Weekly UK Insight - 23 May 2016

Gas

p/therm 13 May 16 20 May 16 Change
Day-Ahead (DA) 30.30 29.95 -1.2%
June 16 29.02 29.32 1.0%
Winter 16/17 35.94 35.73 -0.6%
Summer 17 33.37 33.15 -0.7%

Source: Reuters

Seasonal gas prices fell more than 0.5% last week as around 25 mcm/d was injected into storage in preparation for winter. Excess gas supply was re-routed into medium range storage as total UK gas storage rose to 25% of maximum capacity. Despite weak supply-side drivers, rising oil and coal markets limited losses.

Langeled flows from Norway dropped on Friday, with imports falling from 25 to 15 mcm/d. Temperatures had risen to around seasonal normal levels by mid-week, driving the prompt market lower in response to falling heating demand.

Scheduled maintenance at Rough storage from 25-30 May is expected to leave the system oversupplied. The outage means that a higher portion of gas imports can be routed to meet demand rather than being injected into storage.

LNG send out has been particularly strong over the last week, with all three terminals expecting cargoes in the next seven days. Send out from South Hook terminal has risen to around 43 mcm/d over the last week, and Dragon terminal has been steady around 12 mcm/d.

This week has opened with lower prices due to an oversupplied system, resulting from high gas flows from Norway and the UK Continental Shelf. LNG send out is stable at 43 mcm/d. No major pipeline maintenance is scheduled for the coming week before planned outages begin in June. Temperatures are predicted to fall below seasonal normal levels.

UK NBP

Weekly UK Insight 23 May 2016
Source: Reuters

UK TEMPERATURE FORECAST

Weekly UK Insight 23 May 2016
Source: Reuters

TOTAL UK GAS STORAGE

Weekly UK Insight 23 May 2016
Source: Reuters

DAILY UK LNG SEND OUT

Weekly UK Insight 23 May 2016
Source: Reuters
LNG Tanker Regas volume (mcm) Expected Arrival Date From Port
Berge Arzew 84 23 May Algeria Isle of Grain
Rasheeda 162 24 May Qatar South Hook
Al Sheehaniya 126 25 May Qatar Dragon

Power

£/MWh 13 May 16 20 May 16 Change
Day-Ahead (DA) 39.46 34.28 -13.1%
June 16 32.60 32.48 -0.4%
Winter 16/17 40.00 40.11 0.3%
Summer 17 34.72 34.52 -0.6%

Source: Reuters

Seasonal power prices were little changed last week, as weakness in the forward gas curve was largely offset by rising oil, coal and carbon emissions. The conflicting drivers meant Winter 16/17 rose by just 0.3% week-on-week, while Summer 17 declined by 0.6%. In the near-term, warmer temperatures and strong wind speeds heading into last weekend drove spot prices more than 13% lower week-on-week.

Nuclear outages at Heysham 1 and Sizewell B are expected to continue until at least late May, as planned maintenance works are ongoing, reducing nuclear capacity by more than 1.6GW for the coming weeks. However, Dungeness’s 526MW B22 reactor has ramped back up to full capacity after coming back online at the start of last week following maintenance.

Power from coal sources has been limited over the last couple of weeks, as rising carbon taxes have made it unprofitable for generators compared to alternative power sources. Relatively low power prices meant that producers preferred gas, nuclear and wind instead of more expensive coal. Power demand over the next week has been forecast to average under 30 GW for the first time this year.

UK POWER BASELOAD

Weekly UK Insight 23 May 2016
Source: Reuters

Oil

$/bbl 13 May 16 20 May 16 Change
Brent Crude Jun 16 47.83 48.72 1.9%

Source: Reuters

Brent crude oil prices rose nearly $1/bbl last week, as the benchmark contract nears the psychological $50/bbl level. The increase was supported by data from the International Energy Agency showing tighter supply fundamentals as well as falling US inventories.

Recent price rises are largely a reflection of declines in US oil production, with producers reducing operations in response to low profit margins in the market. OPEC member Kuwait recently stated that the group would not seek price supporting market intervention during its next scheduled meeting on 2 June.

BRENT CRUDE OIL – MONTH-AHEAD

Weekly UK Insight 23 May 2016
Source: Reuters

Coal

$/tonne 13 May 16 20 May 16 Change
API2 CIF ARA 2017 45.80 47.00 2.6%

Source: Reuters

European coal prices rose 2.6% last week, driven by global news that Japan is expected to invest in dozens of new coal power projects. In contrast, the UK’s power network has been seen to rely increasingly on gas and new renewable generation, rather than high-polluting coal.

The UK’s coal imports have been declining since the doubling of its Carbon Price Floor last year, decreasing coal’s competitiveness for use in power generation. A number of coal-fired power plants are also set to close in 2016, lowering demand further.

