Weekly UK Insight - 22 August 2016

Gas

p/therm 12 Aug 16 19 Aug 16 Change
Day-Ahead (DA) 31.35 29.10 -7.2%
September 16 31.78 28.07 -11.7%
Winter 16/17 42.22 41.77 -1.1%
Summer 17 38.20 38.26 0.2%

Source: Reuters

Seasonal gas prices for Winter 2016/17 fell 1.1% last week in response to plunging day-ahead gas and weaker coal prices, although higher oil markets limited losses further along the curve.

August’s heavy maintenance schedule came to an end, leaving the UK gas system as much as 30 mcm/d oversupplied at times, as the long-running outage at Rough Storage means excess gas cannot be injected into storage ahead of the colder winter period.

Langeled flows have fluctuated between 15-24 mcm/d since the beginning of August, however flows increased over the weekend averaging around 30 mcm/d. Average LNG send-out was at 20 mcm/d, with strong flows expected to continue for the coming weeks. Two LNG shipments are confirmed to arrive in Britain in the next seven days, with a further two more possibly heading to South Hook before the end of the month.

Gas usage in power production declined last week, as a surge in wind speeds reduced the reliance on gas-fired power stations to meet domestic demand. Additionally, daily temperatures averaged 16.5°C, marginally above seasonal normal levels, reducing the demand for gas used in domestic water heating.

Our outlook for the coming week suggests lower wind speeds are forecast to drive gas demand for power generation. Seasonal gas prices could be driven by movement in the short-term day-ahead market, as scheduled maintenance and unplanned outages across the UK Continental Shelf gas network end.

UK NBP

Weekly UK Insight 22 August 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 22 August 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 22 August 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 22 August 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Al Ghashamiya 130 23 August Qatar Isle of Grain
Al Mafyar 159 25 August Qatar South Hook

Power

£/MWh 12 Aug 16 19 Aug 16 Change
Day-Ahead (DA) 33.45 31.00 -7.3%
September 16 36.95 35.71 -3.4%
Winter 16/17 45.81 46.24 0.9%
Summer 17 39.10 39.32 0.6%

Source: Reuters

Seasonal power prices for Winter 2016/17 lifted 0.9%, settling at £46.24/MWh on Friday, as seasonal electricity markets took direction from the higher price of oil. Higher oil and gas prices were also the main drivers for the Summer 2017 power price last week.

Maintenance continues at Hartlepool 2 and Hunterston B-7, limiting nuclear capacity by around 1.1GW. However, both units are scheduled to return to full service this week, so should not affect Britain’s power supply capacity during winter months.

Latest information on the UK’s electric car charging network suggests individual charging stations for EVs could outnumber petrol stations by 2020. Such a transition will require Government policy to adapt in order to support changes to power demand. There are fewer than 8,500 petrol stations in the UK today, and only just over 4,000 public electric car charging points.

UK POWER BASELOAD

Weekly UK Insight 22 August 2016
Source: Reuters

Oil

$/bbl 12 Aug 16 19 Aug 16 Change
Brent Crude Oct 16 46.97 50.88 8.3%

Source: Reuters

Brent Crude rose 8.3% higher to $50.88/bbl last week, as recent comments from Russia continued to raise hopes for a freeze on crude output as early as next month. Russia, the world’s largest non-OPEC oil producing nation, revealed it would participate in coordinated OPEC action to help balance prices and achieve stability in the oil market.

Sentiment regarding oil continues to swing back-and-forth with price momentum, creating significant volatility. However, fundamentals tend to be a stronger driver in the medium term, and the picture suggests higher prices are likely next year.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 22 August 2016
Source: Reuters

Coal

$/tonne 12 Aug 16 19 Aug 16 Change
API2 CIF ARA 2017 59.20 56.15 -5.2%

Source: Reuters

European coal prices fell 5.2% week-on-week, as ample stocks of coal at European power plants and poor weather conditions resulted in weaker global demand. Widespread forecasts predict coal prices to post significant declines before the end of the year.

The last two years have seen substantial changes in the Chinese market due to reforms in climate change policy. However, coal supply constraints due to the clean-up of the mining industry are largely expected to be only temporary. On the other hand, China’s preferential shift towards a cleaner energy-based economy appears permanent.

COAL – API2 CIF ARA 2017

Weekly UK Insight 22 August 2016
Source: Reuters

Carbon

/tonne 12 Aug 16 19 Aug 16 Change
EUA Dec 16 4.93 4.80 -2.6%

Source: Reuters

European carbon prices settled 2.6% lower last week, on speculative selling after analysts at Bloomberg cut their price forecasts for carbon allowances by up to 15%, as a result of uncertainty surrounding the UK’s decision to leave the EU.

