A crazy week in UK power. But will the madness return this winter?

Admin

SHARE THIS STORY

In recent days, UK power has been a crazy energy market to trade in. Late in the day on 14 September, a 50MW, £105.00/MWh front-week trade – a transaction worth nearly £900,000 – was down almost 10% at £95.00/MWh, £100,000 wiped off its value, within just 35 minutes.

In terms of jaw-dropping potential, this was not a one-off. The market saw its most expensive baseload trade of all time. The front month jumped more than £5.00/MWh from the previous day’s close, the biggest one day front-month move since the crazy days of late 2008.

In the days that immediately followed, attempts to value short-term fundamental risk seemed to go out the window. Gaping bid-offer spreads on daily products of £20.00/MWh were seen. There was no fair value – only what a counterparty was prepared to pay or accept.

After years of bemoaning low liquidity and a lack of drivers beyond the British NBP gas market, perhaps trading UK power could be fun after all?  The market was out on its own. Normal rules seemed to have been suspended. For a brief window it was like those times at school a teacher had a day off sick and a feeble, ill-equipped, under-prepared supply teacher was drafted in to man the fort. Anything goes. And it did.

Gold-fish memory

One of the first things I remember being told by an energy trader when I started covering this industry as a journalist in 2009 was that the market has “a very short memory”. Never more so was this in evidence than last week.

I’m writing this on 21 September. One week ago, the UK front month was valued 13% higher than it was on Tuesday night. That’s a huge decline given that little has changed fundamentally with October still 10 days away. I understand people take profit on the gains, cash in on a bloated market, but for every seller there’s a buyer.

So a week ago, with fundamental risk “very real” as one trader put it on a day-to-day basis, the market valued October at a set price. A week later, the same delivery period is down 13% because daily fundamental risk has eased. This is what that trader meant when he cited the market’s “short memory”.

Disprove the theory

The big questions are, of course, will this happen again, and if so, when? The standard answer to that is, “if I knew the answer to that, I could retire tomorrow”. But perhaps here we can disprove the “very short memory” theory, and look back at historical events.

British system operator National Grid issued a system warning amid huge price spikes in November last year and May of this year. While this month’s events were not accompanied by a system warning, balancing market price spikes were similar.

Prior to November 2015, having looked through ICIS news archives, 2006 appears to be the last time a system warning was issued, and before that, 2003. I could be wrong, there could have been one in between, but that is all I can find.

It is widely known that, in light of the mass closure of coal-fired plants in recent times, the UK power system enters this winter expecting its tightest supply margins for many years.

Given we have seen two system warnings in the past 12 months and prices to match on a third occasion, and we then have to look back a decade to find the last time one was issued, I would say this will happen again this winter, possibly more than once. The best the market can do is keep an eye on supply margins – week 40 is already looking tight, while December also holds promise – and position itself in advance.

When I was at junior school we had a whole term during my fourth year – that’s what we called it back then – with our regular teacher off sick after he burst into tears one assembly. A whole season of feeble, ill-equipped, under-prepared supply teacher madness, where anything went.

This could be an interesting winter for UK power.

PREVIOUS POST

What’s in a name? That which we call a Bulgarian hub

13/09/2016

Bulgaria and the European Commission have recently been announcing, with much fa...

Learn more
NEXT POST

Ballast bonuses sink shipping activity

26/09/2016

The cancellation of two planned LNG vessel charters in Europe this week shows th...

Learn more
More posts
Clock is ticking on MiFID II
02/02/2017

Time is running out for energy companies that have to work out if they will be included or exempted ...

Read
No alternative: Europe’s low-carbon energy transition will come of age in 2017
25/01/2017

“Alternative energy”. Is that still a common phrase? In some quarters, it is. In a recent New Yo...

Read
Should the EU get tough on the gas network codes?
10/11/2016

Following the recent publication of the EU Agency for the Cooperation of Energy Regulators’ (ACER)...

Read
2016 – for LNG it was the year that wasn’t
24/10/2016

The long-awaited surge of new global LNG production has not led to the widely-expected and sustained...

Read
Ballast bonuses sink shipping activity
26/09/2016

The cancellation of two planned LNG vessel charters in Europe this week shows that it’s becoming h...

Read
What’s in a name? That which we call a Bulgarian hub
13/09/2016

Bulgaria and the European Commission have recently been announcing, with much fanfare, the country i...

Read
This winter it really is about the weather
02/09/2016

The cliche about weather driving energy prices, in particular on European gas and Asian LNG, is just...

Read
Time for change: The expiry of Gazprom contracts in eastern Europe
31/08/2016

While all eyes are turned to Russia’s natural gas pipeline projects – Nord Stream II, TurkStream...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more