Britain faces summer of strong gas consumption from power sector

The British natural gas market could face a summer of strong demand from the power sector, as the economics for generating from coal plants collapses and gas moves back into favour.

The clean dark spread for Q3 ’15, or profit margin for burning coal from power generation, fell from its yearly high of £5.72/MWh on 2 April to just £2.58/MWh on 1 May, according to ICIS calculations.

Despite also having come under some pressure, the clean spark spread for gas fired generation was assessed at £2.99/MWh on 1 May. These dynamics mean that combined cycle gas turbines (CCGTs) could out-compete coal plants for meeting British power demand in the three month period and provide a key point of support for the NBP as it would lift gas demand with it.

One key factor in the sea-change is the ramping up of the British government’s carbon price support on 1 April from £9.55/tCO2e, to £18.08/tCO2e.

However movements in the wider markets and underlying fuels complex, have also helped precipitate the decline.

While coal prices have remained in a bearish trajectory, the purchasing power of British generators of the dollar denominated fuel has ebbed due to the strength of the US currency against the pound sterling.

A collapsing oil price has fed through to the British gas market, due to oil indexation in long term contracts in neighbouring markets.

This has also weighed on global LNG prices along with weak Asian consumption, with an increasing number of tankers arriving on Britain’s shores.

Expectations are that these two drivers to come to a head in the third quarter. Oil indexation is usually priced with up to a nine month lag, meaning that the brunt of the slump in prices this winter will feature in prices in Q3.

Many are expecting European firms to begin increasing nominations on their take-or-pay contracts in the period.

Furthermore, a weakness in the LNG markets may be exacerbated by new production coming online in Australia, which would displace volumes normally sold into the key Asian market.

Low gas prices can often lead to an increase in power demand, providing a floor to the market. An influx of LNG in Q3 ’14 resulted in gas fired plant’s consuming nearly 4.4 billion cubic metres, more than 40% higher year on year, according to National Grid data.

Prices for carbon emission may also play a role in displacing coal plants. The forecast going ahead is bullish because of the combined effect of the delay – until the end of the decade – of some of the scheduled auction volumes, known as back-loading, and progress towards the final approval of the reform. Almost all the analysts polled by ICIS expect prices to reach double-digits between Q3 ‘15 and Q1 ‘16, with most of them expecting it to happen already in 2015.

The reform would introduce a buffer known as market stability reserve that would absorb or release auction volumes depending on surplus levels, giving the supply side of the emissions trading system more flexibility.

Under an informal agreement reached on Tuesday by the European Parliament and the Council of the EU, the reserve would be operational from 2019 and would also absorb some of the pre-existing oversupply. albert.evans@icis.com