With memories of price spikes that occurred last winter still fresh, UK energy traders have moved to guard against a repeat this year, the ICIS Power Index for Q3 2017 shows. But, despite the concerns over tight supply, there are signs the UK energy system is ready for the onset of high demand.
London, UK, 11th October 2017 – An increasing risk of disruption to nuclear power output in France contributed to a sharp increase in wholesale electricity and gas prices in the UK throughout August and the first half of September.
This, combined with rising global fuel markets, threatened to push UK wholesale energy prices to a new high for 2017 in the third quarter.
But a late reversal saw prices retreat with winter looming. In mid-September, having spiked above £48.00/MWh for the first time since January, the ICIS Power Index (IPI) declined, signalling that the UK is better equipped to deal with any price spikes which might emerge in France this winter.
The IPI was £44.98 per megawatt hour (MWh) on average over Q3 2017, up 5.3% quarter on quarter. The average price of gas to be delivered over the next calendar year rose 2.9%.
“Last winter, UK energy prices spiked to record highs because of unexpected nuclear power disruption in France. This year, the risk of a repeat performance has steadily increased, and UK markets have been pricing in this risk,” said ICIS power markets editor Jamie Stewart.
“UK traders are worried about being ‘caught short’, which could mean having to buy electricity to satisfy delivery obligations at a time when severe price spikes are occurring. So, to mitigate this risk, traders have bought more electricity on the forward market which has itself pushed up prices.”
The price of gas has also risen, not only in the UK but in Western Europe too, partly because more fuel may be needed to run gas-fired power plants in the event of nuclear power plant closures.
Moreover, the UK will enter this winter with a near-total absence of capacity at Rough, the country’s only large-scale natural gas storage site. This means forward prices have had to be sufficiently high to encourage gas to flow from the continent into Britain.
While nuclear power in France was the dominant driver of UK energy prices, a swathe of other, more global drivers also weighed in during Q3. These included high global coal prices driven by a tightening of fundamentals in China, high Asian LNG prices due to a lack of supply on the short-term market, and production controls in the global crude oil market.
But other factors will go some way to countering this risk of higher prices. One such factor, the UK electricity capacity market, is in play for the first time this winter. Under this mechanism a number of power plants must guarantee their availability at times of system stress. This makes harsh, short-term price spikes less likely to occur.
The IPI delivers independent insight into the complex world of wholesale power prices for both households and industrial electricity consumers, based on real market trading. The IPI is updated every working day and is freely available from the ICIS website, along with ICIS’ quarterly analysis of price trends and volume.
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