Falling temperatures, rising prices and increased volatility could combine this week to test energy suppliers’ hedging arrangements. The Met Office has issued yellow weather warnings for the remainder of the week, with snow and high winds expected to affect most parts of GB.
In its quarterly power index, published today, price-reporting company ICIS said that wholesale energy market prices had “continued to trend upwards in Q4 2016, as concerns over power and gas supply availability pushed quarterly average prices for UK energy to hit two-year highs”. The ICIS Power Index (IPI) finished 2016 32% higher over the year, while gas rose by 54%.
Tight margin “made itself felt throughout Q4, with high prices for short-term delivery up 7% from the previous quarter,” ICIS said.
This week was expected to be among the winter’s tightest regarding supply margins, System Operator National Grid identified it in its Winter Outlook report as likely to have the highest demand compared to available generation.
Zoe Double, head of power at ICIS said ICIS was also expecting higher price volatility for the rest of Q1, with traders commenting that prices of up to £400/MWh for short periods “are just normal now”. Regulator Ofgem has also acted to sharpen balancing market prices.
Continued windy weather could help ease supply concerns, as has the restoration of full capacity on the IFA interconnector with France.
National Grid has contracted so-called Supplemental Balancing Reserve plant to provide additional power this winter. For winter 2017/18 the supply margin is expected to be tighter still. ”The UK’s electricity margin continues to cause alarm, leading to high short-term prices and encouraging market participants to factor in greater price risk for next winter,” said Double. Instead of SBR the government has decided to hold an early Capacity Market auction to incentivise plant to stay on the system.
“The government’s decision in March to bring the capacity market forward to cover electricity delivered in winter 2017 could bring long-term power prices in the IPI lower, as plants that are successful in the auction on 30 January will receive a payment to incentivise them to remain online despite lower wholesale prices,” said ICIS.
But Jamie Stewart, EDEM editor at ICIS, said that generators may see very low prices in the auction. He said, “With no SBR option for winter 2017/18, plant operators must bid into the first T-1 capacity mechanism auction and hope to earn the clearing price. But they may have to be prepared to bid in lower than in previous T-4 auctions as competition in the first T-1 auction could be intense.”
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