//April Price Risk Report

April Price Risk Report

Important Information Update

Since the start of the month we have seen quick and severe increases in contract costs that had not been foreseen. There are 3 main drivers (carbon costs, oil costs and gas cost) but the most prominent being the increase in gas costs. The below graph shows movement over the last 30 days and as you can see the general downward trend has ceased with severe upward pressure.

One of the main causes of the increase is limitations in gas exports from Norway. Norway experienced a cold snap themselves and have been refilling their internal storage to replenish supplies which reduced output. In addition a key Norwegian processing plant is experiencing disruption which is expected to last around 2 weeks as well as planned maintenance at some UK gas fields. When you factor in lower than forecast wind generation, carbon prices being at record highs (only once have they been higher than they are today), oil hitting $70/barrel and the UK experiencing lower than seasonal temperatures there is a perfect storm for short term impact.

Whilst it is impossible to predict the exact time frames and long term impact of the factors we believe that currently the best approach for customers with renewals in 2019 is to allow the market time to settle with regular review points. During this period we suggest having all areas of contractual needs discussed so clients are in a position to act when the market position supports their needs.

Summary of last months report:

Overview:
Throughout March we have seen reductions in gas and electricity costs across the board.

Gas:
Gas prices dropped on average 7.8% during March with summer 2019 seeing the greatest drop of c13%. Winter 2019 dropped to an 11 month low. For annual contracts starting in April, the cost dropped but was still c6% higher than this time last year for the same period. LNG tanker arrivals remained strong with 14 arriving last month. When factoring in above seasonal temperatures, reducing demand and good levels of storage on the continent, the reduction in contract prices is explained.

Electricity:
Electricity has followed the path created by gas, due to high dependence on gas fired generation with the average drop of 4.4% during March. Summer 2019 dropped c8% and April 2019 contracts dropped c6%. But, this is still 14% higher than the same period last year.

Oil:
Brent Crude prices continued to recover during March with an increase of 4% despite US output levels being very high. The main drivers are sanctions on Iran and Venezuela reducing supplies alongside OPEC production cuts.

April Energy Price Outlook

 

 

 

Areas of concern:
The main area of concern is the increasingly problematic BREXIT situation.

The continued uncertainty relating to Brexit is a constant concern. We currently operate under an EU instrument called the Internal Energy Market. One key element of this instrument is the security of supply to all Member States. How the UK exits the EU will impact on how the current arrangements and protections are impacted. The main concern would be a “no deal” exit. Whilst it is unthinkable that this would result in supply capacity issues there is a real risk of financial impacts. Ginger has spent a considerable amount time speaking to suppliers and industry experts in relation to this outcome and the general feeling is that, should there be a financial impact caused by a no deal exit this could be up to £25/mWh. It is worth pointing that though that these figures are estimates based upon many unknown factors.

From an end users perspective the appetite for risk is a key factor when making purchasing decisions. This obviously has always been the case but with previously unexperienced risk factors now existing this is a changing landscape.  If the appetite for risk  is low we would suggest locking in on a fixed contract now and accept the market may change during the period. If unknown risk is acceptable, we would suggest deciding on an “acceptable” cost level, this will be unique to each client, and locking in when that level is achieved.

Recommendations:
Despite recent drops in the market the wholesale costs remain high, year on year. This could lead to further drops, especially in the summer months, but with many risk factors remaining live, the market is subject to increased volatility should any of these factors come into play.
Due to the above we would suggest all customers with contracts renewing in Q2, Q3 and Q4 of 2019 contact us to commence their renewals asap. Starting the process does not mean that you have to secure now if you decide not to but you should review the options that are open.

April News Stories

CRC AND CCL:
With the Carbon Reduction Commitment (CRC) scheme being abolished in 2019 there are severe increases in Climate Change Levy (CCL) being introduced in April 2019. Whilst CRC only applied to large users CCL applies to the vast majority of users regardless of consumption levels. The increases can be seen below:
Taxable commodity Rate from 1 April 2016 p/kWh Rate from 1 April 2017 p/kWh Rate from 1 April 2018 p/kWh Rate from 1 April 2019 p/kWh 2018 – 2019 Increase p/kwh 2018 – 2019 Increase %
Electricity 0.559 0.568 0.583 0.847 0.264 45.28%
Natural gas 0.195 0.198 0.203 0.339 0.136 67.00%
Should a business use 1,000,000 kWhs of electricity they would currently pay £5830 in CCL and from April this will increase to £8470. If your business is involved in the processing or manufacturing of ceramics, metal or glass you may be eligible to pay zero CCL. Call us now to discuss.

 

UTILISING OFFSHORE WIND FARMS
Britain has developed plans to generate a third of its electricity from offshore wind farms by 2030. In an effort to boost the value of exports of offshore wind services and equipment to 2.6 billion pounds a year.
As Brexit continues, Britain aims to lift industrial productivity by making use of the worlds biggest offshore wind market as both on and offshore wind turbines met 17% of UK power needs in 2018. Click here to read more on this news story.

 

ENERGY EFFICIENCY SCHEME

‘This call for evidence seeks views on various proposals for a new Business Energy Efficiency Scheme focused on SMEs. We are keen to hear from anyone with an interest in how a new scheme for SMEs could be designed, including:’
Energy companies
Network operators
SMEs
Financial institutions
Energy Service Companies (ESCOs)
Academics

If you wish to respond or would like more information, please click here.

By | 2019-04-10T15:33:26+00:00 April 10th, 2019|Uncategorized|0 Comments