK and Continental Europe during times of high demand.
  • Following European court of justice ruling that Capacity Market payments constitute illegal state aid; the UK government has stated that it will consult on what regulatory changes would be needed in order to allow CM auctions to be restarted in the summer.
  • The UK government is still looking into the possibility of widening eligibility criteria for the exemption schemes supporting Energy Intensive Industries (EII) – potentially lowering the threshold from 20% to 10%. Changes could be introduced as soon as 1 April 2019 for CfD and FiT and 1 April 2020 for RO.
  • An exemption for energy intensive industries (EIIs) from FIT is on target to be introduced from 1 April 2019, subject to EU State Aid approval. The FIT scheme will remain compensation-based until further notice.
  • Companies that fall under the remit of the Carbon Reduction Commitment (CRC) scheme will be happy to see it abolished. The final reports and final payments to the government will need to be made in summer 2019.

Gas:

  • The UK gas industry’s problems with high Unidentified Gas (UIG) costs haven’t gone away. Ofgem has rejected all proposed supplier Modifications to quickly rectify the issue, but they have put together a task force with the objective of investigating the charging methodology and coming up with a suitable solution.
  • In the domestic market, millions of households see their energy bills drop as the government’s price cap takes effect. However, Centrica has launched a legal battle with the regulator in over the cap in an attempt to avert a £70m hit to profits this winter.

Oil:

  • Crude oil prices are expected to rise over the next quarter after OPEC and Russia agreed to cut oil production by 1.2 million bpd effective January 2019 for an initial period of six months.
  • There is also a growing possibility that the OPEC-led supply cuts could be further extended. Saudi Arabia has floated plans to cut its crude exports by 800,000 bpd from around 7.9 million bpd in November 2019, in a move aimed at lifting prices above $80/bbl.

Brexit:

  • Theresa May’s government survived a vote of no confidence after MPs rejected the Prime Minister’s Brexit deal by a convincing 432 votes to 202. The PM is now under intense pressure to clarify the UK’s Brexit intentions on Monday 21 January 2019.
  • At this point, any outcome other than a ‘hard-Brexit’ is expected to boost the value of the Pound. A stronger Pound would make gas and power imports less expensive.
  • There is little risk that the UK would abandon EU decarbonisation targets, as the UK consistently sets among the most ambition targets in the EU. As a result, we expect to see little change to other network and green subsidies.

Economics & Financial Markets:

  • Following the decision by the Bank of England to raise interest rates from 0.5% to 0.75% in November, the BoE’s Monetary Policy Committee is set to consider a further increase in February 2019.
  • The OECD has forecast economic growth in the UK to increase slightly in 2019 before slowing in 2020. GDP is expected to grow 1.4% in 2019 and 1.1% in 2020. However, their prediction is based on the assumption that there is a smooth exit from the European Union. This outlook is likely to be revised as the UK government outlines its next steps following its Commons defeat on the negotiated Brexit deal.
  • The eurozone’s economic growth is expected to slow dramatically as Europe continues to grapple with new trade barriers, ongoing uncertainty over Brexit and political spats that undermine confidence in the euro and put banks under further stress. The OECD estimates that eurozone growth will slow to 1.8% in 2019, and 1.6% in 2020.

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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.