Energy Market Update. July 2018

Transcription

1 Energy Market Update July 2018

2 1. Power and gas prices flatten after prolonged growth Bearish oil markets, warmer weather and an oversupplied gas system brought a prolonged period of price growth to an end in June, with some power and gas contracts showing falls. In the nearer term, day-ahead power slipped just 0.2% to average 54.2/MWh. Prices were relatively stable throughout June despite large fluctuations in renewables output. Day-ahead power prices have remained higher then their levels at the start of 2018, an unusual trend considering a move into summer months. After a prolonged period of growth, seasonal power prices stabilised in June with contracts from winter 18 to winter 20 declining just 0.4% across the month. The exception was winter 18 power which gained 0.5% to 60.2/MWh. Growth in prices stagnated as gas and oil prices also brought their upwards trends to an end. Day-ahead gas fell 1.2% to average 55.5p/th. Prices dropped from 58.9p/th at the start of June to lows of 52.3p/th, as an interconnector outage from 13 to 28 June reduced the ability to export gas and left the system oversupplied. Seasonal gas contracts experienced mixed movements in June, rising 0.1% on average. Winter 18 gas prices rose 0.5% to average 62.7p/th. Gains in winter prices were limited as the interconnector outage allowed for increased gas storage injection for UK facilities, refilling storage levels to 40% of total capacity by 25 June. importers to stop buying Iranian crude from November, all led to uncertainty in the market. Prices rose towards $77.0/bl at the end of the month. API 2 coal prices rose 0.8% to average $88.0 /t, peaking at $89.8/t on 13 and 14 June. Coal prices continued to track fluctuations in oil prices throughout the month, but could see bearish behaviour as coal has been included in the list of 650 items facing increased tariffs from China as part of the ongoing trade dispute with the US. EU ETS carbon prices gained 3.0% to average 15.2/t, hitting 16.4/t on 5 June a fresh seven-year high. The month-ahead: Market prices stabilise as upward drivers stagnate after recent volatility Gas and power markets could see more stable prices in July, as months of volatile movement in the commodity markets begins to calm. Improved gas supply security following strong injections into gas storage sites amid the IUK outage could see gas contracts less prone to volatility in commodity markets. However, oil is still unsettled despite OPEC s agreement as geopolitical tensions continue to escalate. EU ETS carbon could move down with improving hydro stocks in Western Europe. Figure 1: Crude oil and annual wholesale gas and power prices Commodities react bullishly to geopolitical tensions Brent crude oil prices fell 1.9% to average $75.5/bl during June. Prices were volatile throughout the month in the run up to the OPEC meeting in Vienna on 22 June, but were ultimately weighed on by a decision that will see the group increase production by around 600,000bpd. However, Brent crude prices responded bullishly in the wake of OPEC s announcement as supply disruptions in Canada, unease at Libya s National Oil Corporation and an announcement from US officials for Energy Market Update July

