Wholesale prices last month
Many wholesale power and gas contracts fell for a second consecutive month in November. A high influx of Liquified Natural Gas (LNG) imports across the month and milder than expected temperatures have led to comfortable gas supplies and below seasonal=normal demand. Carbon, coal and oil prices -which impact power prices -dropped to respective four, seven and 13-month lows in November.
Non-commodity charges and industry updates
The end of November saw numerous developments in energy schemes that relate to Third Party Charges (TPCs). The Capacity Market has been suspended following a European Court ruling that the State Aid process was not fully consulted on by the European Commission. Government has announced the draft budget for the next Contracts for Difference auction for low carbon generation. Several suppliers have failed to pay for their share of the Renewables Obligation scheme.
In early December, we have a neutral to downwards outlook for wholesale power and gas prices. Comfortable gas and power supplies and an expected decrease in gas demand (owing to milder weather forecasts) will likely provide downwards pressure on prices. Commodities including oil, coal and LNG also look to remain at their current relatively low levels, while the OECD has cut its 2019 global economic growth forecast amid rising trade and financial risks. This can dampen energy demand and prices.
Electricity Price Update
Last month All seasonal power contracts decreased in November, down 3.3% on average. Falling EU ETS carbon prices have continued to pressure the power curve as the cost of emitting carbon is factored into the cost of power generation. Lower gas, oil and coal prices have also weighed on power contracts.
In December, power prices could rise as wind generation is expected to average 6.3GW until 14 December; while a fall in nuclear capacity and a delay in the return of Hunterston B could lead to tighter than previously expected supply margins until January 2019. The nuclear Hunterston B plant has a total generation capacity of 965MW and has been offline since March 2018 to allow safety investigations after cracks were found in the plant’s nuclear reactor
Gas Price Update
Last month Nearly all gas contracts fell in October as 12 LNG cargoes came to UK terminals throughout the month, boosting available gas supplies. All seasonal gas contracts decreased in November, falling 6.6% on average. Summer 19 gas dropped to a 14-week low of 54.5p/th on 26 November. Seasonal contracts followed commodity prices lower, as oil dropped to a 13- month low. Looking ahead Revised forecasts expect temperatures nearer seasonal normal levels to the end of 2018. Combined with high LNG send-out following a recent influx of LNG tankers to the UK (expected to continue in December), gas prices are expected to drop further. Prices may be additionally weighed on by falling commodity prices.
Brent Crude Oil
Brent crude oil prices fell 16.4% to average $67.6/bl in November. Prices dropped as concerns of a tightening market disappeared following the US granting waivers to several countries from its sanctions on Iran. Fears of an oversupplied market were responsible for prices falling to a 13-month low of $57.6/bl on 29 November.
API 2 coal prices fell 10.3% to average $87.3/t in November. Coal fell to a seven-month low of $83.0/t on 21 November, following a fall in Chinese demand as the country banned seaborne thermal coal imports until 2019. Carbon EU ETS carbon was down 3.1% to average €18.9/t in November, its second monthly decline. Prices started the month at a four-month low of €15.2/t, amid uncertainty over the UK’s future carbon pricing policy after the Autumn Budget. Prices rose throughout the month and peaked at €21.2/t on 23 November, driven by the upcoming Market Stability Reserve which will reduce upcoming auction volumes in an effort to cut levels of oversupply in the market.
Non-Commodity Charges & Industry Charges
Supplier tariff movements
In October, 23 suppliers moved up the price bandings with their cheapest dual fuel products, with just three moving down. Of the three downward movements, the largest was seen from Simplicity Energy, which launched a new 12-month fixed tariff priced at £1,048 per year on average. The largest price increases of over £100 were applied by several of the Robin Hood white label suppliers. They had previously offered some of the market-leading fixed tariffs in September. Domestic tariff movements are a useful proxy for small and medium-sized business rates, as the bills are largely made up of the same components.
Capacity Market Suspension
On 15 November, it was announced that the Capacity Market (CM) would be suspended after the General Court of the European Court of Justice ruled in favour of Tempus Energy following a legal challenge regarding the treatment of demand-side response in the CM auctions. The CM is a government programme to ensure security of supply and to encourage investment in new generation capacity. Generation providers successful in the auction are awarded payments for providing generation capacity, with the costs of the scheme currently contributing to around 3% (£2.6/MWh) of total TPCs on the consumer electricity bill. As a result, future CM auctions and current CM payments to generators will be suspended until further notice.
34 suppliers fail to pay for the Renewables Obligation
On 21 November, Ofgem confirmed that several suppliers failed to pay their share of the costs of the Renewables Obligation (RO) scheme for 2017-18, with the total underpayment reaching £58.6mn. Ofgem has opened investigations into Economy Energy and Spark over non-payments, and also said it requires URE Energy and Eversmart to deliver outstanding payments by 31 March. The £58.6mn shortfall will now need to be paid by the rest of the supply market, and could lift bills by ~£0.2/MWh in the near-term. The regulator confirmed on Friday 30 November the list of all suppliers who failed to pay their RO by the 31 October late payment deadline, plus the details of the amounts each company owes. Of the 34 suppliers that failed to meet their obligation by the 1 September deadline, 20 fully discharged their obligation by the late payment deadline of 31 October. The total shortfall as a result of the failure to pay was £58.6mn, across both the RO and the RO Scotland, triggering mutualisation for the first time. Of the suppliers who still owe outstanding payments, Ofgem commenced investigations into Economy Energy and Spark Energy; however, the latter investigation ceased after Spark ceased trading and was acquired by OVO Energy.