Published on February 14, 2014
alfaenergy Energy Review United Kingdom 2013
Contents • UK Power • UK Gas • Spark Spread • Dark Spread • Taxes & Non Commodity Costs • UK Power Supply Generation • Gas Prices V Gas Fired Power Generation • Oil • Coal • UK & Global News • 2014 and beyond www.alfaenergygroup.com
UK Power Bullish Drivers Bearish Drivers • Gas prices - the amount of gas fired generation utilised will have a direct impact on the price of power • Large Combustion Plant Directive is (LCPD) legislation created to ensure all ageing and high polluting fossil fuel power stations are closed • The economy - an improved economy will increase demand • Further closure of power plants due to poor market conditions • • • • Cheap coal and over supply Energy efficiency decreasing demand Carbon prices continue to be supressed Weaker gas demand Below seasonal normal temperatures in March caused a surge in prices Prices went above £80/MWh on the 22nd £65.00 62.85 MW/h £55.00 £50.00 £45.00 Average prices in 2013 were £50.88 Lowest point of the year was in June 2013, which falls in line with the summer months and low demand £60.00 52.24 51.05 51.76 48.35 47.84 50.38 47.35 46.51 52.22 48.34 48.29 £40.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 www.alfaenergygroup.com
UK Gas Bullish Drivers Bearish Drivers • Storage - the UK is at a huge risk regarding energy security with a lack of storage available with 14 days of reserve. France and Germany have 99 and 122 days of storage capacity respectively • The economy - an improved economy will increase demand • UK Shale gas production - unlikely to produce for several years • Weak oil prices • LNG creating global gas to gas competition • Weaker gas demand in UK and Europe • Consolidation of European gas infrastructure • • Prices breached 100ppt in March Lack of gas storage available, the system was unable to cope with the increase in demand System was well supplied with storage levels increasing and 90.00 86.45 demand at traditional season lows 85.00 Day-ahead prices Price rose on averages increased demand 60.21p/th to replenish storage compared to stocks and a price 67.95p/th in 2012 attractive enough for Norwegians to sell their gas Norway announced a cut on 6 billion cubic meters of gas during winter Pence/therm 80.00 75.00 70.00 65.00 60.00 70.05 69.61 66.24 67.94 65.98 59.04 65.28 64.48 65.45 64.55 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 69.28 55.00 50.00 Jan-13 Feb-13 Mar-13 Apr-13 Nov-13 Dec-13 www.alfaenergygroup.com
Spark Spread • The spark spread, the profit of purchasing gas and selling it as electricity. • The below graph show the cost of buying wholesale gas prices against wholesale power prices • **Gas prices have been converted to £/MWh from pence per therm • There have been times when it has gone into minus numbers as it did in March on more than one occasion. • The margin rarely goes above £10.00/MWh i.e. the profit of selling electricity from gas fired power stations £/MWh 70.00 35.00 60.00 30.00 50.00 25.00 40.00 20.00 30.00 15.00 20.00 10.00 10.00 5.00 0.00 0.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Power Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Gas • Suppliers have to decide if it is truly economical to operate existing stations, let alone construct new stations. Both Centrica and SSE have mothballed part of their portfolio and will shelf future projects. • According to the former SSE chief executive Ian Marchant, he said it created the “very real risk of the lights going out.” www.alfaenergygroup.com
Dark Spread • The Dark Spread is the profit margin for coal-fired power generation • This profit margin did not drop below £25.00/MWh in 2013 • Lower coal prices make the margin higher. The Dark Spread is now at a 3 year high • Comparing this to gas generation. The profit per MWh has not gone above £7/MWh in 2013 £35.00 £30.00 £25.00 £20.00 £15.00 £10.00 £5.00 £Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Dark Spread Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Spark Spread www.alfaenergygroup.com
