Weekly UK Insight - 19 September 2016

Gas

p/therm 09 Sep 16 16 Sep 16 Change
Day-Ahead (DA) 23.50 28.80 22.6%
October 16 30.30 33.47 10.5%
Winter 16/17 37.80 39.34 4.1%
Summer 17 35.48 36.50 2.9%

Source: Reuters

Gas prices for Winter 2016/17 rose 4.1% as a dip in supply failed to keep pace with growing demand, which was buoyed by rising gas for power production.

The UK’s gas system has been heavily oversupplied for several weeks leading to lower gas markets, however a drop in Norwegian imports via the Langeled pipeline meant the system ended the week broadly balanced, sending prices higher. Flows between Norway and Continental Europe resumed full operations, redirecting gas supplies away from Britain.

Britain also recorded a drop in LNG send-out from South Hook early in the week, while contributions from the smaller neighbouring Dragon terminal were also below expectations.

The arrival of colder conditions today has seen local distribution zone consumption forecasts rise, keeping total demand steady despite a near halt in medium-range storage injection activity. Daily temperatures averaged 18°C last week, once again comfortably above seasonal normal levels.

Our outlook suggests that UK gas demand should rise next week as temperatures drop towards normal levels following after an unusually hot first half of September. Gas-fired power plants will also be more in demand as slowing wind speeds curb wind farm output. At the same time, 1,700MW of nuclear generation has been offline since 7 September, increasing the reliance on gas generation.

UK NBP

Weekly UK Insight 19 September 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 19 September 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 19 September 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 19 September 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Al Hamla 129 19 September Qatar Dragon
Artic Lady 88 20 September Trinidad Isle of Grain
Zarga 159 21 September Qatar South Hook
Aamira 162 26 September Qatar South Hook

Power

£/MWh 09 Sep 16 16 Sep 16 Change
Day-Ahead (DA) 36.40 133.00 265.4%
October 16 39.00 46.06 18.1%
Winter 16/17 44.37 45.97 3.6%
Summer 17 37.68 38.58 2.4%

Source: Reuters

Seasonal power prices for Winter 2016/17 rose 3.6% to £45.97/MWh, after a particularly turbulent week in Britain’s electricity wholesale markets. Long term contracts moved higher in response to extreme short term price volatility, as the UK Day-Ahead power market peaked at £160/MWh on Wednesday, with the Within-Day contract even hitting £999/MWh.

The price surge was a response to a jump in electricity consumption, as the UK recorded its hottest September day since 1911, which boosted demand for air conditioning and power station cooling. Additionally, a shortage in power supply was caused by low wind and solar output, as well as a succession of planned and unplanned electricity output reductions at Drax, Hunterston B-3 and the French IFA interconnector.

National Grid had predicted the UK would have insufficient capacity to meet peak demand on Thursday by 947MW, however the grid was ultimately only short by 39MW as coal generators boosted output to cash in on profits from high power prices.

UK POWER BASELOAD

Weekly UK Insight 19 September 2016
Source: Reuters

Oil

$/bbl 09 Sep 16 16 Sep 16 Change
Brent Crude Nov 16 48.01 45.77 -4.7%

Source: Reuters

Brent Crude fell 4.7% to $45.77/bbl last week, as markets recorded a sharp increase in US oil product inventories, which weighed on prices. Nigeria and Libya are also both preparing to ramp up their oil output, which may aggravate the oversupplied market for oil products.

Shell and Exxon Mobil both lifted restrictions on Nigerian exports after militants had caused the shut-in of supply. Libya’s state oil company lifted curbs on crude sales from the ports of Ras Lanuf, Es Sider and Zueitina, potentially unlocking 300,000 bpd of supply.

Goldman Sachs predict that crude will continue to trade mostly within the $45-50/bbl range over the next 12 months, with any sustained improvement above $50/bbl unlikely.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 19 September 2016
Source: Reuters

Exchange Rates & Economics

£/$ 09 Sep 16 16 Sep 16 Change
GBP/USD 1.3262 1.2995 -2.0%

Source: Reuters

The value of the pound ended the week 2% lower compared to the US dollar. The average cost of everyday household goods and services, measured by the CPI, went up by 0.6% in the year to August. The falling value of the pound has seen raw material costs rise for the second month running.

