Weekly UK Insight - 29 July 2019

Gas

p/therm 19 Jul 19 26 Jul 19 Change
Day-Ahead (DA) 28.80 27.60 -4.2%
Aug 2019 29.09 27.52 -5.4%
Winter 2019/20 53.23 50.32 -5.5%
Summer 2020 47.08 46.13 -2.0%

Source: Reuters


The UK’s Day-Ahead gas price fell 4.2% to 27.60 p/therm as forecasts for cooler weather in both the UK and NW Continental Europe reduced expected gas demand to support power production for air conditioning.

The lower demand means that UK was as much as 21 mcm/d oversupplied. On the supply side, Norwegian exports increased on Monday, indicating a likely return of small fields from maintenance outages.

However, Norway’s Troll field production remains reduced by around 30-35 mcm/day, which if it continues in August, will be at the same time as UK domestic gas production maintenance, possibly putting pressure on Britain’s gas system.

LNG send-out from Britain’s terminals increased to 13 mcm/d following the arrival of two LNG cargoes last week. Low gas demand means that there are currently no scheduled deliveries for the next two weeks.

Winter 2019/20 gas prices declined, losing 5.5% week-on-week to 50.32 p/therm, as further storage injections set the stage for NW Europe to be significantly oversupplied come the start of winter.

European gas storage levels are nearly 82% full, and are therefore well ahead of schedule in their efforts to completely refill gas facilities before the start of the winter season.

However, the recent dip in prices is likely to be short-lived with the winter contract just over two months away. As a result, unexpected outages are likely to cause more concern to the supply side, boosting prices.

 

UK NBP

Weekly UK Insight 29 July 2019
Source: Reuters

Power

£/MWh 19 Jul 19 26 Jul 19 Change
Day-Ahead (DA) 39.56 38.89 -1.7%
Aug 2019 40.62 39.78 -2.1%
Winter 2019/20 58.39 55.97 -4.1%
Summer 2020 51.06 50.15 -1.8%

Source: Reuters

Day-Ahead power prices fell 1.7% to £38.89/MWh, reflecting the lower cost of gas, which is the marginal input fuel for power generation.

Winter 2019/20 power prices slid 4.1% to £55.97/MWh, reflecting strong declines in UK gas, carbon, coal and European forward power prices.

However, the recent heatwave in NW Europe has caused several French and German nuclear units to curtail power output, as higher water temperatures and slow water flow rates limited the ability for power plants to use river water to cool nuclear reactors.

EDF’s use of water from rivers as a coolant is regulated by law to protect plant and animal life and it is obliged to cut output in hot weather when water temperatures rise, or when river levels and flow rates are low.

UK POWER BASELOAD

Weekly UK Insight 29 July 2019
Source: Reuters

Oil

$/bbl 19 Jul 19 26 Jul 19 Change
Brent Crude Sep 19 62.47 63.46 1.6%

Source: Reuters

Brent crude oil prices gained 1.6% week-on-week to $63.46/bbl, supported by rising tensions between the West and Iran and a big decline in U.S. crude stockpiles. However, gains were capped due to lingering worries about slowing economic growth that could reduce fuel demand.

A week after Iran seized a British-flagged tanker in the Gulf, Britain has started sending a warship to accompany all British-flagged vessels through the Strait of Hormuz, a change in policy after the government previously said it did not have resources to do so.

Saudi Arabia, the world’s top oil exporter, also urged global oil buyers to secure energy shipments passing along the Strait of Hormuz, through which about 20% of global supply is transported daily.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 29 July 2019
Source: Reuters

Exchange Rates & Economics

£/$ 19 Jul 19 26 Jul 19 Change
GBP/USD 1.2500 1.2380 -1.0%

Source: Reuters

The value of the Pound Sterling fell to its lowest level since 2017 as the U.S. dollar rallied after better than expected U.S. growth number.

Newly-appointed UK prime Minister Boris Johnson reportedly had a reportedly tense conversation with German Chancellor Angela Merkel on Friday, reiterating his wishes that the Irish backstop be scrapped. The EU’s chief negotiator Michelle Barnier said on Thursday the terms on which Mr Johnson wants to negotiate a new agreement were unacceptable.

Meanwhile, a speech from ECB President Mario Draghi struck a dovish tone, with the euro inching higher despite the central bank hinting at more quantitative easing in September, which should typically be a negative for the currency.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 29 July 2019
Source: Reuters

Regulatory and Market News

UK has one of the most attractive regulatory environments for Corporate PPAs, says Zeigo

The UK has one of the most attractive regulatory environments for Power Purchase Agreements (PPA), with relatively few compliance barriers to procuring renewables either from the grid or via on-site generation, says renewable tech firm Zeigo.

Changes to the UK government’s renewable energy policy in 2015 triggered an exodus of investment and a slowdown in corporate PPA uptake. That lull is now subsiding as more renewable projects come into the pipeline. New RFI’s are being issued with increasing frequency, and more PPAs are being negotiated.

Historically, corporate PPAs in the UK were negotiated under a subsidy scheme on a sleeved basis. The shift from feed-in tariffs to a fully merchant market means corporate energy buyers can now negotiate directly with developers, avoiding the bureaucratic hassles of integrating PPAs with subsidy schemes on existing sites.

Another factor driving interest is an increase in transmission and distribution charges – cost variables a well-structured PPA deal could help mitigate.

Rank Country Name Ave. PPA Price (£/MWh)
1 Finland £33
2 Germany £36
3 Sweden £36
4 Netherlands £36
5 Spain £41
6 Denmark £41
7 Portugal £47
8 Italy £48
9 United Kingdom £49
10 France £53

Source: Zeigo

Europe’s corporate PPA market has been invigorated by recent changes to the EU’s Renewable Energy Directive, which now instructs member states to find and remove any administrative barriers to corporate PPAs for wind and solar. As European governments continue to deregulate and encourage more private sector involvement, interest in direct deals for renewable offtake can only continue to rise.

It is too soon to say if any one country or region has positioned itself to outpace others, but a race to attract the interest of company energy buyers is clearly on.

LINK: Zeigo – Corporate PPAs

Gas pipeline between the Netherlands and UK announces reverse flows now available

On 17 July, the operator of the Dutch-UK Balgzand-Bacton link (BBL) gas interconnector announced that transportation capacity for physical reverse flows is now available. This marks the first time that bi-directional gas flows on the pipeline will be available.

The reverse flow plans will allow for 16mcm/d of exports from UK to the Netherlands, whilst the capacity from the Netherlands to the UK is 45mcm/d.

So far this year, the UK has imported 1,272mcm, averaging 6.5mcm/d. This is much lower than the same period in 2018, in which gas imports totalled 2,061mcm, averaging 10.5mcm/d.

The decision to implement reverse flows on the BBL  was due to a lack of use of the pipeline during summer months – a period in which the UK is traditionally long on gas due to lower demand – and allows the UK to export additional gas capacity to the continent.

The link connects the UK’s NBP gas hub to the Dutch TTF, a market which is described as the most liquid gas trading hub in Europe, providing a new market for North Sea gas producers.

LINK: BBL Company – Reverse flows

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