Utilities will typically buy part of their supply portfolio as early as six to 12 months ahead of time through long-term contracts, and top up their supply by buying on the short-term spot market which is typically more volatile.
But as the proportion of the UK’s energy mix shifts towards intermittent and unpredictable wind and solar power the value of long-term contracts is becoming difficult to estimate. Traders cannot guarantee that renewable energy will contribute to the UK’s thin power supply margins so they must price in the risk that renewable output could be lower than expected with higher prices.
Price data from market experts at Icis show that the difference between the cost of buying electricity in advance and buying on a day-to-day basis is widening each year, meaning utilities are now more likely to delay their buying to avoid the ‘renewables risk’.
Last winter the average price of buying a Winter 2014 contract over the nine month period before October of that year was £52.15/MWh, 18 per cent more than the average price of buying power during the winter on a day to day basis which was £42.66/MWh. The risk for Winter 2013 was just 12.2 per cent, but the long-term contract premium is expected to grow as renewables claim a greater stake of the market.
Icis head of power Zoe Double told Utility Week that energy suppliers can particularly struggle over the summer.
“It is more difficult to predict how much solar will be generated, as solar generation is not directly connected to the National Grid, so there is less visibility,” Double explained.
The risk premium paid by traders for Summer 2013 was the highest since renewables deployment began to make serious inroads into the generation mix, with the price paid in advance averaging as much as 21 per cent more than the price paid during the summer itself.
However, Double warned that this trend could reverse altogether if tightening supply offsets stronger than predicted renewables, meaning those utilities which delay their winter buying to the spot market could be stung by higher costs.
“If there is an unexpected outage, or lower wind and solar generation than expected – or indeed a colder winter and higher demand for gas and power – short-term prices could spike,” she said.