3 2. Changes proposed to business exemptions from renewable subsidy costs The UK government has introduced several policies to drive renewable energy growth to help meet low carbon targets. However, these have also increased the price of electricity for consumers. To help the UK s energy-intensive industry (EII) businesses such as mining, chemicals, steel, engineering and heavy manufacturing remain competitive in international markets, the government has implemented certain exemptions from Third Party Charges (TPCs) for selected renewable electricity subsidy schemes. The government has now proposed to extend the exemptions to allow a greater number EIIs to avoid indirect charges for things such as policy costs. If the threshold is changed, it will not only impact those newly eligible, but will also have implications for energy costs for non-eligible and currently eligible businesses. The EII exemption EIIs were previously compensated by the government retrospectively for certain costs incurred in subsidising renewables. However, in the 2015 Autumn Statement it was announced that this would be changed to an exemption to provide EIIs with greater financial security in an effort to improve international market competitiveness, as energy costs make up a high proportion of outgoings for such firms. Exemptions from three schemes were proposed, which are: Contracts for Difference (CfD); The Renewables Obligation (RO), which supports large-scale renewable electricity projects, and; Feed-in Tariffs (FiT), which support small-scale renewables. The FiT exemption is yet to gain State Aid approval. These exemptions can be claimed against up to 85% of an EII s electricity consumption. Businesses within heavy industry are currently eligible for exemption if energy expenditure accounts for more than 20% of total site costs (energy intensity). When it introduced the measures, the government estimated that those included could save around 100mn/ year on energy costs. However, most UK businesses do not fall under the eligibility criteria and the cost of this scheme is effectively paid for by all non EII exempt electricity users, rather than by the government. This includes households and all other non-domestic users. At the time the government estimated that non-exempt businesses would see an overall increase in their energy bills of between 0.2% - 0.6%, or from around 160 extra for an average small energy user to an additional 62,900 for an average large energy user over a 10-year period. New government proposals On 22 June the government launched a consultation on whether the eligibility for EII exemptions should be widened for the CfD, RO and, if introduced, FiT schemes. The consultation has called for views and evidence from a wide range of stakeholders. The government decided to review the 20% exemption due to potential competitive distortions that it believes could have resulted from the current threshold, particularly for those within the same sectors. In order to address any distortions that have occurred, it has asked for evidence on whether the energy intensity threshold should be reduced to 17%, 15%, or 10%, or whether it should remain at 20%. If the threshold is lowered, the cost of exempting more EIIs will fall on other consumers. Therefore, the government is also seeking views on how to minimise the extra cost burden for those not eligible. The CfD exemption was the first to come into effect and was introduced in December Exemptions for the RO followed on 1 April Energy Market Update July

4 Implications for businesses If the lowest proposed threshold (10%) is adopted, up to 85% of electricity use for newly eligible industrial businesses would be exempt from RO, FiT and CfD policy costs. As a result, the government estimates that their bills will decrease by an average of 2.8mn/ year per business. However, those not eligible for the relief schemes would see an increase in their bills to cover the revenue lost towards renewable subsidies. It was estimated that the average annual bill would increase by 300 for a small business, 12,000 for a medium-sized business and 110,000 for an ineligible business operating in an energy-intensive industry. Businesses currently eligible will also see a rise in their bills of an average of 17,000/ year. Figure 2: Average additional energy bill cost for exemption change intensity scenarios This would add to already rising costs of energy for businesses. The latest government energy statistics have revealed that average electricity prices for non-domestic use rose by 7% between Q to Q and gas prices rose 4.2% over the same period. Options to lower the threshold by either 17% or 15% would still benefit newly eligible EII businesses in the same way but would see a decrease in associated costs for those not eligible and those currently eligible. However, the government has set out a proposal to mitigate costs for non-eligible users, which would see the amount of exemption (aid intensity) that a company receives tiered depending on energy intensity. So, aid intensity would remain at 85% for businesses with electricity intensity at or above 20% but decrease to 50% for those with electricity intensity of 15-19% and 35% for businesses with electricity intensity of 10-14%. Head of Climate and Energy Policy at WWF-UK Gareth Redmond-King commented: Whilst EIIS are important to our economy, they also contribute huge amounts of greenhouse gases to UK emissions. It is only right that they pay their fair share to support the building of the cleaner, greener energy infrastructure. However, Jeremy Nicholson, Director of the Energy Intensive Users Group argued the EIIs pay in other ways, such as through carbon costs and that the 85% limit would mean all companies would still be making a contribution to renewable energy costs. The consultation also seeks views on how the operation of the exemption schemes can be improved and how the redistribution of money recovered from over-exempted EIIs operates. Views are invited until 7 September Conclusions This is part of the broader debate on the balance of fairness on who should pay for decarbonisation. It could have significant cost implications. Energy Market Update July

