Gas and power prices level out

ICIS says decoupling of gas and power prices indicates continued need for coal generation

Wholesale gas and power prices levelled out in the second quarter of 2017 as buyers returned to the market following three months of falls, according to price reporting firm ICIS.

The period also saw the decoupling of gas and power prices, indicating that coal will continue to play an important role in the energy market for some time to come.

The ICIS Power Index averaged £42.73/MWh over the three months to the end of June – a drop of 6.5 per cent on the previous three months.

The decline largely reflected the tail-end of the losses which began in the first quarter and carried on into the early part of the second. The market soon stabilised as buyers were tempted back by the lower prices. The movements were exaggerated by fluctuations in the exchange rate between sterling and the euro, which drove changes in demand from interconnected neighbours.

The average price for gas delivered over the following year similarly fell by 6.2 per cent quarter-on-quarter. However, starting in early June “the trend of electricity and gas prices moving largely in tandem, which had been evident since at least last November and is usually a steadfast characteristic of the relationship between the two commodities, came to a surprising, although most likely temporary, end,” ICIS said in its quarterly report.

This decoupling was mainly the result of increased expectations of the need for coal generation to ensure security of supply during periods of high demand, prompted by several instances in the second quarter when coal plants were called upon to keep the power grid in balance.

“According to forward markets, the UK’s gas-fired power plants will be cheaper to run in coming years than coal. This means they will be switched on and be more likely to run twenty-four hours a day,” said ICIS power editor Jamie Stewart.

“Coal plants will be fired up only when necessary to meet demand. But this does mean the price of electricity at that time will need to reflect the cost of turning on those aging, expensive coal plants. And, with global coal prices at a high for 2017, that could in turn mean large, albeit brief, power price spikes over the months ahead.”     

Coal has been steadily phased out of the generation mix over the last few years, leading to a major milestone on 21 April when, for the first time in 130 years, the power system ran without any domestic coal generation for a full 24 hours.

The second quarter of 2017 also saw Centrica announce the closure of Rough – the UK’s only long-range gas storage facility. Nevertheless, the spread between gas prices for delivery during the summer and winter failed to shift.

“Participants had largely expected the site to close after years of faltering performance from the ageing asset, hence the lack of price movement,” said ICIS. “The lack of Rough has however put a lot of pressure on the Interconnector - a pipeline linking Britain with Belgium - to export volume to mainland Europe so participants can access storage sites there.”

The average of the ICIS power index over the quarter was up 12 per cent year-on-year, whilst the average gas price for delivery over the following 12 months was up 18 per cent when compared with the same period in 2016. 

Author: Tom Grimwood,
Channel: Markets & Trading

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