Growth of renewables led to increased hedging in 2015

The growth in renewable generation led to an increase in the amount of hedging undertaken by UK traders in 2015, according to a report by ICIS.

The price reporting firm said over the counter (OTC) trading volumes shifted from the near to the far curve during the year, with front season volumes falling by 14 per cent year-on-year and volumes two and three seasons ahead climbing by 17 and 13 per cent respectively.

According to its European Power Market Report 2015 the shift was driven by a number of factors, predominantly the growth of intermittent renewable generation which cannot be relied upon to provide power on demand.

Editor of the ICIS European Daily Electricity Market Jamie Stewart told Utility Week: “The actual physical output had to be traded on the short-term market because they’ve been very difficult to predict … but that output still has to be hedged for … so that’s where the [power purchase agreement] market comes in.”

“As you get more renewables come into the system … then you’re also going to get this increase in forward curve liquidity. You would also expect an increase in short-term liquidity but not necessarily relative to the curve.”

The report said a rise in the number of retail customers taking up fixed rate tariffs further increased the need for suppliers to hedge their requirements on the far curve. It added that tightening supply margins also enticed buyers into the market as did uncertainty over the carbon price for UK companies.

Overall OTC volumes during 2015 decreased by 4.2 per cent when compared to the previous year. The report said this was partly down to a dispute between Russia and Ukraine in the second quarter of 2014 which had threatened gas supplies to the rest Europe.

It said high levels of volatility had boosted liquidity at the time, meaning trading volumes were down 35 per cent in the same period this year. A 24 per cent increase in trading in the final quarter of 2015 prevented overall volumes from falling further.

“The dynamics behind the UK power market economics are set to change”, according to the report. It predicted that the pricing of contracts will become more and more influenced by movements on the global coal market as “the falling cost of gas and its superior competitiveness against the more heavily penalised coal” results in “more coal operating in the margins”.

However, it said the inertia of traders – for whom the link between UK gas and power prices is “ingrained” – meant that a “major shift away from gas as the dominant driver” looks unlikely.

The report suggested that new players could be drawn to the market by tighter supplies next winter and the resulting increase in volatility. It added that the continued focus on the offloading of generation assets by the big utility companies could also draw in new players, as they take up the mantle of investing in new generation.

In recent months SSE announced the closure of three of the four units at its Fiddler’s Ferry coal-fired plant and Engie announced the full closure of its Rugeley coal-fired plant. Both cited deteriorating market conditions as a motivation for the closures.