Taxes & Non Commodity Costs Non-energy costs are making up an Increasing proportion of the total costs and now account for as much as 40% of a typical bill Policy Costs The pie charts below summarise the rising government levies included in your electricity contract to help the UK reach its ambitious carbon reduction target as set by the EU. In simple terms it is the cost of a ‘green’ and sustainable energy market in the UK. • • • • • • Climate Change Levy (CCL) is essentially a tax on energy consumption set at a fixed rate for non-renewable forms of energy Renewable Obligation (RO) requires suppliers to buy a proportion of their electricity from renewable sources Feed-in-Tariffs (FiT) is an incentive for small-scale renewable generation CRC EES is the scheme that affects any organisation that consumes over 6,000 MWh. Participants must pay allowances from the Government to cover their emissions Climate Change Agreements is an incentive for large industrial users to improve their energy efficiency EU Emissions Trading Scheme (EU ETS) is another mechanism introduced by the EU to encourage the reduction of CO2 Network Costs These charges are set by the operators of the regional distribution networks and the national transmission system. They vary depending on where you are geographically in relation to the source of power. The further away you are from a source of power, the higher the distribution costs. In simple terms it is the cost of transporting electricity along its wires and cables to the end user’s meter. It also incorporates the costs for maintaining an aging network. For further information on a breakdown of these charges please follow the link: http://bit.ly/1dMrLoW www.alfaenergygroup.com
UK Power Supply Generation Mix Coal - Four months of the year coal was responsible for over 50% of UK power production • A record high of generation averaging 45.7% of the supply mix, compared to 2012 with 35% average generation Nuclear - Second largest source of power to the UK averaging 29% of the supply mix. It has met extra demand in the summer as and when required • Transition from ageing plants to new generation will be one to lookout for with future supply crunches CCGT - Averaged 15% of UK generation throughout the year, lows of 21% in March and highs between 35-39% during the summer periods. This could drop in the future as margins remain very tight and suppliers lack of interest due to poor economics Wind - Recent government legislation has led to onshore wind to be less incentivised and offshore to be encouraged With a lack of alternative energy production (solar, anaerobic digestion etc.) available this has led the UK to revert back to coal as a primary source of power production 100% 90% 80% 70% 60% 10% 11% 30% 13% 3% 6% 9% 19% 14% 14% 10% 26% 21% 29% 5% 31% 12% 17% 28% 14% 13% 16% 39% 12% 11% 31% 35% 21% 50% 8% 38% 16% 9% 12% 14% 28% 27% 40% 30% 20% 49% 50% 57% 50% 48% 44% 10% 32% 44% 46% 43% Oct-13 Nov-13 32% 52% 0% Jan-13 Feb-13 Mar-13 Coal Generation (MW) Apr-13 May-13 Jun-13 Nuclear Generation (MW) Jul-13 Aug-13 CCGT Generation (MW) Sep-13 Dec-13 Wind Generation (MW) www.alfaenergygroup.com
Gas Prices V Gas Fired Power Generation Below we can see the correlation of wholesale gas prices against gas fired power generation (CCGT - Combined Cycle Gas Turbine) March crisis- Spark spread scarcely enough to justify production Perfect scenario for CCGT operators, summer low gas prices allows for higher margins therefore production increases 70 pence per therm – The line of resistance Warning for the future – if gas prices breach 70ppt it will force CCGT operators to rethink their strategy: http://reut.rs/1apNi6r 8000 90.00 7000 85.00 6000 80.00 5000 75.00 4000 70.00 3000 65.00 2000 60.00 1000 55.00 0 50.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 CCGT Generation (MW) Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 UK Monthly Gas Price (p/therm) www.alfaenergygroup.com
Coal • The Large Plant Combustion Directive will force all but one of the UK’s 19 coal fired power plants to shut by 2022 • Only 2 have stated that they will invest in themselves and convert to becoming biomass plants, how environmentally friendly it is to be burning wood instead of coal remains to be seen • The graph below shows that there is no correlation between coal prices and coal generation • 2014 is likely to show Coal prices continue to decline and coal generation to increase until they are forced to close Coal Price V Coal Generation 2013 25,000 $120 $100 20,000 $80 15,000 $60 10,000 $40 5,000 $20 - $0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Coal Generation (MW) Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Thermal Coal Price ($) www.alfaenergygroup.com
Oil - Brent Crude • Global demand was lower with European, US and Chinese demand falling or lower than expected • Price spikes such as August/September where oil breached $111 was largely attributed to fear and sentiment over Egyptian protests and an unlikely Suez Canal closure • Libyan production was down some 60% to 400,000 bbl/day • From the trend line in grey we can see that oil was overall relatively stable with an average of $108.59 for the year $120.00 $115.00 $110.00 $105.00 $100.00 $95.00 $90.00 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 www.alfaenergygroup.com
