UK electricity market shifts risk to first quarter
Energy traders should be “very careful” leaving volume open on the UK electricity market for the Q1 ’14 delivery period amid a shifting of risk to the post-New Year period, major energy buyers have been told.
“Be very careful of leaving any volume open for the first quarter because, if the weather forecast is accurate, the market will only go up during that period,” Magali Hodgson, optimisation manager at Big Six supplier npower, told the Major Energy Users Council on Wednesday afternoon.
“Therefore, you have to be careful when you buy your summer,” Hodgson added, “because if you buy between January and March, prices may be a lot higher than they are at the moment.
“So cover the first quarter and be careful of when you hedge in the first quarter for the following summer.”
The warning was specifically a reference to electricity traders, but being weather-based can apply equally to Britain’s NBP wholesale natural gas market.
It came very much in line with electricity market activity in recent sessions. Between Tuesday 8 October and Wednesday 16 October, the premium held by Q1 ’14 Baseload over the average of the November ‘13 and December ‘13 contracts increased by 23%, from £1.30/MWh to £1.68/MWh, ICIS closing assessments show.
Before that, movement on the contracts reflected a market uncertain of where to price the spread, with a relatively wide £1.30-2.22/MWh range in evidence since the start of September. But over the past week a higher degree of certainty appears to have emerged, with the risk stacked on a post-New Year cold snap.
There was agreement from Isa Coles, operations manager at consultancy LG Energy Group. “The first quarter is without a doubt the risky period,” Coles said.
“We have customers looking at the summer, expecting the summer to soften as we come out of winter, but if we remember last year when gas storage [stocks] went down to 3% – are we going to put all our faith in the English weather? That’s a foolhardy thing to do.”
Coles added that LG Energy Group was looking to position its customers “with quite a hefty hedge on the summer, with a view to closing out the remainder as we come out of this quarter”.
Hodgson said that, for Q1 ’14, at this stage buyers should be “at least 80% hedged”.
However there were murmurings of a less risk-averse approach from Energy Industries Council risk management head Jon Ferris. “I would be more relaxed about the first quarter,” he said.
“I wouldn’t necessarily say you have to be fixed at this point in time but, have a strategy, and have a stop-loss in place,” he added.
Weather to buy?
The recent shift of risk premium to the first quarter was first cited by electricity traders last week ( see EDEM 9 October 2013 ), and is backed by longer-term weather forecasts.
A recent Met Office statement said temperatures during November ”are thought more likely than not to be close to or a little above average throughout, especially in the south”, where the majority of British energy demand is centred.
Weather Services International also said in its most recent three-month forecast that the UK would be warmer than normal in December, although it also said to expect a slightly below average November.
The power market move comes in spite of National Grid supply margin forecasts, which indicate considerably more comfortable margins, in the region of 14GW, across the front quarter, compared with an average of around 12GW during December. This suggests demand will drive the market over the winter with little note paid to the supply side.
The forecast put a lot of faith in weather models stretching up to four months ahead, which traders may see as a risk they are not prepared to take. Despite acknowledging this, Hodgson said: “If you like skiing in January and February, you’re going to be absolutely pleased.” Jamie Stewart
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