5 3. Gas Market Trends 3.1 What s been happening? Figure 3: UK gas year and season ahead In June, day-ahead gas prices decreased 1.2% to average 55.5p/th. The month-ahead (July) gas contract went down 0.6% to average 54.6p/th, dropping to a low of 52.2p/th on 21 June. Gas prices witnessed bullish growth in May, with seasonal contracts from winter 18 to winter 20 rising 11.5% on average. Contracts on the near-curve both grew 0.5%, with winter 18 and summer 19 gas increasing to average 62.7p/th and 48.4p/th respectively. Winter 18 has grown 20.1% from January 2018 when it averaged 52.2p/th. Winter 19 and summer 20 gas lowered 0.7% and 0.2% to 55.9p/th and 43.8p/th respectively. Winter 20 gas climbed to 52.5/th (up 0.1%). Figure 4: UK gas day and month ahead The annual October 18 gas contract grew 0.5% to 55.5p/th. 3.2 Key market drivers Warmer temperatures have driven demand down. An interconnector outage between June also weighed on prices with the reduced ability to export gas. Prices were supported by increased gas demand for power generation which resulted from low wind output towards the end of the month. Energy Market Update July

6 4. Electricity Market Trends 4.1 What s been happening? Figure 5: UK power year and season ahead Day-ahead power fell 0.2% throughout the month to average 54.2/MWh. The month-ahead (July) power contract dropped 1.2% to average 53.7/MWh. Winter 18 was the only contract to rise, gaining 0.5% to 60.2/MWh, despite increased supply security in UK gas storage levels. Summer 19 and winter 19 power lost 0.3% and 0.7% to average 48.7/MWh and 54.5/MWh respectively. Contracts for summer 20 and winter 20 delivery also subsided, down 0.9% and 0.8% to 44.7/MWh and 52.6/MWh. The annual October 18 power contract increased 0.1% to average 54.5/MWh. Figure 6: UK power day and month ahead 4.2 Key market drivers Prices have reflected falling commodity prices, with gas directly affecting power prices, particularly in periods of lower renewables generation. Energy Market Update July

7 5. European Gas Figure 7: European gas Despite growth on the NBP in the first week of June, all other tracked gas markets underwent bearish movement, declining 0.6% on average. Towards the end of the week Belgium and Dutch prices eased with the expected arrival of LNG cargoes, strengthening supplies. Lower demand across Northwest Europe added to bearish fundamentals. The second week of June saw a decline in all gas markets, with the Dutch TTF experiencing the biggest change, falling 2.9% to 56.1p/th last week. LNG tanker arrivals on 8 June for the Netherlands and UK boosted gas supplies. Al Bahiya from Qatar arrived into the UK s Dragon terminal and Vladimir Rusanov from Russia arrived into Rotterdam. Tracked gas markets rose in the middle of the month, increasing 2.3% on average. Dutch TTF saw the biggest change, gaining 4.4% to 58.6p/th last week. The Dutch TFF was supported on 14 June as planned and unplanned outages in Norway supported day-ahead prices. (p/th eq) GB Zeebrugge (NCG) Germany TTF (NL) Figure 8: European gas 30 May May Change Towards the end of the month, gas markets lost the previous week s gains, decreasing 1.6% on average. Dutch TTF continued to experience the largest changes. Prices were impacted by temperatures falling below seasonal norm levels in Holland. EU gas prices have been weighed on by volatile oil prices and pressured by the ongoing trade dispute between the US and China. Energy Market Update July

8 6. European Power Figure 9: European power European power prices saw predominantly bullish movement in May, with Dutch power prices experiencing the greatest growth, rising 4.1% across the month. ( /MWh eq) 27 June 01 June Change GB prices were the exception, dropping 2.9% across the month. British prices remain higher than other European power prices; 31.6% higher than French prices, 36.3% above German prices and 13.3% more than Dutch prices. GB France German prices were driven higher by low renewables generation at the start of June but were capped by falling carbon prices. A rise in wind output throughout the rest of the month led to German prices dropping as low as 18.2/MWh within-day. A German nuclear plant outage supported prices in the first half of the month but drove prices downwards when the country s nuclear capability came back online on the 14 June. Germany 39.9 Netherlands 48.0 Figure 10: European power French prices have been influenced by nuclear outages, lower wind generation and ncreased demand as temperatures were lower than forecast. Energy Market Update July

