Weekly UK Insight - 15 August 2016

Gas

p/therm 05 Aug 16 12 Aug 16 Change
Day-Ahead (DA) 33.23 31.35 -5.7%
September 16 34.11 31.78 -6.8%
Winter 16/17 42.13 42.22 0.2%
Summer 17 37.46 38.20 2.0%

Source: Reuters

Seasonal gas prices for Winter 2016/17 were marginally higher last week, rising 0.2% in response to higher oil and coal prices, although Summer 2017 gains were more significant. However, previous news that Rough Storage would allow withdrawals of 6 mcm/d during peak winter months continued to weaken seasonal prices.

The gas network spent much of the week oversupplied, as Rough Storage’s ban on injections meant gas supplies headed directly to the system. However, Norway’s Heimdal platform shutdown on 27 July had its return-to-service date pushed back to 19 August.

Gas usage in power production rose last week, as weak wind speeds increased the reliance on traditional fossil fuels to meet domestic demand. Daily temperatures averaged 15.5°C, below seasonal normal levels, lifting the demand for gas used in domestic water heating. In the week ahead, lower wind speeds are forecast to drive gas demand for power generation.

Our outlook for the coming week again suggests seasonal gas prices could be supported by movement in the short-term day-ahead market, driven by heavy maintenance across the UK Continental Shelf gas network – predicted to last until 20 August. However, in the absence of long-range gas storage injections, the system may remain broadly balanced.

UK NBP

Weekly UK Insight 15 August 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 15 August 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 15 August 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 15 August 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Rasheeda 162 14 August Qatar South Hook

Power

£/MWh 05 Aug 16 12 Aug 16 Change
Day-Ahead (DA) 36.50 33.45 -8.4%
September 16 38.63 36.95 -4.3%
Winter 16/17 45.38 45.81 0.9%
Summer 17 38.43 39.10 1.7%

Source: Reuters

Seasonal power prices for Winter 2016/17 lifted 0.9%, settling at £45.81/MWh on Friday, as the front season took direction from higher oil, coal and carbon allowance markets. Higher gas prices supported these power gains, but were not the major driver of seasonal price movements last week.

Hinkley Point B returned to service on schedule, returning 505MW to service this week. Hartlepool 2 and Hunterston B-7 both remained offline for maintenance, limiting nuclear capacity by around 1.1GW. However, both units are scheduled to return to full service before the end of August, so should not affect Britain’s power supply capacity during winter months.

The Government’s delay on Hinkley Point C has led China and Britain to blows over the future of nuclear power in the UK. A Government decision is expected in early autumn, and the outcome may impact the likelihood of Chinese funding in future generation projects in Britain.

UK POWER BASELOAD

Weekly UK Insight 15 August 2016
Source: Reuters

Oil

$/bbl 05 Aug 16 12 Aug 16 Change
Brent Crude Oct 16 44.27 46.97 6.1%

Source: Reuters

Brent Crude rose 6.1% higher to $46.97/bbl last week, as comments from Saudi Arabia’s oil minister indicated major producers would take action to help boost market prices. OPEC announced that member states will meet informally between 26 and 28 September to discuss possible ways to stabilise the world oil market.

The news spurred an increase in speculative buying, even though the likelihood of an agreement, let alone its implementation, remained slim. Oil markets also rose in response to increased buying activity from speculative traders who looked to hedge their bets in the face of price volatility.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 15 August 2016
Source: Reuters

Coal

$/tonne 05 Aug 16 12 Aug 16 Change
API2 CIF ARA 2017 56.30 59.20 5.2%

Source: Reuters

European coal prices increased 5.2% week-on-week, as market reforms continue to fuel a rebound in global prices. Coal prices have soared this summer, after new mining restrictions curbed production in China. Benchmark prices for coal in Europe have climbed more than a third since April.

