New Stream Market Update
Gas Driving Power as Wind Stays Low
NBP gas has been firm again this week as warm, low wind conditions persist across the UK. Demand for gas is higher than normal for this time of year as temperatures have been well above average for more than a month. Interestingly NBP curve gas contracts are now also pricing in a risk premium for next summer delivery which is trading 28 % more than average outturn prices of last summer. Closer in the August front-month contract is trading at its highest since 2013.
Strong gas prices have also pushed up UK power contracts. UK power volatility remains high with distributed generation, particularly gas peakers, being called upon to fill the wind gap.
UK reliance on wind generation creating more power price volatility and opportunities for peaking and storage assets… “‘Wind drought’ means Britain’s turbines are at a standstill” – The New Scientist
“In a statement, a spokesperson for the National Grid said: ““Between 4th June and 15th July wind generation was around 30% lower compared to the same period last year.”
“Climate change might mean that less wind is available for energy production in general during the coming decades. One projection, published in Nature Geoscience in December, suggested that wind power would decrease in the northern hemisphere but increase in the southern hemisphere.”
“This might mean a loss of as much as 18 per cent of wind…”
“It’s essential that the UK plans for windless periods in the future, says Gross.”
In Germany, wind output over the past 10 days has been a third lower than the average for the year so far.
Low levels of wind power are not the only factor driving up summer gas and power as air conditioning demand, along with concern that output from nuclear and hydro plants is drying up and further fundamental support to prices.
French Nuclear Issues
In a statement by EDF this week the company cautioned that rivers have become too warm to effectively cool the reactors and may be forced to cut output later this week at two stations.
- As a result of the recent recovery in pricing following the June sell offs, we are now seeing the wholesale market back at the highs experienced in May. Clients continue to lock in PPAs further out along the curve with April 2019 renewals being reviewed.
- With the movement to PAR1 pricing in November 2018, which changes the way cash out prices are calculated, we expect significant increases in volatility. A number of European countries have this type of system (including Germany) and whilst historic data shows lower average prices (due to structural differences) there is greater volatility, higher price peaks and increased occurrence of negative pricing.
- Shift from less coal to more renewables has placed more significance on gas supplies from Europe and globally. Fears over European outages, Russian sabre rattling and increased global LNG demand have pushed prices higher leading to continued support for the power price
- ROCs – the secondary market for ROCs has continued to strengthen and as such the share of both buyout and recycle in PPAs has increased
- TRIAD – PPA providers have yet to receive funds from Elexon but we would expect this to happen later this month. Despite the fact that TRIAD benefits have been cut by a 1/3 we have seen increasing passthrough levels in the PPA market
- FIT – monthly payment terms becoming more common amongst PPA providers