Quarterly Insight Q2-2019

Wholesale Market Changes

Gas
p/therm 31 Dec 18 31 Mar 18 Change
Oct 2019 12M 55.07 46.90 -14.8%

 

Power
£/MWh 31 Dec 18 31 Mar 18 Change
Oct 2019 12M 56.71 49.99 -11.9%

Source: ICE

UK gas and electricity prices fell during Q1-2019, as milder temperatures, lower gas demand in Asia and rising production of global liquified natural gas (LNG) left the UK gas network broadly oversupplied.

Meanwhile, the European Union has agreed tighter rules for Nord Stream 2 pipeline to supply gas from Russia and Germany. However, the EU are also looking to boost imports of U.S. liquified natural gas and new pipelines, such as a planned Norway-Poland pipeline via Denmark, that would supply Sweden and other neighbouring states.

Gas prices for 12-month Oct 19 start contracts ended the quarter 14.8% lower overall at 46.90 p/therm, with electricity prices down 11.9% to £49.99/MWh also driven by falling coal and European power prices.

Brent crude oil prices rose 25.6% to $67.58/bbl quarter-on-quarter 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 non-affiliated 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.

Outlook: With gas storage facilities now predominantly filled across Northwest Europe, supply risks continue to subside. OPEC’s decision to cut production will continue to reduce the oversupply in the global oil market over the next quarter, boosting energy prices. However, any unscheduled major supply outage during Q2-2019 could cause volatility in electricity and gas prices.

Quarterly Energy Insight Q2-2019
Source: ICE
Quarterly Energy Insight Q2-2019
Source: ICE

Electricity Cost Breakdown

Quarterly Energy Insight Q2-2019

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. As of April 2019, the CRC scheme (a huge administrative and cost burden on participating businesses) has finally been abolished, benefiting ≈1,800 large UK organisations:

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

However, businesses will still need to complete their compliance for the 2018-19 year. Customers not involved in CRC should also be careful to budget for the increase in total electricity supply costs.

In its place, businesses have seen 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 rose approximately Û 1.31 p/kWh year-on-year.

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

Network Charges

  • National Grid has scheduled the previously postponed T-1 Capacity Market (CM) auction for 11-12 June 2019. The auction was postponed indefinitely after the European Court of Justice suspended the scheme in a landmark ruling in November 2018. 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.

Environmental Taxes & Levies

  • The UK Government officially closed the Feed-in Tariff (FiT) scheme to new entrants as of 1 April 2019. The FiT Scheme pays renewable energy generators and exporters for electricity they produce for the grid. The FiT scheme closure should see costs to consumers plateauing.
  • The exemption for energy intensive industries (EIIs) is has been in place for CFDs since Nov 2017 and RO since April 2018, with non-EII businesses picking up the EII costs. The majority of consumers who do not have an EII exemption, pay a combined 0.161 p/kWh uplift (included in the estimates above). Rather than a rebate, EIIs will be directly exempted from 85% of the cost of these schemes. There are still plans to roll out an exemption from FIT in 2019, subject to State Aid approval, however Brexit confusion has delayed major changes such as this.

What’s coming up?

General Regulatory:

  • Ofgem reveals plans to introduce tougher tests for new suppliers starting in June 2019. Ofgem confirmed that:
    • applicants will have to demonstrate sufficient funding, provide a customer service plan and pass a fit and proper test;
    • Ofgem will be launching a consultation on ongoing requirements for suppliers currently in the market in the summer.

Electricity:

  • National Grid has scheduled the previously postponed T-1 Capacity Market (CM) auction for 11-12 June 2019.
  • 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 from 1 April 2020 for CfD, FiT and RO schemes.
  • An exemption for energy intensive industries (EIIs) from FIT may still be introduced in 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 have settled down, but haven’t gone away. Ofgem’s task force continues to investigate the charging methodology with the ultimate aim of 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’s legal battle with the regulator over the cap is ongoing in an attempt to avert a £70m hit to profits this winter.
  • Russian gas supplier Gazprom has forecast a decline in natural gas production outlook for 2019, due to warm weather and growing competition from global liquified natural gas exports.
  • The government has given the green light for the development of a 1,700MW combined cycle gas turbine (CCGT) power station in Middlesbrough. The power plant will take around 3-years to build.

Oil:

  • Crude oil prices are expected to continue rising over the next quarter, resulting from OPEC and Russia’s 1.2 million bpd oil production cuts, which are scheduled until the end of June 2019.
  • 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:

  • The European Union approved an extension to Brexit until 31 October 2019. However, Prime Minister Theresa May still hopes the UK will leave the EU well before the deadline.
  • The extension means that the UK must now hold elections for the European Parliament on Thursday 23 May 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 hold interest rates at 0.75% in February 2019, the BoE’s Monetary Policy Committee is set to consider a further increase in May 2019.
  • The National Institute of Economic and Social Research has upgraded Britain’s growth forecast to 1.5% for 2019. Meanwhile the Bank of England has predicted annual growth of 2.2% by mid-2022 and expects the rate of unemployment to fall to 3.5% – the lowest it has ever forecast.
  • 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.