Steep British gas price discount to persist through summer, CCGTs to cash in

British NBP natural gas prices will remain disconnected from mainland European equivalents and exports to Belgium will continue at record levels until at least September, data suggests.

The British front month contract traded 3.00p/th below its Belgian equivalent on Wednesday morning, its steepest discount since May 2014.

This is an indication NBP prices will stay low relative to those on mainland Europe, and traders will have a financial incentive to export large volumes of gas to Belgium.

“There is no reason for [British] prices to come up until the supply situation changes,” one trader said on Thursday afternoon.

Low British demand, high Norwegian production and technical problems at Britain’s largest storage site Rough are the main drivers of the substantial British discount.

This is an even more encouraging economic outlook for UK gas-fired power plant operators, which have already been supplying more than 50% of UK electricity on certain days this summer.

And more combined-cycle gas turbine (CCGT) capacity will become available to the UK power system over the next few weeks, peaking at just under 24GW in week 33, up from 20GW in week 28. This means gas, already dominant in the UK this summer, seems certain to hold an even larger share of the generation mix moving from July into August.

ICIS calculations put gas plant profit margins including carbon tax for August delivery at a major premium to coal of over £16.00/MWh at Wednesday’s closing values. Coal plant margins remained deeply negative.

Inflexible system

“There is very little demand for UK gas at the moment, and there’s only so much flexibility in the system,” the trader added.

Britain’s only flexible export route – the Interconnector pipeline – has been running at near-maximum capacity since returning from annual maintenance on 29 June.

The high usage appears to be taking its toll, with operator IUK announcing a partial outage on 12 July due to excessive dust build-up. This rendered around 13 million cubic metres (mcm) of the pipe’s 60mcm/day capacity unavailable to shippers.

Technical indicators also suggest further downside for British prices. The NBP front month contract breached a key support level of 34.00p/th on 12 July, with the next support level seen at 30.00p/th.

Forward prices indicate NBP contracts will continue to trade below those on mainland Europe until the fourth quarter.

Looking ahead to the first month of winter, NBP and Zeebrugge contracts for October delivery closed at close to parity on 12 July.

Norwegian maintenance in September could be a trigger for prices to reconnect, as imports to the St Fergus and Easington entry points drop.

Future volatility

However, NBP contracts for winter delivery hold a substantial premium over Belgian prices. NBP winter price volatility and seasonal flow swings via the Interconnector pipe should become more prominent following the closure of Rough.

Despite this NBP premium, UK CCGTs remain comfortably in the money going into winter, with coal plant profit margins including taxes for a 35% efficiency plant going negative for the first time as recently as Friday. Gas plant margins for winter delivery carried a premium in excess of £7.00/MWh.

In June, operator Centrica Storage announced its intention to permanently close the ailing site following numerous reoccurring problems in recent years.

The site is Britain’s only long-range storage facility and accounted for around 70% of Britain’s total storage capacity making it a key source of supply flexibility for the NBP.

Over the course of summer 2015, when the facility was operating at full capacity, around 1,800mcm of gas was injected into the site.

Flows in both directions through the Interconnector have surged in Rough’s absence. christopher.somers@icis.com and alex.thackrah@icis.com