Brexit vote helps push gas and power prices to nine-month highs

The vote to leave the European Union at the end of June helped to push gas and power prices to near nine-month highs.

Wholesale gas prices rose by 29 per cent over the second quarter of the year and wholesale power prices by 25 per cent, according to a report by ICIS

“We’ve actually had around two years in the gas and power markets of long term sustained drops in prices,” said ICIS power editor Jamie Stewart. “That’s really been driven by the steady rise in renewable energy in the UK and elsewhere across Europe.”

However, prices began levelling out in the first quarter of this year. “What we’ve seen in the last quarter is the gas and power markets really bottom out and start to pick back up a little,” Stewart told Utility Week. 

The ICIS Power Index averaged £38.12/MWh over the quarter, an increase of 8.9 per cent on the previous three months. Average calendar year-ahead gas prices rose by 12 per cent to 36.14 pence per therm.

The bump in prices was partly driven by the collapse in value of the pound following the Brexit vote. A weaker pound makes imports more expensive and exports cheaper, in turn leading to stronger demand and higher prices.

Asked whether Brexit had any impact on prices through reduced activity in the wider economy, Stewart responded: “This is one of those situations where it really is too early to say”.

He continued: “Once we start to see manufacturing statistics come in if there is a general economic slowdown then you can probably expect to see that factored in to longer terms forward contracts on the gas and power markets.”

Stewart said the overall impact of Brexit was actually fairly minimal. He said there were some “more fundamental drivers” behind the price increases. 

Gas and power prices:

Source: ICIS

In the gas market the “greatest shock” of the quarter came the day before the referendum vote, when it was announced the Rough gas storage facility – the country’s largest – would be out of action for at least 42 days.  

“That facility is going to be unavailable through the whole of July. It won’t be available until August. So we’re not going to be able to refill that facility by the same rate that we usually would,” said Stewart.

The facility is currently 40 per cent full and will remain so until it reopens. Even if it returns to service in early August as operator Centrica Storage is hoping, by then it will be missing around 1.2 billion cubic metres (bcm) of gas – more than a third of its capacity.

“If we have a cold start to the winter – so a cold October – and we have to withdraw gas then, we could find ourselves looking very tight in the gas market because of this outage,” he added.

Gas prices were also influenced by moves in the oil market, with “gains in the oil price helping to support gains in gas”. The Brent crude front month price rebounded from a 13-year low of less $32 per barrel and briefly broke $52 per barrel in mid-June.

In the power market prices were driven higher by the continued closure of coal-fired plants. Longannet and Ferrybridge were both shut down in the first quarter of this year, and Eggborough exited the wholesale market ahead of it joining the Supplemental Balancing Reserve. All together 5GW of coal-fired capacity was lost – the equivalent of around 10 per cent of demand during winter peaks.  

The trend carried on in the second quarter of the year, as Engie shut down its 1GW Rugely plant and RWE announced its 1.6GW Aberthaw plant would be taken out of the wholesale market from April 2017. The resulting fears of tight supply margins during the coming winters put upward pressure on prices.

The coal closures also led to an increase gas-fired generation, which accounted for 47 per cent of all output during the quarter. It was the highest level in over five years and more than double the level for the same quarter last year. The trend helped to push up gas prices as well.

ICIS said the quarter was the most volatile for energy prices in two years. Traded volumes were boosted as a result, reaching 26GW. It was the highest volume for the period since 2010.