Irish Energy Market Autumn 2021

Media and the Press have highlighted significant movements within the energy markets over recent weeks.  This reporting has not been sensational when compared to the rapidity and range of pricing swings observable in the Electricity Commercial Market.  Renewable Partnerships felt that it might be helpful to share some more background information.

There are a number of elements to the current ‘perfect storm’.

Gas

In N Ireland there has been historically a very close correlation between the price of Gas and Electricity.  Albeit that there is some pressure on this link it is still material.

At a Global Level there has been significant shortfall of supply against demand.  There are some medium-long term factors that impact this:

• Demand from China and S Korea ran late into 2021 with unseasonably cold weather.  Consequently UK Gas stocks stayed very low, as replenishment was delayed.  With storage at 57% of normal levels gas needs to be purchased on the international spot market which is very high.
• The Dutch Groningen natural gas field closes in 2022, and flow will be reduced continuously to that date. Russia’s Nord stream 2 Pipeline into North Germany will be non-operational until Governmental agreement (including USA) has been reached.  The supply of gas into Europe is low. 
• Japan has shut down all nuclear electricity production with the slack being taken up by gas powered generation.
• UK Gas supply is currently dependant on delivery by ship-tanker with off-boarding directly into the national grid.  Each shipping load has to be bid for competitively against Asian buyers.
• Other Geo-Political factors also effect where the demand for gas is coming from.  Brazil needs to make-up a generation shortfall as greatly reduced river flows into the Parana River Basin  have reduced the production of Hydropower. Their gas imports reached an all-time record in July.

Wind

• Enthusiasts for green energy production will have been encouraged by the increasing level of grid supply generated by wind.  Unfortunately the British Isles have experienced the lowest wind speeds in 2021 since 1961.  Green Energy suppliers have needed to balance the energy that they have agreed to supply their customers by buying the shortfall on the open market.  This has proved unsustainably expensive.
• The wind sector has become significantly less viable and supply of wind-generation below forecast.

Inter-Connectors and power station outages

• Electricity in Ireland is partly supplied by an interconnector from England – so the GB Grid is relevant.  It is in turn supplied by two interconnectors from France – so the performance of French generation is also relevant to pricing in the all-Ireland electricity market.  French nuclear generation has suffered a number of setbacks due to arduous maintenance schedules.   Germany has published its first round of coal fired capacity reductions so competing for the supply of French generation.

• Two Power Stations in ROI, supplying the all-Ireland Grid have been out of production due to unplanned maintenance.  Huntstown in Dublin and  Whitegate in Cork are due to re-commence generation in November although using Gas as an energy source.  This may lessen the particular peaks in the local market although fundamentals suggest a sustained expensive market.

How bad has energy inflation been?

A normal Fixed-Price Contract will be a blend of forward buying choices throughout the duration of a contract.  What this chart, supplied by SSE, shows is that gas to be delivered in (for example) Feb 2022 has risen in cost from £0.90/ therm 12 weeks ago to almost £2.50/ therm.

Similarly the £ per MW cost of electricity (spot price – imbalance) has risen.  The September 2019 Imbalance price of £35.20 has risen to £177.83 – translated as the energy-only component of a unit of electricity rising from 3.52 pence to 17.78 pence – ignoring pass-through costs.  

What is the Market indicating the future will be?

Energy Suppliers and Large Volume users commonly ‘buy-forward’ on the market.  Essentially they contract-now for energy to be delivered at points in the future.  When a business ‘fixes’ a price for a year, the supplier should have transacted within the market for energy to be supplied at Month 1, Month 2 and so on.  Forward purchasing can be commonly bought as much as five years ahead:

Traders are currently transacting at a very high prices in the 5 years Forwards Market.  This pricing is determined by actual commercial trades, not sentiment

The current forward markets suggest that gas will fall to a rate in Summer that exceeds any previous Winter and that little respite will occurs until Summer 2022.  The ongoing years continue to show higher that historic price levels.

What does this mean?

The Market tells us that prices will remain high for the next 18-24 months although probably not at the current extreme levels.  Forward buying shows transactions staying at a level above all previous years – so high energy prices will remain a feature.

The extreme fluctuations have forced all (bar 1) suppliers to shut-up shop – virtually no new business has been written until mid October.

The next ‘Basket Buying’ opportunity via Renewable Partnerships is going to open up in February and we anticipate significant interest in both our 18 and 36 month offers.  If no deflation takes place in the market then clients will see increases between 60% and 100% on their current bills.

Gun shots heard by the Messenger

The current market is historically unprecedented.  We hope that inflation falls back.  However as advisors and brokers we feel that it is important that you are fully appraised of the potential impact of the market and that budgetary forecasts may need to be amended.