However, the upcoming suspension of EU auction volumes could provide some bullish pressure to prices, which, together with the support level at €4.50/tonne, should stop the EUA Dec 16 contract from slipping further.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 22 August 2016
Source: Reuters

Exchange Rates & Economics

£/$ 12 Aug 16 19 Aug 16 Change
GBP/USD 1.2918 1.3074 1.2%

Source: Reuters

The value of the pound ended the week 1.2% higher compared to the US dollar, as warmer weather helped boost British retail sales in July. Barclays Bank believes the pound is 10% undervalued and as foreign exchange markets rebalance towards fair-value, the pound may increase to higher levels over coming months.

In other economic news, the RPI measure of inflation rose 1.9% in July, as the increasing cost of motor fuel and vehicles drove up transport prices. Economists had expected the figure to remain unchanged.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 22 August 2016
Source: Reuters

Regulatory and Market News

Government gives green light to world’s largest windfarm, Dong Energy’s 1.8GW Hornsea Project Two

The world’s largest offshore windfarm, Hornsea Project Two has received development consent from Business and Energy Secretary Greg Clark. When complete, the windfarm located 89km off the Yorkshire coast will deliver up to 1.8GW of low carbon electricity to the UK power grid.

Weekly UK Insight 22 August 2016

Clark said: “The UK’s offshore wind industry has grown at an extraordinary rate over the last few years, and is a fundamental part of our plans to build a clean, affordable, secure energy system.”

Approximately £730m of financial support is being made available for renewable electricity generation this Parliament through the Contract for Difference renewable scheme, as the British Government hopes to send a clear signal the UK is open for business. Around 10GW of offshore wind is expected to be installed by the end of this decade, with up to 10GW of new offshore wind in the 2020s going online as costs come down.

Offshore wind is already on course to meet 10% of the UK’s electricity demand by 2020. Major developments of Hornsea Project Two’s scale will pave the way for its continued growth alongside driving down costs, creating high value jobs, and supporting the UK’s transition to a low carbon energy supply.

Dong Energy and other developers have expressed confidence levelised costs of under £100/MWh can be delivered by the end of the decade thanks to larger turbines, improved operations and maintenance processes, economies of scale, and new foundations. The developer also announced recently that its latest offshore wind farms off the Dutch coast are expected to deliver power at a record low cost of €72.70/MWh (c. £62.70/MWh).

LINK: World Coal Association letterLINK: Hornsea Project Two press release (DBEIS)

Ofgem proposes lowering National Grid’s TNUoS costs as fewer generators connected to HV grid

Ofgem set the price controls for energy transmission and gas distribution from 2013 to 2021. However, in May Ofgem opened a mid-period review into the energy transmission price controls. Ofgem is proposing to reduce National Grid’s revenue for its electricity and gas transmission businesses.

  • In electricity transmission propose to reduce National Grid’s allowances by £38.1 million as less maintenance is required due to fewer generators connecting to the high voltage grid. This has not affected the reliability of the high voltage network.
  • However, the system is going through major changes as we move to a low carbon economy. National Grid now has a bigger role to play in managing additional supply and demand balancing services.
  • In gas transmission Ofgem proposes to reduce National Grid’s allowances by £168.8 million as the Avonmouth gas pipelines it planned to build are no longer needed.

Ofgem is consulting on its proposals and will make a final decision this autumn. Changes to National Grid’s electricity and gas transmission costs would take effect from April 2018.

LINK: World Coal Association letterLINK: Ofgem proposes lower transmission costs

299MW biomass CHP plant set to be built in Teesside after developers complete £900m funding for project

Macquarie of Australia and Danish pension fund PKA have completed a £900m funding round for the Tees Renewable Energy Plant project.

The facility will cost £650m to build and a further £250m has been raised for working capital and operating costs. Site preparation works will start within weeks, with main building works to begin a few months later. The plant is expected to come online in 2020.

Once up and running the plant will be fuelled by roughly 2.5 million tonnes of sustainably-sourced wood chips per year, and will generate around 2.4 TWh of electricity each year. As it will work around the clock, every day of the year (baseload) it will produce as much renewable electricity in a year as a 1,000MW wind farm. The station will help to meet the UK’s legally binding EU’s renewable energy target of 15% of all energy consumed by 2020, accounting for around 1% of the target.

LINK: Operator MGT Power news story

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