Analysis: UK power supply confidence re-establishes electricity-gas correlation
Fewer power plant outages and a reassessment of supply margins for the remainder of the yearare set to strengthen the monthly link between the natural gas and electricity fron-month contracts in the wake of an unusually low correlation coefficient, fundamental evidence suggests.
Key UK power and gas curve contracts tend to share a near-perfect correlation of 0.9 or higher. But ICIS analysis shows that the rolling front-month power versus gas correlation fell to 0.32 in September, its lowest value since May 2011 (see graph).
Conflicting perceptions of how well-supplied the UK’s power and gas markets would be this winter were largely responsible for the disintegration of the relationship.
A series of unplanned power plant outages, coupled with a busy maintenance schedule for nuclear capacity, sparked concern that baseload generation could be low, with the picture mirrored the other side of the 2GW IFA cable in France ( see EDEM 4 October 2013 ).
Long outages took place at British nuclear units, such as EDF’s 550MW Dungeness B22 and its 480MW Hinkley Point B7, leading to 5.2TWh being generated in September – the fuel source’s lowest share of the mix
Nuclear’s share of total electricity production fell to 23.3%, down 6.2 percentage points month on month – its largest monthly decline, according to ELEXON figures dating back to the beginning of 2011.
This supported the front winter and its component contracts as market participants took care to lessen exposure against a sudden drop in temperatures, combined with low potentially stuttering nuclear output.
“The panic is quick to arrive, given the size of the cold spell last year and the depth of the cold in February the previous year,” said one UK power trader.
September’s drop in nuclear output meant the country had to turn to more expensive gas-fired generation to help make up the shortfall, which lifted prompt power prices.
This led to the market considering spark spreads to be “undervalued” with traders suggesting less-efficient gas plants would be called upon to maintain supply margins during the winter ( see EDEM 11 October 2013 ).
While UK near-curve power prices were pushing higher during the final weeks of September, the NBP found downward moves easier to come by. This was due to the market growing increasingly confident that the hub would be well-supplied throughout the fourth quarter, despite a year-on-year deficit in storage levels ( see EDEM 16 October 2013 ). Data from Gas Infrastructure Europe put September’s average stocks at 85.7% full, 9.3 percentage points lower year on year.
However milder temperatures and maintenance at Centrica’s Rough storage site meant that more gas was readily available, offsetting the stocks situation.
The correlation coefficient ascertains the strength of the relationship between two variables, and gives a measure between minus one and one. Positive values illustrate the two variables have a direct relationship, while negative values imply an inverse connection.
A value closer to zero implies a weakening correlation, while the closer the value to one, the more the two markets move in tandem.
There are already signs that the strong gas-power relationship is returning with the front month during the first half of October recording a correlation coefficient of 0.99 – a near-perfect relationship.
Nuclear output has increased, which has allowed gas prices to exert greater control over power with less expensive capacity on the system. Both power front-month baseload and the NBP have largely moved in tandem with the contracts responding to the recent drop in temperatures.
However, the extent to which the NBP near curve will dictate the mood of power could still hinge on the perception of supply margins for the coming months.
“We should be relatively well supplied for power. Coal will ramp up as we go into the winter following some maintenance, and we should get a lot more wind power. However gas is the marginal fuel and it will be the main driver for power,” concluded one power analyst. Christopher Rene
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