Power prices dip after hitting two-year high

Gas prices up 42 per cent due to ongoing problems at Rough storage facility

Wholesale power prices started to slide in February after hitting a two-year high during the first three months of 2017, according to price reporting firm ICIS.

The ICIS power index averaged £46.19/MWh during the quarter – a 32 per cent increase on the same period in 2016 – reflecting concerns over the closure old loss-making thermal plants. Prices began to ease as the coldest months of the year passed without incident.

“Market participants have been reassured by the electricity system coping during the winter, despite tight supply margins,” said ICIS head of power, Zoe Double.

“There are still concerns as to whether payments to generators under a new capacity market will incentivise plants remaining online next winter, but more renewable energy is likely to be available as well.”

The index tracks prices for baseload contracts delivered over the following two seasons. The large year-on-year increase incorporated substantial prices rises during the last nine months of 2016, after the index dropped to a nine-year low in the first three months of the year.

Meanwhile, the average wholesale gas price over the quarter for year-ahead delivery was up 42 per cent when compared to same period in 2016 at 46.07 pence per therm.

Ongoing technical issues at the UK’s only long-term gas storage facility, Rough, left the UK with its lowest winter stocks since the gas market was liberalised. The facility accounts for around three quarters of Britain’s total storage capacity, but has been unable to receive injections since mid-2016.

The shortfall was largely met with imports from Norway, which ramped up by 22 per cent year-on-year to 22 billion cubic metres (bcm) and met nearly half of all winter demand in the UK (51 bcm).

Interconnector imports from Belgium also helped also helped to fill the gap, as did short-term storage sites, which increased injections during off-peak periods, such as weekends and the Christmas holidays to make up for the lack of long-term capacity. 

A year-on-year reduction in liquefied natural gas (LNG) cargoes, down from 23 to just 11, indicated a more relaxed supply situation during the quarter than might have been expected, and storage stocks were back to the seasonal norm of just over 1 bcm by the end of the period.

As fears dissipated, gas prices started to decline slightly and there was a knock-on effect on power market due to the large volume gas generation in the UK’s energy mix.  

“Additional supply from Norway and imports of gas from Europe via the interconnector helped to ensure that Britain managed its demand, despite lower levels of liquefied natural gas,” said ICIS head of gas Ben Weatherall. “Technical issues with long-range storage remain, but the system has shown its flexibility.”

Given the ability of the system to cope with reduced storage capacity, ICIS expects gas prices to be bearish over the rest of 2017. Nevertheless, the price reporting firm warned that the problems at Rough are not over and noted that Ofgem has approved a request from Centrica not to sell storage capacity at the facility for the next year, starting in April.

Fossil fuel prices – coal as well as gas – are expected to play a key role in determining power prices during the remainder of the year. The volume of renewable generation which comes online will also be a driving factor.

Wholesale gas and power prices since beginning of 2016

Source: ICIS