The Bank of England left its main interest rate at 0.25% but said another cut is still a possibility. Last month, the BoE halved its bank rate from 0.5% as it tried to ensure the stability of the UK’s banking system. However, the BoE said again that it might cut rates further in the coming months, even though the immediate economic after-shock of the Brexit vote now appears to be weaker than first thought.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 19 September 2016
Source: Reuters

Carbon

/tonne 09 Sep 16 16 Sep 16 Change
EUA Dec 16 4.11 4.39 6.8%

Source: Reuters

European carbon prices rallied to a two-week high on Friday, rising 6.8% week-on-week, with traders hedging their bets. The unexpected UK power crunch and spot price spike also led to somewhat increased utility buying. In the medium-term we expect the cost of carbon allowances to consolidate at current levels.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 19 September 2016
Source: Reuters

Coal

$/tonne 09 Sep 16 16 Sep 16 Change
API2 CIF ARA 2017 56.85 58.15 2.3%

Source: Reuters

European coal prices rose 2.3% last week, as China confirmed it sought to cut as much as 9% of its production capacity to trim industrial oversupply and curb pollution. However, Macquarie Bank predicted the recovery to be short-lived, with the next couple of months forecast to drop between 5-10%.

COAL – API2 CIF ARA 2017

Weekly UK Insight 19 September 2016
Source: Reuters

Regulatory and Market News

Hinkley Point C nuclear plant given Government approval with safeguards on future investment

The UK Government has given the go-ahead for the construction of Hinkley Point C in Somerset after imposing “significant new safeguards” for future nuclear projects.

The Hinkley project is being led by EDF, while China had agreed to finance one third of the new nuclear plant in exchange for using its own design for another nuclear station at Bradwell, in Essex. The Bradwell part of the deal has raised questions over national security, and it is thought that the conditions attached to the Hinkley approval may include greater oversight and scrutiny of China’s involvement.

The Department for Business, Energy and Industrial Strategy said: “After Hinkley, the British Government will take a special share in all future nuclear new-build projects. This will ensure that significant stakes cannot be sold without the government’s knowledge or consent.”

Nuclear energy companies say the approval of the £18bn Hinkley Point C power station will boost plans for new reactors across the UK, in spite of stricter conditions for foreign investment.

Executives said Theresa May’s go-ahead for the Hinkley project had removed doubts about the Prime Minister’s commitment to the renewal of the UK nuclear power industry. However, approval of Hinkley Point C will not be sufficient to avoid a future supply crunch.

Director at the Energy Intensive Users Group (EIUG) Jeremy Nicholson said: “We need action to ensure new … power stations get built quickly during the ten years or more that it will take before Hinkley Point is built.”

Hinkley Point C is expected to produce 3,200MW but is not expected to begin operations until at least 2025, with construction delays largely expected to push the start date back further.

The UK needs new, secure baseload to replace retiring coal fired power stations, and intermittent renewables alone are not able to provide this, regardless of cost. However, battery storage is expected to become a key fixture of electricity grids in the future, helping grid operators manage the higher volatility that comes with increasing the use of renewable generation.

LINK: BEIS announce Hinkley Point C nuclear approval

New national ‘105’ phone line launched to report power cuts

A new national phone line has been launched to help business and home owners report power cuts in their area, and get help and advice.

The free-to-dial 105 number will ensure members of the public are put straight through to the right organisation responsible for fixing power cuts in their local area.

Previously, consumers were supposed to contact their local electricity network operator if there was a problem. But research by the Energy Networks Association (ENA) showed around 72% of people did not know who to call in the event of a power cut.

This is particularly important when there’s bad weather, as severe storms can cause damage to power networks and disrupt the electricity supply into people’s homes. This new, free number will make life easier for electricity customers. People can call 105 from most landlines and mobile phones, no matter who they choose to buy electricity from.

LINK: ENA launch national ‘105’ number for power cuts

Government confirms delivery period extension for CfD renewable scheme until March 2026

The Department for Business, Energy and Industrial Strategy (BEIS) has confirmed its intention to extend the timeline of Contracts for Difference (CfD) to allow renewables projects to be delivered beyond the current cut-off of 2020.

Following a consultation, the department confirmed it will amend CfD regulations to extend the delivery of projects to 31 March 2026 from 31 March 2020.

Under CfD regulations, allocation rounds and their associated budgets can only be made available for projects commissioning in set periods, known as delivery years.

The first CfD solar project was connected to the grid last month and 39 renewable projects have passed the CfD milestone requirement.

CfDs provide long term price stabilisation for low carbon generators, encouraging renewable investment to come forward and therefore ensuring security of supply at a lower cost to consumers.

LINK: BEIS extends delivery of renewable CfD scheme

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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.