Weekly UK Insight - 01 August 2016

Gas

p/therm 22 Jul 16 29 Jul 16 Change
Day-Ahead (DA) 35.80 34.53 -3.5%
September 16 37.29 36.62 -1.8%
Winter 16/17 45.47 44.06 -3.1%
Summer 17 40.10 39.26 -2.1%

Source: Reuters

Seasonal gas prices for Winter 16/17 fell 3.1% week-on-week to 44.06 p/therm, tracking negative movement in crude oil markets, while the stronger pound sterling also made gas imports into Britain marginally cheaper.

Last week, supplies to the gas system were boosted ahead of August’s heavy maintenance schedule across UK Continental Shelf gas terminals. UK domestic production flows reached their highest level since April and Norwegian imports through the Langeled pipeline increased.

Domestic gas demand used in water heating fell week-on-week, as average daily temperatures last week dropped to 17°C, although they were still above seasonal norms. Next week, temperatures are expected to average around normal levels. While gas demand for power generation is forecast to decline as production from renewable sources picks up.

Britain’s biggest gas storage site, Rough Storage, is unavailable for gas injections until March or April 2017. This has curbed UK demand for gas injections into storage by around 24 mcm/d.

Our outlook for the coming week suggests further gas price declines could be halted as the UK Continental Shelf is set to begin its heaviest maintenance schedule of the summer. Production at a significant number of major pipelines is set to drop dramatically as outages are predicted to last until 20 August.

UK NBP

Weekly UK Insight 1 August 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 1 August 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 1 August 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 1 August 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Al Gharrafa 132 1 August Qatar Isle of Grain
Al Samriya 157 3 August Qatar South Hook

Power

£/MWh 22 Jul 16 29 Jul 16 Change
Day-Ahead (DA) 39.34 39.75 1.0%
September 16 40.03 40.10 0.2%
Winter 16/17 47.63 46.56 -2.2%
Summer 17 40.09 39.73 -0.9%

Source: Reuters

Power prices for Winter 2016/17 dipped 2.2%, settling at £46.56/MWh on Friday, as the front season took direction from the corresponding gas market. Seasonal power prices also responded to declines in crude oil and carbon allowance prices, although higher coal markets limited losses.

Hartlepool 2 remains offline for planned maintenance, reducing production by 620MW until mid-August. While an unexpected generator oil leak at Hunterston B-3 saw the 480MW nuclear unit hit with an unplanned outage, supporting electricity prices.

After long delays, EDF’s board of director finally gave the green light to the proposed 3.2GW Hinkley Point C nuclear power plant. However, the contract signing has been postponed with the UK Government revealing it would need until early autumn to decide whether the project should go ahead. Read the full story in the Regulatory and Market News section.

UK POWER BASELOAD

Weekly UK Insight 1 August 2016
Source: Reuters

Oil

$/bbl 22 Jul 16 29 Jul 16 Change
Brent Crude Sep 16 45.69 42.46 -7.1%

Source: Reuters

Brent Crude fell 7.1% last week, to its lowest level in more than three months, after US energy data revealed an unexpected glut of oil in storage. US crude oil stocks rose by 1.7 million barrels last week, as the demand for crude by oil refiners declined.

The stronger US dollar has made both crude and refined oil products bought in the currency less profitable. As a result, oil refiners have been operating at less than half their potential capacity, the lowest level in more than six months.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 1 August 2016
Source: Reuters

Coal

$/tonne 22 Jul 16 29 Jul 16 Change
API2 CIF ARA 2017 58.00 61.20 5.5%

Source: Reuters

European coal prices resumed their recent trend of steady gains, rising 5.5% week-on-week, returning to 2016’s upward trend. Sharp declines in global coal mining activity continued to create a tighter supply and demand balance, driving markets higher.

The Chinese government’s clamp-down on domestic coal mining has boosted the country’s import demand. Weather related disruptions in supplies from leading exporters, Australia and Indonesia, have also lent support to prices.

COAL – API2 CIF ARA 2017

Weekly UK Insight 1 August 2016
Source: Reuters

Carbon

/tonne 22 Jul 16 29 Jul 16 Change
EUA Dec 16 4.60 4.47 -2.8%

Source: Reuters

European carbon prices settled 2.8% lower last week, as an updated weather forecast provided a slightly weaker signal for carbon prices on milder temperatures and higher wind generation across North-West and Central Europe.

