Weekly UK Insight - 19 November 2018

Gas

p/therm 9 Nov 18 16 Nov 18 Change
Day-Ahead (DA) 61.30 67.00 9.3%
Dec 2018 67.10 72.27 7.7%
Q1-2019 66.85 71.69 7.2%
Summer 2019 56.15 58.31 3.8%
Winter 2019/20 64.97 66.37 2.1%

Source: Reuters

The UK’s Day-Ahead gas price jumped 9.3% to 67.00 p/therm on colder temperatures and as a major outage at Norway’s Kollsnes gas processing plant is expected to restrict output until the middle of the coming week (9-10 days in total), reducing gas flows by 12 mcm/d.

Temperatures are forecast to remain below seasonal normal levels for most of the next two weeks, which should result in higher gas demand to be used in heating.

However, several LNG cargoes are expected to arrive at UK terminals before the end of November, which will offset rising demand to some degree.

Summer 2019 gas prices rose 3.8% to 58.31 p/therm tracking gains in winter prices, and reflecting a weaker Pound. Falls in oil, coal, and European gas markets were not enough to stop forward prices rising.

UK Medium Range Storage remains close to full capacity, providing reasonable flexibility of supply as heating demand rises.

A few of the nuclear reactors currently offline in France and Belgian are still expected to return to service by the end of November. However, outages at several other nuclear units are scheduled to continue creating a “difficult” supply situation in the first two months of 2019 according to Belgium’s Transmission System Operator Elia.

UK Summer 2019 prices gained in response to rising Continental prices, as supply risks and the improved profitability of burning fossil fuels in Germany boosted prices for 2019 delivery.

UK NBP

Weekly UK Insight 19 November 2018
Source: Reuters

Power

£/MWh 9 Nov 18 16 Nov 18 Change
Day-Ahead (DA) 60.39 62.67 3.8%
Dec 2018 63.54 68.30 7.5%
Summer 2019 55.43 57.50 3.7%
Winter 2019/20 61.58 63.22 2.7%

Source: Reuters

Day-Ahead power prices rose 3.8% to £62.67/MWh as significantly higher gas spot prices made power production from gas-fired power plants more expensive.

Summer 2019 power prices rose 3.7% to £57.50/MWh, tracking higher prices in Europe. German coal-fired margins were at their highest level since 2015 as the cost of coal and carbon declined. This has a big impact on German electricity prices for 2019 delivery, pushing up the cost of UK power for Summer 2019.

Several French and Belgian nuclear reactors are expected to return to service in the coming weeks, however, ongoing outages will still pose supply risks during times of peak winter demand.

UK POWER BASELOAD

Weekly UK Insight 19 November 2018
Source: Reuters

Oil

$/bbl 9 Nov 18 16 Nov 18 Change
Brent Crude Jan 19 70.18 66.76 -4.9%

Source: Reuters

Brent crude oil prices slid 4.9% last week, closing down at $66.76/bbl reflecting concerns that the global market is oversupplied, posting a sixth straight weekly loss. In the last four months, an oil market sell-off has shaved more than a fifth off the Brent crude oil benchmark.

However, OPEC is widely expected to start trimming output after its next meeting on 6th December, fearing a repeat of the 2014 price glut. This could produce a swift price rebound, especially if production falls further in Venezuela and Libya. OPEC’s de facto leader, Saudi Arabia, wants the cartel to cut output by about 1.4 million bpd, around 1.5 percent of global supply.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 19 November 2018
Source: Reuters

Exchange Rates & Economics

£/$ 9 Nov 18 16 Nov 18 Change
GBP/USD 1.2974 1.2837 -1.1%

Source: Reuters

The value of the Pound Sterling fell 1.1% versus the U.S. Dollar last week, in response to the unexpected resignation of Brexit Secretary Dominic Raab. Doubts intensified over Prime Minister Theresa May’s ability to win parliamentary support for a Brexit deal she is trying to negotiate with the EU.

On the Continent, Europe’s five-year economic expansion is facing a mid-life crisis as it copes with potential debt troubles in Italy, a U.S.-China trade war and the risk of a disorderly British exit from the European Union. New data showed Germany’s economy, the currency union’s largest shrank 0.2% in Q3 2018.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 19 November 2018
Source: Reuters

Regulatory and Market News

Capacity Market payments halted after European Court of Justice rules it constitutes illegal state aid

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.

Payments to energy firms under the £1bn capacity market scheme will be halted until the government can win permission from the European commission to restart it.

The scheme subsidises owners of coal, gas and other power stations so the plants are ready to ensure that electricity for businesses and homes is available at peak times in winter.

The UK has also been blocked from holding any Capacity Market auctions for energy firms to bid for new contracts to supply backup power in the future. National Grid said ministers had instructed it to indefinitely postpone auctions that had been planned for early 2019.

While electricity supplies were unlikely to be at risk, he added, companies may seek to recoup lost capacity market revenues through wholesale power prices instead.

Sara Bell, founder and CEO of Tempus Energy, which started the challenge in 2014, said: “This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

The company believes that the capacity market favours fossil fuel generation at the expense of alternative ways of securing electricity supplies, such as “demand side reduction”, where companies reduce electricity demand at times of need.

The winter of 2017/18 was the first year the capacity market was in effect, with companies due to receive £990m for 2018/19. More than half of that is still yet to be paid this winter.

The scheme works by energy companies bidding years in advance for billpayer-funded subsidies to provide backup power at crunch times during winter.

Business and Energy Secretary Greg Clark said the UK government was already in contact with the European commission and seeking state aid approval, so the capacity market could be reinstated.

LINK: National Grid – Capacity Market on hold

Energy giant SSE admits to uncertainty as Npower merger delayed

‘Big 6’ energy supplier SSE has admitted there is “some uncertainty” that its merger with rival Npower will go ahead after the pair delayed the tie-up due to the incoming cap on default tariff prices.

SSE said the incoming price cap on standard variable tariffs (SVTs) – due to come into force in January – will put further pressure on retail division profits for the full year.

The impact of the cap saw SSE and Innogy-owned npower announce last week that they were having to postpone their merger to renegotiate the terms of the tie-up.

The two firms had been hoping to seal the merger of their retail operations in the first quarter of 2019 after it was recently given the green light by the competition watchdog.

But they said talks over the new terms of the deal will take several weeks and will probably see the deal delayed beyond the first quarter, although they stressed work to complete the merger would continue. They plan to provide an update by mid-December.

The proposed venture has secured merger clearance by British regulators, suggesting Innogy’s British unit Npower could merge with Eon’s British retail unit if the deal with SSE falls through, according to chief financial officer Markus Krebber.

LINK: SSE – delay to merger with Npower

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