News UK News Global News Shale gas in Europe: Centrica is the first supplier to invest in fracking. Mixed reactions in Europe e.g. Poland is for it, Spain is against it. http://bit.ly/1aHo125 Post Fukashima - LNG prices are up 85% since March 2011. This has led to South East Asia to switch back to coal fired generation. http://bit.ly/1aHohOr Nuclear Deal struck - the first plant in 15 years, expected to go live in 2020, prepare for non-commodity price increases over the next 6 years to recoup the investment. http://bit.ly/1aGkFPO German Power prices collapse by over 50%, this has also effected the share prices of EON and RWE which will effect their ability to borrow money and invest in power generation projects. It has also led to job losses with around 4000 expected to go at Npower in the UK. http://bit.ly/1hdgCM1 LNG Security - Renewal of Qatar contact for LNG from June 2014 till 2018. Thereafter we shall start our contract with the US to import their shale gas for the next 10 years till 2028. http://bit.ly/1f2EylG Ed Miliband wants a price freeze - expect 16 months of energy debates till the election in 2015. A consequence of this was the share price of Centrica and SSE has dropped which will effect their ability to raise money and invest in power infrastructure. http://bit.ly/1dQkTFh David Cameron wants to get rid of the green taxes and levies which are the reasons for price increases - this has been implemented for domestic users, not likely to affect the commercial sector. http://bit.ly/1ij00pT China to double its LNG import capacity by 2015 to 3540million tons per annum. The UK imports around 4million tons per annum. http://bit.ly/1mzxdNU Russian state owned gas producer Gazprom has started to build pipelines to China as gas demand and prices drop in Europe. http://bit.ly/1bMWCjb Floating LNG - the ability to discover and ship gas in deep water has been revolutionised by taking away rigs and pipelines to be done on a single ship: http://www.youtube.com/watch?v=nVs9qjF5Uzo www.alfaenergygroup.com
2014 and Beyond Capacity Margins and Forecasts • Capacity to meet demand under normal conditions looks sufficient, however convergences of events could really test the UK robustness to an evolving landscape • Below shows that from 2014/2015 the UK capacity margins for supply to meet demand become alarmingly tight leaving the UK vulnerable to black outs UK Electricity Supply Crunch 20% De-rated Capacity Margin 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012/2013 Base Case 2013/2014 Low CCGT 2014/2015 High CCGT 2015/2016 Fuel Imports from Continent 2016/2017 Fuel Exports from Continent www.alfaenergygroup.com
2014 and Beyond • Election year in preparation for April 2015 will dominate again impacting UK energy infrastructure investment prospects • Demand remains weak, this will be impacted by economic prosperity or lack of • Gas and power prices are likely to remain flat with gas forward curves showing declines (backwardation) • Energy security regarding gas imports - the UK continues to increase its reliance on global gas imports • Lack of storage capacity could lead to another price shock if another prolonged winter occurs • Non-Commodity Costs continue to increase every April and/or October • Go green but going dark - a robust replacement for coal has yet to be found, renewables are unable to pick up the slack as we try to wean off coal under the LCPD http://bit.ly/LTcQ0w • Self-generation and energy efficiency investments will rise as consumers look to mitigate rising costs alfaenergy Can Help Consumers to: 1. To buy smarter 2. To use less 3. To generate their own electricity www.alfaenergygroup.com
About alfaenergy In 1995 a group of like-minded individuals came together with a vision to form an energy services company that would achieve growth by building trusted and lasting relationships with its clients. Their aim was not only to drive their clients energy costs down through exceptional procurement services and energy management consultancy, but to constantly add value by mediating between them and the intricate supply chain in the energy industry. With 4 international offices, over 90 employees and over 4000 clients, alfaenergy is now responsible for over £1 billion of annual spend on energy. Our nomination as one of the finalists for the Broker of the Year award at the 2013 Energy Awards and our preceding success in winning the same award in 2012 is recognition that our vision is being realised. WE ENCOURAGE YOU TO CALL US TODAY LET US MAKE THE DIFFERENCE www.alfaenergygroup.com
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