Northern Ireland Electricity and Gas Review – January 2022

The current volatility in the electricity market has largely been driven by the unpredictability in the Gas market where a mis-match of demand and immediate supply had caused unprecedented price spikes.  Rising carbon prices payable by generators burning fossil fuels is also an increasingly important factor.

During Q3 and Q4 of 2021 in particular these price spikes have been exacerbated with the All-Irish Market experiencing the lowest wind speeds since 1962, along with Generation outages such as Whitegate Power Station near Cork (now offline until February 2022).  Wind generated power is unpredictable and in itself can be responsible for some very big swings in spot electricity prices.

The end-user effect of price spikes would normally be ameliorated via the depletion of national reserves.  These normally grow in Summer and reduce in Winter but are currently at historically low levels, in part to a late Winter in Asia 2020.  Low European and UK Gas reserves also compound the gas volatility currently observed and are currently at 51% of capacity when they would normally be 76% of capacity in January.

The Pre-Christmas Gas price drop was partly driven by the arrival of Gas-Cargo Shipping into NW Europe in late December 2021.

China, S Korea, Japan and Brazil were competing for these shipments and the spike in Summer 2022 forward Pricing that is apparent at the time of writing (see below) suggests that the relief won’t be extended.

Russian Supply:  Not Commercially logical

Normally gas producers increase supply into a high-priced market to exploit the revenue and profit opportunity.  Supplies from Russia at present do not reflect this pattern and (red line) supply has been below historical norms.  Since inflation occurs at the ‘margin’, this reduction has proved highly destabilising.

Outlook

Demand in Asia, especially China, is growing.  Power outages in NW China have stimulated the construction of new Electricity Generation plants, all supplied by Fossil Fuels, especially Coal but also Gas.  Albeit that gas supply into Europe is increasing, global demand is also increasing, and shipping cargos will be bid for competitively.  Rebuilding storage will be slow and expensive.

Place this alongside unreliable supply from Russia and French Nuclear issues, then Power markets have become increasingly expensive.  The example Forward Graph below shows high Gas pricing through 2022 with a stable but high level maintained in 2023.  Gas powered generators are the dominant ‘price setters’ for Power prices in the all-Island electricity market.

N Ireland Electricity

The graph below shows the raw energy costs for electricity in N Ireland in £ and expressed as the arithmetic average of half hourly actual market prices without Use of Sytems loss-adjustment increases.  Two markets are available to Suppliers – Imbalance Market (IM) and Day Ahead (DA).  There is no such thing as a ‘Wholesale’ Market.  The prices shown are a function of a variety of generation sources, most relevantly gas and wind, but also reflect generation and inter-connector issues.

Client Advice

Maximise your options

For our larger clients we are recommending a Hedge/Flex product which for example allows you to fix 25%-50%-75%-100% of your volume in a range of 3-36 months.  Should prices rise then 'at least we have locked away 50%'.  If prices fall then ‘at least we only fixed 50%’.  For an increasing large component of your overhead, risk management is especially important.

For very large clients we provide risk managed hedging (fix and unfix) within fully flexible contracts that extend up to 3 years ahead.

For our smaller clients,  presently, we are recommending that you adopt a contract which starts variable but that can be ‘fixed’ at any stage of the 24-36 month duration.  The importance of budget certainty is unique to each organisation and action can be taken depending on the trade-off of predictability and value.

We look forward to presenting these options to each of our clients as renewal deadlines come into view. 

If you are currently in an expensive contract please email us at the address below.  We will endeavour to visit you to explain the options available to you and review the best way to navigate the current tempestuous market conditions.

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

Gas tanker ship

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:

UK gas connections to Europe

Wind

Inter-Connectors and power station outages

UK electricity interconnectors

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.

Gas price fluctuations 2021

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.  

Electricity price fluctuations 2021

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

Suggested energy pricing going forward

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.

Government launches post Brexit Energy White Paper

The white paper expands on Boris Johnson’s recently announced Ten Point Plan and sets out the steps needed to cut emissions from industry, transport and buildings by 230 million metric tonnes.

The Energy White Paper commits to supporting up to 220,000 Green jobs within 10 years, with roles in major power generation, carbon capture storage and hydrogen projects. In addition, a nationwide programme to retrofit homes and buildings with energy efficiency and clean heat technologies will create additional opportunity.

The Energy White Paper commits to all electricity being emission-free by 2050 and sets the country on target for an “overwhelmingly decarbonised” energy system by 2030.  It states low carbon power is a “key enabler” of the more sustainable economy of the future and notes demand for clean electricity is forecast to double in order to decarbonise the transport and heating sectors.

The government also promises to set up a UK Emissions Trading Scheme (UK ETS) from 1 January 2021 to replace the current EU model. This will give busines certainty about the path forward.

The Energy White Paper reaffirms the Prime Minister’s commitment to deliver enough wind capacity to power every home in the country by 2030 – this would consist of 40GW of offshore wind, including 1GW of floating wind.  This initiative will be enhanced by investing £1 billion in carbon capture and storage (CCS) by 2030.  This investment will be spread across four low carbon industrial clusters by 2030 and at least one net zero cluster by 2040. The technology would be used to directly capture emissions from factories and other heavy industry before they enter the atmosphere. The investment is expected to drive new investment and attract new manufacturers to the UK’s industrial heartlands.

The government is keen to deploy 5GW of hydrogen production by 2030, supported by a new £240 million net zero Hydrogen Fund.  Hydrogen will accelerate road freight de-carbonisation as will a wide rollout of electric vehicle (EV) infrastructure.  This is why the Energy White Paper sets out a plan to invest £1.3 billion to accelerate the deployment of EV charging points across homes, streets and motorways, as well as another £1 billion to support the development of EVs themselves, such as funding for battery production.

Fossil fuel boilers will be gradually removed and replaced with cleaner alternatives – by the mid-2030s the government hopes that all newly installed heating systems will be low carbon models or be appliances that can be converted to a clean fuel supply.  Renewable Partnerships Ltd has already developed an immediately solution for this, assisting clients to switch to cleaner boilers in a commercially compelling way.