Weekly UK Insight - 7 May 2019

Gas

p/therm 26 Apr 19 3 May 19 Change
Day-Ahead (DA) 32.35 34.80 7.6%
Jun 2019 33.58 33.99 1.2%
Winter 2019/20 57.00 54.98 -3.5%
Summer 2020 47.15 45.00 -4.6%

Source: Reuters

The UK’s Day-Ahead gas price recovered from a two-year low the previous week, rising 7.6% to 34.80 p/therm, reflecting an undersupplied gas system.

On the demand side, cooler weather for the start of the week left temperatures well below seasonal normal levels for the start of the week.

Supply was also hit as withdrawals from Rough gas storage fell to zero last week due to an unplanned outage.

Britain is expected to receive six LNG tankers over the next two weeks, supporting UK gas system supply. LNG send-out was notably high at 93 mcm/d. However, this is still less than average for April.

Winter 2019/20 gas prices fell 3.5% to 54.98 p/therm, driven lower by crude oil and carbon prices.

An extended power outage at EDF Energy’s Hunterston B8 nuclear reactor is also scheduled to an end on 14 May, with the 640MW unit ramping up to full output soon after reducing demand for gas to be used in power production.

Pipeline constraints in Germany also increased imports into the UK via Norway’s Langeled pipeline to around 45 mcm. There is uncertainty as to whether Langeled will be 30mcm or 45mcm over the coming days, but we do expect a reduction to 20mcm/d once deeper Troll maintenance starts on 10 May. This could result in higher prices for the week ahead.

UK NBP

Weekly UK Insight 7 May 2019
Source: Reuters

Power

£/MWh 26 Apr 19 3 May 19 Change
Day-Ahead (DA) 39.94 41.25 3.3%
Jun 2019 43.25 43.00 -0.6%
Winter 2019/20 59.40 57.58 -3.1%
Summer 2020 50.43 48.60 -3.6%

Source: Reuters

Day-Ahead power prices rose 3.3% to £41.25/MWh, in response to higher spot gas prices and weaker wind output.

Winter 2019/20 power prices fell 3.1% to £57.58/MWh, tracking weaker gas, oil and carbon prices.

The expected return of EDF’s Hunterston B8 nuclear reactor on 14 May also eased supply concerns.

UK POWER BASELOAD

Weekly UK Insight 7 May 2019
Source: Reuters

Oil

$/bbl 26 Apr 19 3 May 19 Change
Brent Crude Jul 19 72.15 70.85 -1.8%

Source: Reuters

Brent crude oil prices slipped 1.8% week-on-week to $70.85/bbl, reflecting concerns that the escalating China-U.S. trade dispute could slow the global economy, denting fuel consumption.

However, on the supply side oil markets remain tense as the United States tightens sanctions on Iranian oil exports, saying on Monday it was boosting its military presence in the Middle East.

Iran has threatened “reciprocal actions” against U.S. sanctions, which could mean restarting some of its nuclear programme.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 7 May 2019
Source: Reuters

Exchange Rates & Economics

£/$ 26 Apr 19 3 May 19 Change
GBP/USD 1.2917 1.3171 2.0%

Source: Reuters

The value of the Pound Sterling fell versus the U.S. dollar and euro last week on news that progress has been made in Labour-Conservative talks. While Prime Minister Theresa May’s leadership remains precarious, the Government is thought to be shifting its position to form a Brexit deal with Labour.

Meanwhile trade talks between China and the United States, the world’s two biggest economies, hit a wall over the weekend when U.S. President Donald Trump announced a raft of new import tariffs on Chinese goods.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 7 May 2019
Source: Reuters

Regulatory and Market News

Government seeks views on the future of UK carbon emission pricing post-Brexit

The UK Government is seeking views on the approach to carbon pricing in Britain after the nation leaves the EU. The Department for Business, Energy and Industrial Strategy (BEIS) is proposing establishing a UK national greenhouse gas emissions trading system (UK ETS) linked to the EU ETS.

However, in the unlikely event a linking agreement cannot be secured, alternative carbon pricing options will be considered, including a standalone domestic emissions trading system and a tax on carbon.

Option A: Linked UK Emissions Trading System

The UK would develop its emissions trading system (ETS) and when linked with the EU ETS, each system would recognise the allowances of the other and create a single carbon price across both systems.

Linking carbon markets can lead to more efficient emissions reduction, since allowances are tradable across a larger pool of participants. This results in a larger number of cost-effective abatement opportunities, as well as greater market liquidity for trading purposes, ensuring lower transactional costs and minimising the risk of market abuse.

A link between a UK ETS and EU ETS would also ensure a smooth transition for the relevant sectors.

Option B: Standalone UK ETS

The Government says a UK ETS could operate independently, including ahead of securing a linking agreement with the EU.

To facilitate a smooth transition for industry and maximise the potential for linking, the consultation is proposing to initially “limit the areas of deviation from the EU ETS to those where the benefits to business of changes outweigh those of alignment”. Limiting the number of changes in a standalone UK ETS compared to the current EU ETS is expected to provide greater continuity for business during the transition between the two systems.

An initial review is to be carried out in 2023 to ensure the system is operating as intended and aligns with the Paris climate agreement review, with the necessary changes implemented for 2026.

Option C: Carbon tax

The Government and the devolved administrations are currently not consulting in detail on a tax on carbon but if necessary, responses to this consultation may be used to develop work on such an alternative.

The consultation is open until 12th July 2019.

LINK: BEIS – Future of carbon pricing consultation

Ofgem changes to charging regime ‘could take £15/MWh from renewable generators’

Charging regime change being undertaken by Ofgem could reduce renewables generators’ revenues by up to £15/MWh according to Smartest Energy, driven by:

  • TNUoS falling by up to 87%
  • BSUos flipping from a revenue to a charge
  • Wholesale prices dropping

Embedded benefit cuts and proposed changes under the TCR are forecast to kick in from April 2021. TNUoS revenue will reduce by 87% in 2021 and BSUoS could shift from revenue to charge with the net effect of this alone predicted to be -£5.45/MWh for generators.

While wholesale price forecasts fluctuate depending on multiple factors, current forecasts predict that prices will fall in the next few years, meaning generator revenues could reduce by over £15/MWh by 2023.

Finding ways to counter this impact will be essential to maintaining project margins, and encouraging both future investment in renewables and growth in the sector more broadly.

These include flexible PPAs, providing balancing services and/or capacity services or co-locating batteries alongside generation assets.

LINK: SmartestEnergy – Charging changes for renewables

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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.