Weekly UK Insight - 22 January 2018

Gas

p/therm 11 Jan 18 18 Jan 18 Change
Day-Ahead (DA) 52.65 50.33 -4.4%
Feb 2018 54.38 50.11 -7.9%
Q2-2018 46.28 44.06 -4.8%
Summer 2018 45.58 43.53 -4.5%
Winter 2018/19 54.36 52.52 -3.4%

Source: Reuters

The UK’s Day-Ahead gas price fell 4.4% to 50.33 p/therm, as milder temperatures and strong wind output reduced demand for natural gas.

Vesterled flows from Norway are reduced due to pipeline maintenance and an unplanned outage at Heimdal gas field. UK Continental Shelf gas production is also lower as a result of an ongoing outage at North Morecambe gas sub-terminal, whose restart date has been repeatedly pushed back. It is scheduled to return on 24 Jan but given previous delays, it could be inactive into February.

South Hook is expecting to send gas flows at 5mcm/d in to the UK system today and the total LNG send-out from UK terminals is forecast to continue at around 7-8mcm/d. The Christophe de Margerie LNG tanker arrived last week from Russia. However, due to high gas demand from the global LNG market, Reuters does not expect any further cargoes offloading this month at UK terminals.

Medium Range Storage (MRS) stocks are currently at a healthy level with no immediate disruptions to supply expected. Low domestic consumption combined with strong supply from the Continent in January will further boost the inventory with injections expected this week. Withdrawals from Rough remains static at around 8 mcm/d.

The seasonal gas price for Summer 2018 fell 4.5%, tracking declines in Continental European energy markets.

UK NBP

Weekly UK Insight 22 January 2018
Source: Reuters

Power

£/MWh 11 Jan 18 18 Jan 18 Change
Day-Ahead (DA) 49.84 48.46 -2.8%
Feb 2018 52.32 49.84 -4.7%
Q2-2018 45.75 44.64 -2.4%
Summer 2018 44.99 44.07 -2.0%
Winter 2018/19 51.10 50.38 -1.4%

Source: Reuters

Day-Ahead power prices dipped 2.8% to £48.46/MW, reflecting a drop in spot gas prices to be used in power generation.

Only two nuclear units are currently offline (Sizewell B-1 and B-2), with both of these being planned outages.

Seasonal power prices for Summer 2018 fell, reflecting similar losses in the corresponding UK gas market, with significant losses in German power prices also driving UK energy markets lower.

UK POWER BASELOAD

Weekly UK Insight 22 January 2018
Source: Reuters

Oil

$/bbl 11 Jan 18 18 Jan 18 Change
Brent Crude Mar 18 69.26 69.31 0.1%

Source: Reuters

Brent crude oil prices traded above $70/bbl for the first time since late-2014, but ended the week little changed reflecting higher U.S. output.

The International Energy Agency (IEA) has predicted that global oil markets are tightening quickly on falling supply from Venezuela, which posted 2017’s biggest unplanned output fall and could see a further decline in 2018.

As a result of lower Venezuelan production, the IEA said OPEC’s crude output in December fell to 32.23 million bpd, boosting the group’s compliance with a deal to curb output to 129%.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 22 January 2018
Source: Reuters

Exchange Rates & Economics

£/$ 11 Jan 18 18 Jan 18 Change
GBP/USD 1.3536 1.3891 2.6%

Source: Reuters

The Pound Sterling rose 2.6% against the US dollar last week reflecting an unexpected shift in Bank of England tone and an increased likelihood of a second referendum on EU membership being announced.

The prospect of a second referendum has suddenly grabbed the attention of political news after Nigel Farage suggested a second referendum on EU membership was a good idea.

The idea has since been further advanced by comments from Donald Tusk, President of the European Council, who last week said that the British would be welcomed if they changed their mind on Brexit.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 22 January 2018
Source: Reuters

Regulatory and Market News

Zero subsidy contracts and balancing access could deliver 30GW of offshore wind, says Aurora

Awarding contracts for difference at power market prices and facilitating better access to balancing products could enable offshore wind to hit 30GW, potentially within the next 15 years, according to energy research firm Aurora.

The firm’s report reflects that supply chain and technical innovation in offshore wind is driving down costs to the point that subsidy will soon no longer be required. The government support mechanism, the contracts for difference (CfD) scheme, could instead guarantee developers current market rates for their power.

The CfD then becomes a revenue stability mechanism, rather than price support, Aurora suggests. While that transfers some risk onto consumers, it would be offset by enabling wind farms to be built at a lower cost of capital, the report states.

By technically making offshore wind subsidy free, operators could then bid into mechanisms such as the capacity market (CM), increasing competition and driving down costs to consumers, argues Aurora. Currently subsidised technologies cannot bid into the CM.

Enabling offshore wind to better access balancing and ancillary services procured by National Grid would allow operators to ‘stack’ different revenue streams and would also increase competition, driving down overall system costs to bill payers, the report adds.

LINK: Aurora – economics of offshore wind

Drax greenlights conversion of 4th generation unit to biomass by end of 2018

Drax has said the government’s decision to continue supporting biomass technologies means it will convert a fourth unit at its power plant from coal to wood chip-fired generation.

The energy giant had feared government proposals to cap the level of subsidies that power stations converted to biomass (and co-fired generators can receive through the Renewables Obligation Certificate scheme) could scupper its expansion plans.

The firm seeks to convert further units as a response to government plans to phase out all unabated coal power by 2025.

Drax Chief Executive Will Gardiner said: “We welcome the government’s support for further sustainable biomass generation at Drax, which will allow us to accelerate the removal of coal from the electricity system, replacing it with flexible low carbon renewable electricity.”

The conversion is expected to be completed during the second half of 2018.

The unit will likely operate with lower availability than the three existing converted units, but the intention is for it to run at periods of higher demand, which are often those of higher carbon intensity, allowing optimisation of ROC generation across three ROC accredited units. The CfD unit remains unaffected.

LINK: Drax 4th unit biomass conversion

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