Power sector-fuelled switching levels to cap NBP natural gas gains

Albert Evans

28-Aug-2014

Consumption from the power sector, which is providing the backbone of British gas demand in the absence of strong storage injections, may cap prompt gains around the 45p/th mark as fuel switching dynamics come into play.

Analysts polled by ICIS have estimated that the coal-to-gas switching level for power plants would be around the 45p/th mark, as the less efficient plants that benefit from the slump in gas prices are forced out of the merit order by cheaper coal plants.

However this may have a contradictory effect – reducing gas demand by enough volume to send prices in the other direction, in effect creating a ceiling to the market, one London-based analyst at a trading house said.

Another analyst at a consultancy agreed, but viewed it more as an aspect that would slow any breakout to the upside.

“Once we start hitting the top end of 45p/th, some of the more marginal gas plants will be priced out of the merit order,” he said.

“This trend will properly be ramped up if we head towards 50p/th,” he said, but added that the shift in the supply-demand balance would be enough to stall the gains.

This balancing factor could stall gains that have been caused in recent days due to bullish sentiment from the ongoing crisis in Ukraine, one trader active in the UK gas market said.

Demand from the power sector has been a key supporting factor in an otherwise fundamentally bearish gas market, with plants consuming around 20-30% of British gas demand throughout August, according to National Grid data.

In the period between 20-27 August CCGT plants off took an average of 48 million cubic metres (mcm) of gas per day from the British system, offloading a total of 385mcm in the seven-day period, data showed.

The largest gas consuming plants were RWE’s Pembroke which consumed 14% of gas in the period and its Staythorpe plant which consumed 9.5%, the data indicated.

These plants, along with GDF Suez’s Saltend and EDF Energy’s West Burton plant consumed continuous strong volumes in the period as high levels of efficiency and cheap gas prices allowed them to occupy space near the base load of UK power demand.

However the remaining 21 power plants which consumed 224mcm of gas in that seven-day period, had lower efficiencies and will be more vulnerable in any shift higher in gas prices.

While these may have their running times reduced to zero, more efficient plants running at levels closer to baseload may find that they are forced to return to covering peaks in power demand, reducing the overall levels of gas consumption.

British gas prices hit multi-year lows at the end of July, due to unusually high storage stocks that saw demand for the summer period revised considerably lower. Albert Evans

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