UK wholesale energy prices continued their unabated bullish trajectory throughout October as several factors converged to give rise to concerns over the power supply margin going into winter. Gas prices were up 16% to 1.63 p/kWh and electricity prices followed suit with a 19% rise to 5.40 p/kWh. Oil prices were also volatile initially rising to $52.00/bbl before falling back to $49.00/bbl at month end. Coal prices continued to rise and closed the month up nearly 8% at $69.75/tonne.
EDF announced that 12 of their French nuclear reactors would be subjected to extensive tests during scheduled maintenance in the coming months. This precipitated concerns over a tight nuclear power supply in the winter period and forced up French and European electricity prices. The UK imports French power via an interconnector and the anticipated loss in flows from France will impact upon the already small electricity UK generating margin. Indeed, there is a likelihood that the UK will need to export power to France to cover any shortfall during this period.
The National Grid nevertheless issued a report predicting a slightly better than anticipated generating capacity margin of 6.5% (up from 5.5%) over the 2016-2017 winter period, but this failed to reassure the market as speculators forced up prices. The continuing weakness of the pound throughout October also impacted on the cost of gas imports and there was a drop off in LNG cargo arrivals into the UK as ships were diverted to more profitable markets.
The much heralded OPEC agreement to freeze production in order to curb the global oil glut failed to have a lasting effect on prices after an initial flourish in early October. The next OPEC meeting will be held during November but once again there is a lack of optimism and non OPEC members are disinclined to agree to any cuts until there is unanimity within OPEC.
In the UK the Department for Business, Energy and Industrial Strategy confirmed it will hold an auction for about 55GW of additional power generating capacity in January 2017 for delivery in 2017-2018. Once this cost is settled it should help energy suppliers budget for this cost when pricing forward contracts.
In the short to medium term bullish factors look to be dominating the energy market and of course at this time of the year the weather can play a major part. The outcome of the US election and the subsequent impact on the value of the US dollar could also prove to be a factor in the coming weeks.
Article by: Richard Clayton