Quarterly Insight Q3-2019

Wholesale Market Changes

Gas
p/therm 31 Mar 19 30 Jun 19 Change
Oct 2019 12M 46.90 46.92 0.04%

 

Power
£/MWh 31 Mar 19 30 Jun 19 Change
Oct 2019 12M 49.99 51.65 3.3%

Source: ICE

UK gas prices were almost unchanged during Q2-2019, while electricity prices rose overall over the same three-month period, as hot temperatures across Northwest and Central Europe combined with unplanned Norwegian gas and French power outages boosted forward prices for the coming winter.

European gas storage levels are nearly 81% full. Europe’s total gas storage capacity is around 98 bcm, but the current rate of injections means that Europe is on schedule to have a massive of 13 bcm of surplus gas that can’t be placed in storage ahead of the winter gas season.

European Carbon prices hit 11-year highs after Germany signalled it would protect the region’s emissions market by cancelling allowances to prevent a surplus accumulating as it closes coal power plants.

Gas prices for 12-month Oct 19 start contracts ended the quarter just 0.04% higher overall at 46.92 p/therm, with electricity prices gaining 3.3% to £51.65/MWh, also driven by the weaker Pound Sterling, rising coal and European power prices.

Brent crude oil prices fell 4.2% to $64.74/bbl quarter-on-quarter, driven lower by the ongoing trade war between the United States and China, although middle eastern tensions in Iran also caused a lot of friction. This overshadowed an agreement between OPEC and its allies to extend production cuts through March 2020, as this decision was largely seen as a foregone conclusion.

Outlook: With the start of the winter season barely two months away, unscheduled gas and power outages are creating more significant supply shocks. The weaker Pound, surging carbon market and rising German prices are all key drivers that could result in prices rising over the next few months. However, prices are likely to slide in the first half of next year as Europe’s gas system handles an oversupply.

Quarterly Energy Insight Q3-2019
Source: ICE
Quarterly Energy Insight Q3-2019
Source: ICE

Electricity Cost Breakdown

Quarterly Energy Insight Q3-2019

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) increase 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 increase 1.31 p/kWh year-on-year.

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

Network Charges

  • Government plans to run a capacity market (CM) auction in February 2020 for delivery in 2022/23. It intends to allow renewables to bid for contracts and make changes to methodologies that govern de-rating factors for interconnectors. All of which is subject to successfully re-instating the CM following its suspension by the European Commission, which upheld a legal challenge by Tempus Energy over the treatment of demand-side response. The Department for Business, Energy and Industrial Strategy (BEIS) said the Commission is likely to have made a decision by early next year. If that happens, the T-1 auction will take place a week after the T-3.

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. The same exemption from FIT also went live on 1 April 2019.

What’s coming up?

General Regulatory:

  • 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.

Electricity:

  • Government plans to run a capacity market (CM) auction in February 2020 for delivery in 2022/23. It intends to allow renewables to bid for contracts and make changes to methodologies that govern de-rating factors for interconnectors. All of which is subject to successfully re-instating the CM following its suspension by the European Commission, which upheld a legal challenge by Tempus Energy over the treatment of demand-side response. The Department for Business, Energy and Industrial Strategy (BEIS) said the Commission is likely to have made a decision by early next year. If that happens, the T-1 auction will take place a week after the T-3.
  • 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.
  • A new 700 MW HVDC electricity cable called ‘Celtic Interconnector’ will be built to bypass Britain and connect Ireland directly to the European Union’s energy markets after Brexit. Ireland is expecting to face significant disruption when Britain leaves the single market because a large proportion of the country’s trade travels through the United Kingdom and then onwards across the Irish sea.

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.
  • 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:

  • OPEC and Russia have agreed to extend existing 1.2 million bpd oil production cuts, until the end of March 2020.
  • EIA expects global oil consumption will grow by an 1.1 million bpd in 2019. This growth is 0.2 million bpd lower than forecast in June and marks the sixth consecutive month that EIA has revised down its 2019 global consumption growth forecast. EIA expects global oil consumption to increase by 1.4 million bpd in 2020.
  • The downward revision for 2019 reflects lower-than-expected oil consumption so far this year, in addition to slowing economic growth in many of the world’s largest oil-consuming countries.

Carbon:

  • Germany signalled it will protect the region’s carbon emissions market by cancelling allowances to prevent a surplus accumulating as it closes coal power plants.

Brexit:

  • Boris Johnson’s appointment as UK Prime Minister is likely to be a key factor in the outcome of Brexit negotiations.
  • However, as it stands the UK will leave the European Union after 31 October 2019.
  • 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 June 2019, the BoE’s Monetary Policy Committee is set to consider a further increase in August 2019.
  • PwC is projecting Britain’s growth forecast to be 1.4% for 2019, and 1.3% for 2020.
  • 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.