COAL – API2 CIF ARA 2017

Weekly UK Insight 23 May 2016
Source: Reuters

Carbon

/tonne 13 May 16 20 May 16 Change
EUA Dec 16 5.89 6.01 2.0%

Source: Reuters

European carbon prices rose 2%, continuing the gradual recovery in emission prices since early March, fuelled by higher auction interest and continental power prices. German power prices rose, increasing the short-term profitability of fossil fuel generation.

Carbon prices are expected to be broadly range-bound this week. An upcoming announcement on the next phase of carbon trading is not expected to drive significant direction, while the long-term unprofitability of coal is expected to limit demand for allowances.

CARBON ALLOWANCES – EUA DEC-2016

Weekly UK Insight 23 May 2016
Source: Reuters

Exchange Rates & Economics

£/$ 13 May 16 20 May 16 Change
GBP/USD 1.4361 1.4500 1.0%

Source: Reuters

The pound sterling hit nearly a three-week high against the US dollar, bolstered by a recent poll indicating a majority of Conservative voters are now in favour of staying in the EU. Conservatives are traditionally seen as a camp that would be more pro-Brexit.

A top Bank of England policymaker has warned that even if Britain votes to stay in the EU, underlying weakness in the UK economy could mean that more support is required from the Bank. Interest rates could be cut below their current record low of 0.5%.

EXCHANGE RATE – GBP/USD (£/$)

Weekly UK Insight 23 May 2016
Source: Reuters

Regulatory and Market News

Britain generated no power from coal sources seven times in the last two weeks

On 9 May, Britain generated no electricity from coal, for what is believed to be the first time since the era of central electricity generation began with the construction of the UK’s first coal plant in 1882. There was no coal generation because relatively low power prices and rising carbon taxes meant the profit margin from running coal-fired plants was negative. When this happens generators are incentivised to turn off at certain times, as it is not economical for them to run. Coal was Britain’s biggest power source as recently as 2013 but is becoming increasingly unprofitable due to the carbon tax and low gas prices that favour burning gas, and the expansion of subsidised renewable sources like wind power. Since the milestone was passed there have been seven separate occasions when coal did not contribute to the UK’s fuel mix. The complete absence of coal generation marked a paradigm shift that would have been unthinkable even two years ago when oil and gas prices were high. The UK Government has announced plans to phase coal out entirely by 2025.

LINK: Coal Generation Data

Labour officials condemns Capacity Market scheme as a ‘waste of money’

The Labour Party has accused the Government of burying bad news after publishing a report on 6 May saying the Capacity Market (CM) scheme could add £38/year to household bills. The CM scheme pays subsidies to energy companies to keep their power stations on standby during times of peak demand. But DECC said its March proposal to bring the CM forward received “overwhelming support” from industry stakeholders, and confirmed recently that it will proceed with the implementation of an early auction for delivery during winter 2017/18. Around 2.5GW of plant capacity has already gone offline in 2016 to date, but the CM is expected to delay a further 3.5 GW of potential station closures for at least another 12 months. The Government acknowledges the operational challenges faced by suppliers in managing unexpected costs associated with an early auction, and recognises that it needs to give suppliers as much notice as possible of policies that will have an impact on consumer bills.

LINK: Capacity Market Impact Assessment

Energy Bill becomes law following approval by Parliament

The long-awaited Energy Bill has been approved by Parliament with no amendments, after the latest bid to extend the grace period allowing wind farms to receive subsidies under the Renewables Obligation (RO) scheme was defeated in the House of Lords. Energy Minister Lord Bourne said the Bill strikes a fair balance between the public interest, including protecting consumer bills and ensuring an appropriate energy mix, and the interests of onshore wind developers. The overall cost of onshore wind is continuing to fall, with new onshore wind cheaper than new gas – even at a time of low gas prices. The Bill contains measures to establish an independent oil and gas authority, as well as setting in law the early closure of the RO subsidy scheme to new onshore wind. The Bill became law after receiving Royal Assent on 12 May. Energy Secretary Amber Rudd said the Energy Bill is a vital part of the government’s plan to keep bills down while securing future supply.

LINK: Energy Act 2016 Parliament Website

One of UK’s highest-profile nuclear lobbyists urges Government to rethink nuclear strategy

Former Conservative MP Tim Yeo, one of the UK nuclear industry’s highest-profile lobbyists, has called on the Government to pause its nuclear strategy and think again about what energy technologies to pursue. Concerns have been mounting about whether a new nuclear power station will be built at Hinkley Point C. As chairman of industry-funded group New Nuclear Watch Europe, Yeo called on ministers to review which nuclear projects are most likely to be built. As delays at Hinkley continue, Yeo said that the Government needed to take a much more proactive stance to prevent collateral damage to other new nuclear projects in the UK. NuGen, who expects electricity generation to start at its new Cumbrian nuclear plant in 2025, could see the their 3.8 GW project overtake EDF’s Hinkley Point C as the first new nuclear plant operating in Britain since 1995.

LINK: New Nuclear Watch Europe

Download

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.