Rising European coal prices have made it less profitable to burn coal for power generation, making it unattractive for utilities to buy carbon allowances. Overall, the summer holiday season has begun, reducing power demand, and as such, the strength of Europe’s carbon markets.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 1 August 2016
Source: Reuters

Exchange Rates & Economics

£/$ 22 Jul 16 29 Jul 16 Change
GBP/USD 1.3106 1.3226 0.9%

Source: Reuters

The value of the pound ended the week 0.9% higher compared to the US dollar, as Britain’s economy grew by 0.6% during Q2-2016. Businesses appeared to shrug off Brexit concerns in the lead up to the referendum.

However, the Bank of England is expected to announce on Thursday that it will cut the growth forecast for 2017 from 2% to 0% as the economy reacts to Brexit uncertainty, following the vote. The BoE will also announce the latest interest rate decision amid suggestions that there could be a further round of quantitative easing to stimulate the UK economy.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 1 August 2016
Source: Reuters

Regulatory and Market News

UK Government delays decision on Hinkley Point C until Autumn despite EDF voting to begin construction

Plans to begin construction at the first new UK nuclear plant in 20 years have been hit with an unexpected delay after the government postponed a final decision until the early autumn.

EDF’s board of directors had previously given their formal go-ahead for Hinkley Point C, after making a final investment decision at a meeting on Thursday. Contracts were widely expected to be signed on Friday, but the British Government surprised everyone by announcing that ministers would now conduct another review of the project, before deciding whether to give it the green light.

Business and Energy Secretary Greg Clark said: “The Government will now consider carefully all the component parts of this project and make its decision in the early autumn”.

Earlier this week, EDF shareholders approved plans to issue new shares to raise €4bn (£3.4bn) to help pay for the project. The French government currently owns an 85% stake in EDF.

Supporters of the delayed nuclear project consider Hinkley Point C to be vital in helping the country maintain the country’s security of energy supply. However, the nuclear project has not been without controversy, with opponents typically citing one of two reasons for their objections:

  • Concerns around the environment impact; or
  • Gas generation being a cheaper alternative to Hinkley Point C’s £92.50/MWh strike price.

It is estimated that the plant’s construction would create 25,000 jobs, with completion scheduled for 2025 and work potentially beginning next year. Hinkley Point C would have a generating capacity of 3.2GW, providing enough electricity to meet 7% of Britain’s total power demand.

Hinkley Point C timeline:

  • Mar 2013 – Hinkley Point C construction approved
  • Oct 2013 – UK government agrees £92.50/MWh will be paid for electricity produced at the Somerset site – around double the current market rate at the time
  • Oct 2015 – EDF signs investment agreement with China General Nuclear Power Corporation (CGN)
  • July 2016 – EDF board approves final investment decision, but the UK Government postpones a final verdict on the project until autumn.

LINK: BBC news – Gov delays Hinkley Point C decision

Ofgem concerned about ‘unfair’ benefits received by small-scale generation

Ofgem, the regulator for Britain’s gas and electricity industry, published an open letter in which it revealed its concerns about embedded benefit payments received by power generators. Those who connect directly to distribution networks can receive financial benefits for helping to reduce the National Grid’s power demand at peak times.

Generators connected to the high-voltage transmission network and larger generators connected to the lower voltage distribution network, are at a disadvantage as they do not get these payments. However, small generators connected to the distribution network do receive financial benefits.

As the UK’s electricity system continues to evolve, there has been a significant increase in the number of generators connecting to the distribution networks, most notably in the last couple of years.

Ofgem believes that these arrangements may be harming competition in the electricity markets, favouring some generators over others. This could also impact on decisions to either build or close large power stations, which would have a substantial impact on security of supply.

Stakeholders that want to provide views or evidence around the issues are invited to respond to Ofgem by 23 September 2016.

LINK: Ofgem open letter on embedded generation

Small and medium sized UK business now able to get ‘green gas’ from Total Gas & Power

Small and medium sized business in Britain now have the option to source 100% of their gas from green sources. Total Gas & Power have released an Eco-Energy gas option alongside their existing Eco-Energy electricity contracts for small and medium sized businesses (gas consumption of less than 10 GWh per annum). These options allow customers to source all of their power from renewable sources in the UK.

Dave Cranfield, General Manager at TGP, said: “Our customers have been telling us they want a 100% renewable option for both fuels and we are excited to be able to meet that demand. Helping our customers achieve their environmental goals is very important to us”.

It is likely that any business opting for ‘green gas’ would have to pay a premium for the privilege.

LINK: Total Gas & Power Eco-Energy gas option

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