Gas and power prices hit new record highs

Gas and power prices reached new record highs over the past few days as concerns over gas stocks for the coming winter fed through to the power market and amplified price spikes due to unusually low wind generation.

An analyst for price reporting firm ICIS said the surge in gas prices seen over recent weeks and months is like nothing the company has ever witnessed in nearly three decades covering the market.

On Sunday, average power prices in the day-ahead auctions for Monday hit a new record high of £230/MWh as coal units were ramped up to help fill a large gap in wind generation.

“Out of installed capacity in the UK of 24GW, which is split almost equally between on- and offshore wind, we had hours on Monday and Tuesday that actual generation was well below 1GW,” said ICIS senior energy economist Stefan Konstantinov.

This was followed by another new record average of around £285/MWh in the day-ahead auctions for Thursday.

There were also record high balancing prices on Thursday itself, with the baseload imbalance price hitting £960/MWh – more than three times the previous record from January of £304/MWh according to EnAppSys – as some power stations priced themselves at £4000/MWh in the Balancing Mechanism.

Speaking to Utility Week on Thursday evening (9 September), Konstantinov said wind output had risen to around 2GW during the day but had still left the market at least 5GW short of the 7 to 9GW that could typically be expected at this time of year: “It’s like two or three large-scale nuclear plants that have effectively come off the grid”.

This slight uptick in wind generation was also accompanied by a sharp decline in solar generation, which was around half as much on Thursday as it was on Wednesday: “The fact it is a cloudy and quiet day means we’re down on both solar and wind and it’s double whammy.”

He said this missing renewable generation had to be replaced with thermal generation made more expensive by high gas and carbon prices.

Konstantinov said there have been extremely high prices during peak hours, with deviations from forecast renewable generation exacerbating the spikes.

“The power situation is the peak on the top of the mountain but the mountain is very big because of the gas situation,” explained Tom Marzec-Manser, lead analyst for European LNG and natural gas at ICIS.

He said if the events of this week had taken place in the context of “normal” gas prices “obviously there would be spiking power prices but they would be relatively similar to the previous spikes in power prices when similar drops in wind and solar occur”.

Marzec-Manser said the front month price on the TTF gas hub in the Netherlands is currently hitting new record highs on an almost daily basis: “It’s in a constant northbound trajectory.”

He said the front month price hit a new peak of €55.24/MWh on Wednesday and looked likely to reach €56.50/MWh as he spoke to Utility Week on Thursday evening: “I’ve been watching the market for 13-odd years. You would typically expect the market to move maybe a euro or two over a month, not in the space of 24 hours. The volatility is high. The nervousness is great.”

At the same point in 2020 the price was just €10.84/MWh and prior to the coronavirus pandemic had been in the range of €15-20/MWh at this time of year: “ICIS has been pricing the TTF and the NBP for 27 years – we’ve been doing it the longest – and there has been nothing compared to this rally in 27 years, without a doubt.”

Marzec-Manser said the record gas prices ultimately stem from a lack of sufficient gas stocks within storage facilities in Europe.

“Why are those gas storage units empty? Well, we’d have to rewind to April and May. Typically, that storage injection campaign within Europe begins in April.”

He said April and May this year were “still pretty cold so actually we were still drawing from storage. We were taking the bottom of the tank from the previous winter so we were starting that injection campaign six weeks later than we normally would from a lower base from where we would normally begin as well. We’ve been in catch up for the whole of the summer.

“The majority of the utilities have got that curve back onto where they would be and that is in a world where they’ve not been able to call upon as much LNG as they would typically like. The European gas market, when it’s tight, typically has two sources of discretionary supply above the Norwegian gas, the standard Russian gas, the Algerian gas and the domestic production. The two bits of flexible supply are LNG and additional Russian gas.”

He said global LNG demand is experiencing a rebound, particularly in Asia, where users are “prepared to pay a premium on whatever the European participants are prepared to pay, which means any spare shipments are principally going to Asia.”

In South America, Brazil is also forecast to triple its LNG imports in 2021 when compared to last year due the lowest level of rainfall in the country in more than 90 years, which has hit the hydropower generation on which it primarily relies for electricity.

“You’ve got Chinese industrial demand rebounding strongly from Covid and you’ve terrible precipitation in South America drawing that LNG away from Europe so that’s not helping the European utilities refill their stocks, which means they’ve turned to Russia for additional gas.”

However, Russia is also “struggling” to send additional gas above the volumes it is contracted to supply: “Actually, the one company whose storage is depleted is Gazprom’s within Europe. Everyone else has sorted out their books by now but Gazprom is not supplying its own storage units within Europe, which means the overall reserve ahead of winter is lower than it should be by about 9bcm (billion cubic metres), and when storage capacity is about 100bcm,  we’re probably talking about 10 per cent by the time we get to October; we’re missing 10 per cent of our storage that we’d typically expect.”

He said there are two narratives over why this is – the first being that Gazprom is applying pressure on European regulators to promptly approve the start of the operation of its new Nord Stream 2 gas pipeline. Media reports earlier this week suggested the company is angling to start operation next month.

“That’s definitely one school of thought and I’d say that school of thought was probably the main argument until the beginning of August. Things have changed a lot since then and the situation with Russian supply has actually got worse because we’ve seen a fire at a processing plant in Siberia.”

He said his own research has found “the storage situation is Russia itself is in a pretty bad situation. Like the storage units in the EU and the UK, they got depleted really, really heavily so by the end of Q1 they were also way below where they ought to be. Therefore, they similarly need to inject 35 per cent more gas into storage over the six months of summer than they normally would.”

He said that equates to about 80 million cubic metres per day that cannot be sent to Europe: “It is actually that 80mcm that European market participants would love to see flowing into the Germany, Austria and the Netherlands that is just not turning up because its staying within Russia.

“This has made people very nervous. They’re trying to incentive LNG to come in even though the Asian market and the South American market is also buying and so there’s a lot of nervousness about will this 10 bcm gap in storage somehow be filled; will the startup of Nord Stream 2, whenever that happens, lead to a wave of additional coming from Russia? No one really knows.”

Looking forward to the winter season, Marzec-Manser said the weather will “make or break this.”

“If we actually have a very mild Q4, this could all very rapidly disappear, and similarly, if we have another winter of the calibre that we had in 2017/18, which led to the Beast of the East in March of 2018, then I can’t see a way in which this bull run would not persist.”

On the power market, Konstantinov said low wind output is expected to persist for the next week or two and remain “well below” the seasonal normal. However, he said prices are likely to become less spiky due to the return to full capacity of the UK’s interconnector with France as well as the resumption of generation from multiple gas power stations and several of the units at the Heysham nuclear power station.