Gas and power prices soar amid supply challenges

Tight winter margins, combined with reduced nuclear output in France, pushed baseload power prices to their highest levels in two years over the last three months of 2016, according price reporting firm Icis.

Wholesale gas prices hit an 18-month peak after an ongoing outage at the Rough gas storage facility left Britain with its lowest reserves since market liberalisation in the mid-1990s. Prices over the last quarter averaged around 45 pence per therm – an increase of 10 per cent over the previous quarter and 22 per cent year-on-year.

The Icis Power Index averaged around £45.94 per megawatt hour over the last three months – up 7 per cent on the previous quarter and 16 per cent year-on-year. The increase was partly the result of short term price spikes on the spot market, which rippled through to the longer-term contracts on which the index is based.

The index reached a 12-month high in early November after National Grid forecast a 500MW shortfall during peak hours due to low levels of wind generation. Prices on the spot market neared £400/MWh for some of the half-hours affected.

Fears over the availability of nuclear output from France also provided upward pressure on prices.

In June, the French nuclear regulator ASN ordered EDF to conduct safety checks on 12 of its reactors due to concerns over possible manufacturing defects. Then, in September, it was revealed that EDF had extended maintenance at some of its reactors into 2017 to accommodate the inspections. The following month ASN instructed EDF to speed up the process by conducting tests on five of its reactors without waiting for scheduled maintenance periods as it had intended.

French power prices were driven up and there was a knock-on effect in Britain which typically imports power from across the channel via a 2GW interconnector. Quarterly imports from France dropped to the lowest level in five years, falling by nearly three quarters when compared to same period in 2015.

“It certainly added to the general feeling of alarm that we’re quite tight on the supply margins,” said ICIS head of power Zoe Double. “Overall we’re still importing power from France despite France being very short of power at the moment.” Imports were also throttled by suspected storm damage to the interconnector in late November which left it operating at half capacity.

With the UK still facing tight margins, Icis expects power prices to be mainly driven by the weather during the first quarter of 2017, although concerns over the French nuclear output are likely to ease as EDF’s reactors come back online. Double said the early auction for the capacity market, which is due to take place towards the end of January, should allay fears over tight margins during the next winter season, lowering prices.

The Rough outage means gas supplies will be tighter than usual for the rest of the winter season and Icis expects prices to remain high to attract imports from mainland Europe.