In the first half of 2016, the UK imported 2.08 million mt of coal, down 81% compared to the same period in 2015. The UK’s coal imports have been declining since Britain’s Carbon Price Support mechanism was doubled in April 2015, decreasing coal’s competitiveness.

COAL – API2 CIF ARA 2017

Weekly UK Insight 15 August 2016
Source: Reuters

Carbon

/tonne 05 Aug 16 12 Aug 16 Change
EUA Dec 16 4.75 4.93 3.8%

Source: Reuters

European carbon prices settled 3.8% higher last week, as strong gains in crude oil markets drove the cost of carbon allowances higher. Weather forecasts for above seasonal normal temperatures supported power demand, while lower wind speeds increased the use of fossil fuels in Britain and South-West Europe.

Auction volumes will be lower next week as August’s holiday season continues to reduce the available supply of auctioned carbon allowances, increasing buying interest.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 15 August 2016
Source: Reuters

Exchange Rates & Economics

£/$ 05 Aug 16 12 Aug 16 Change
GBP/USD 1.3068 1.2918 -1.1%

Source: Reuters

The value of the pound ended the week 1.1% lower compared to the US dollar, as negative momentum drove the sterling close to fresh 2016 lows. Whether or not the decline continues will be revealed on Tuesday the when both inflation and employment data for the month of July are revealed.

Britain’s building sector is officially in recession, falling 0.7% in Q2-2016. Economists believe this could be an early sign that the wider economy could enter a mild recession later this year.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 15 August 2016
Source: Reuters

Regulatory and Market News

UK coal industry urges Government to rethink carbon capture

The World Coal Association, which represents coal producers, appealed to the Business and Energy Secretary Greg Clark, urging the UK Government to rethink its decision to scrap a £1bn scheme to develop carbon capture and storage (CCS) technology. Carbon capture technology involves capturing emissions from coal and gas power stations before they enter the atmosphere.

Weekly UK Insight 15 August 2016

The prospects for CCS adoption in the UK encountered a major setback last year the Government cancelled a competition in which two carbon capture projects were vying for government backing, citing high costs. The Treasury estimated the technology would require a subsidised electricity price of £170/MWh. This compared with £92.50/MWh for nuclear power from Hinkley Point C.

However, advocates argue that growing use of gas in the UK will make carbon capture essential to hit climate targets — and that the cost of the technology will come down as the technology matures.

The recent changes in Government leadership are seen as a chance to put carbon capture back on the agenda. Coal producers hope that they can make the case for CCS as a way to cut greenhouse gases while maintaining plentiful supplies of affordable electricity.

The letter says the technology could enable “continued use of coal for electricity in the UK beyond 2025”, referring to the government deadline for removing coal from the country’s energy mix.

LINK: World Coal Association letter

British generation market stable and competitive, says Ofgem analysis

EDF Energy had the largest electricity generation market share in 2015, according to official Ofgem research. Last year saw the power output from the French-owned utility account for around 28% of total transmission generation, up 2% from 2014.

Overall, the market shares of the major electricity producers are relatively unchanged from 2014; nearly 70% of which is accounted for the by the Big 6.

Ofgem’s figures suggest that the generation market is relatively stable with a large number of players. There were at least 40 participants in 2015, which is positive and implies that market shares are not currently a competition concern. The market concentration is relatively low and companies are unable to exert market power under normal market operation.

Wholesale electricity generation market shares by company 2015

Weekly UK Insight 15 August 2016

The findings of a two-year investigation by the Competition and Markets Authority, published last month, also found no evidence that companies are able to exploit market power in the wholesale markets in their final report into the UK energy market.

However, the growing trend towards community electricity and decentralised energy generation in the UK is causing tension between smaller and larger operators sending energy to the grid – and a growing headache for Ofgem, the energy sector regulator. Ofgem announced last week it is seeking changes to current network charging arrangements, which it says are giving smaller electricity generators, including some wind power, energy from waste and combined heat and power installations, an unfair competitive advantage over larger generators.

LINK: Ofgem wholesale electricity competition

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