LONDON (ICIS)--UK energy margins were further pressured after a fire took the 2GW UK-France electricity interconnector (IFA1) offline on 15 September.
Both electricity and gas prices surged in the early part of Wednesday’s session in response to the fire, as an additional 1GW was removed. Baseload Day-ahead prices surged in response, climbing to £480/MWh, £95/MWh higher than its previous close.
The British NBP Day-ahead contract was trading at 187p/th around 11:00 London time , more than 22p/th above its previous assessment.
While the fire at IFA1 helped boost prices further, the news added to an already tight and volatile market. The first half of September has already seen price records being shattered in consecutive sessions, with the latest being an all-time high of £2,500/MWh clearing for a 15 September evening peak on Nord Pool.
Speaking about the recent price spike events, one market participant said: “people will be sitting on very high wholesale losses at the moment, especially those who have not hedged for these events.”
WHAT HAS BEEN BEHIND THE UK ELECTRICITY PRICE SURGE?
Beyond tight global gas market fundamentals, the UK has been facing generation unavailability issues owing to low wind output, unreliable nuclear fleet and mothballed CCGT plants.
In the first half of September, wind generation has averaged less than half that of the same period last year, data from National Grid showed. The lower wind output meant that more expensive forms of generation were called to help balance the system, demanding higher balancing prices. This saw a record cashout for the summer of £4037.80/MWh on 9 September.
Extended nuclear outages added to supply woes as two reactors at Heysham 1 and 2 remain offline due to maintenance. Since the start of August, Nuclear generation has averaged 4.5GW, 0.5GW below the same period last year.
While there is enough of a buffer in the system to meet increasing demand, the short-term availability of these assets (mostly coal and inefficient gas) has led to higher prices. This has been exacerbated by the unprecedented surge in gas prices with both TTF and NBP front-month shattering records.
The TTF front month surpassed €75/MWh for the first time on Wednesday morning, while the NBP front month edged closer to 200p/th.
Tight margins have meant that the cost of procuring electricity during peak demand periods has surged, with the average base to peak spread widening significantly.
Traders have highlighted that a wider base to peak spread is expected to be an issue heading into winter.
Since the start of August, the spread between the Winter ’21 baseload and peakload has widened from £13.85/MWh to £29.50/MWh.
“Spreads are an issue for sure,” said one trader, with another adding “given the base and peak spreads, overnights and 5A’s, people will go bust these next two weeks.” This is likely due to the growing premium of hedging Block 5 (peak demand period between 15:00 – 19:00).
Tim Partridge, Head of Energy at DB Group says “The morning and evening peaks are harder to forecast,” which makes it difficult to supply during these periods. Partridge adds that while peak periods have increased at roughly the same rate as their baseload equivalents, the “price change between the peaks and a flat load has nearly doubled for the summer period.”