Power and gas prices level out at 10-year lows

Wholesale power and gas prices stabilised in the first three months of 2016, levelling out at 10-year lows, according to a quarterly report by price reporting firm ICIS.

The ICIS power index averaged £35/MWh in the first quarter of the year – the lowest figure since 2007 and a 12 per cent drop on the previous quarter.

The gas price averaged 32.35 pence per therm (p/th) – a 12.5 per cent fall on the prior three months and the lowest quarterly average in more than a decade.

The power index reflects trading activity for power delivered over the following summer and winter, weighted according to seasonal demand, whilst the gas price is for deliveries over the following year.

The price of power has been downwards on trajectory because of the growth in renewable generation, with its low operating costs and subsidies. The price of gas has also experienced a prolonged decline because of a global glut of liquefied natural gas (LNG) and the collapse in the price of oil.

However, despite reaching historic lows, power and gas prices fell by much less over the last three months than in preceding quarters. The power price ended March at £34.31/MWh, a 6.7 per cent fall since the end of last year. The gas price dropped 4 per cent to 31.99p/th.

The report said gas and power prices were both held up by the stabilisation of the oil market, which saw the price of Brent crude finish the quarter higher than where it started. Speaking to Utility Week, head of power Zoe Double said gas contracts on the continent are often indexed to the oil price.

“So when the oil price falls the price of gas supplied under long-term contracts in the European market falls,” she said.

More gas is therefore bought under these contracts, reducing demand in the rest of the market. “Prices on the continent fall and there’s a knock-on effect on UK prices as well, because there’s a lot of interconnection between the UK and Europe,” said Double. As gas is one of the two main fuels used for generation, there is an additional knock-on effect on power prices.

Rising demand from the power sector, also helped to support gas prices, offsetting weaker household demand due a mild winter. Almost 40 per cent of the UK’s generation came from gas fired plants over the quarter – the highest share in at least five years.

Concerns over supply margins for the coming winter similarly helped to stem the decline in power prices, after two coal-fired power stations closed during the quarter – Longannet and Ferrybridge – and a third – Eggborough – exited the main energy market.

According to ICIS, market participants agree that gas and power prices are likely to remain low but there is debate as to whether they could fall further still, with much depending on the price of oil.

Continued low oil prices, it said, could lead to a more substantial decline in North Sea gas production although increased storage volumes and LNG imports should help to offset any reduction to supplies. The growth of renewable generation will continue exert downward pressure on long term power prices, the report added.