9 7. World Oil Brent crude oil prices fell 1.9% to average $75.4/bl during June. Figure 12: World Oil Prices continue to respond with volatility to ongoing geopolitical tensions including the US/ China trade war. Brent crude oil fluctuated throughout the month in the run up to the OPEC meeting in Vienna on 22 June, with prices falling as low as $73.5/bl on 21 June. The meeting resulted in OPEC agreeing a 600,000bpd increase in production. Within-day prices rose to over $78.0/bl on 27 June as disruptions in Canada s Syncrude production facility is expected to last throughout July and will see an additional 300,000bpd of capacity offline, adding to reduced production from Venezuela and Libya. Figure 11: World Oil 27 June 01 June Change Crude Oil ($/bl) Gas Oil ($/t) Energy Market Update July

10 8. Coal API 2 coal prices rose 0.8% to average $88.0 /t, peaking at $89.8/t on 13 and 14 June. Coal prices continued to track fluctuations in oil prices throughout the month, but could see bearish behaviour as coal has been included in the list of 650 items facing increased tariffs from China as part of the ongoing trade dispute with the US. Figure 14: API 2 Coal This comes just a month after Chinese officials had been encouraging businesses to buy more US coal to reduce the trade gap, with coal arrivals into China at 26.4mn tonnes, up 22% from June Figure 13: Coal API 2 Coal ($/t) 27 June 01 June Change Energy Market Update July

11 9. Carbon (EU ETS) EU ETS carbon prices gained 3.0% to average 15.2/t, hitting 16.7/t on 5 June a fresh seven-year high. Figure 16: EU ETS carbon Prices were supported by the MSR which is expected to see a reduction in the availability and supply for EUAs from 2019, and a reduction in the number of surplus allowances. A deal from EU lawmakers could see the renewable energy target increased from 27% to 32% for 2030, acting to reduce future demand for EUAs. EU ETS prices fell below their 50-day average towards the end of June, but experienced strong auction results in the final week. Figure 15: EU ETS carbon ( /EUA) June 01 June Change Energy Market Update July

12 10. Consultations Monitor Sponsor Background and Proposal Close Date National Grid Defra Defra Winter Review and Consultation 2018 Following the publication of its Winter Review and Consultation for , National Grid is seeking views on electricity and gas supply and demand for this winter, changes to the GB electricity percentage margin formula and gas notifications, specifically the Margins Notice and the Gas Deficit Warning. As part of National Grid s Winter Review and Consultation, it moved away from a transmission demand-based margin to a margin based on total underlying demand. National Grid considers the changes will present the margin in a more consistent manner in the future, and plans the updated formula in its Winter Outlook Report in October. Environmental Principles and Governance After EU Exit Defra opened a consultation on 10 May, asking for views on plans to introduce a new watchdog to hold the government to account on environmental ambitions and obligations once GB has left the EU. The watchdog s remit would cover areas including the reduction of greenhouse gas emissions. It will work alongside a new policy statement which will set out environmental principles to guide policy making. The introduction of the watchdog and the policy statement is intended to replace EU environmental principles such as the polluter pays principle. However, the principles would not be binding, and the government would only be required to give regard to them when setting legislation. Air Quality: Draft Clean Air Strategy 2018 Defra opened a consultation on 22 May, seeking views on plans to improve air quality by reducing pollution from a wide range of sources. The strategy sets out that the UK should maintain the existing EU model of integrated pollution control post-brexit. Individual plans are presented for a range of sectors including transport, domestic properties, and industry. There are plans to explore opportunities to further reduce emissions by publishing a series of sector roadmaps detailing ambitious standards to make the UK industry world leaders in clean technology. The government aims to close the regulatory gap between the current EU ecodesign and medium combustion plant regulations to tackle emissions from generators in the 500kW to 1MW thermal input range. 19 July 2 August 14 August Energy Market Update July

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