Tight winter margins lead to rising gas and power prices

Gas and power prices have risen in the third quarter of 2016, prompted by fears of tight supply margins over the coming winter.

Power prices for delivery during the season spiked towards the end of September after news emerged of prolonged maintenance at nuclear plants in France. There was a knock-on effect on gas prices, which increased in anticipation of extra demand from the power sector, according to analysis by price reporting firm ICIS.

The ICIS Power Index averaged £43.06/MWh over the period, eventually reaching a 17-month high. The price for gas contracts delivered the following year averaged 40.98 pence per therm. Both figures were up 13 per cent on the second quarter of the year – the largest quarter-on-quarter increase since 2010.

Nevertheless, the average power price in the three months to the end of September was only 0.5 per cent higher than in the same period last year and the average gas price was 5 per cent lower.

The recent jump in power prices came after EDF revealed that planned outages for refuelling had been extended to accommodate safety tests on up to 18 reactors across its French nuclear fleet. It had been ordered to conduct the checks in June by the nuclear regulator ASN to make sure they don’t suffer from a similar defect to one it uncovered at the Flamanville 3 reactor being built in Normandy.

On the French market there was a 17 per cent day-on-day increase in the price of baseload contracts for delivery in first quarter on 2017. Britain, which frequently imports electricity from France via a 2GW interconnector, saw a 7.5 per cent increase.

There were also price spikes for short-term contracts earlier in September due to a combination of ongoing summer maintenance at gas-fired plants; unplanned outages at coal and nuclear plants; low-levels of wind power; the partial failure of an interconnector with France; and even a boost in demand from air-conditioning due to warmer than usual weather. Baseload contracts for delivery over one 24-hour period hit a new record high of £200/MWh.

“The record highs in UK short-term prices in September, and then subsequent concerns over levels of French imports this winter, show the market’s concern over the tight supply margin, which boosted long-term prices in the third quarter,” said ICIS head of power Zoe Double. “Looking ahead to future winters, this margin is expected to improve, but strong demand or supply disruption in the next six months could continue to make traders nervous.”

Aside from the spike in power prices in late September, gas prices over the third quarter were largely driven by issues with Centrica’s Rough gas storage facility, which accounts for around three quarters of the UK’s total storage capacity.

Gas prices rocketed up in July, after it announced the complete shutdown of the facility over the winter as it extended a 42-day testing programme through to next year. However, they softened the following month as UK traders diverted supplies to European facilities instead and Centrica decided to make two-thirds of Rough’s withdrawal capacity available from the beginning of November.

“Initial concerns over whether the UK has enough gas in storage have eased, as the UK has other sources of supply to draw on for the coming winter,” said ICIS head of gas Ben Wetherall. “Britain is in a good position to take advantage of global gas market oversupply, which will help to meet the stronger demand for gas for generation.”