March saw a surge in UK wholesale electricity and gas markets, as carbon costs, supply disruptions and low European gas storage levels, meant a risk premium was established into prices across the board.
Oct ’21 annual wholesale costs increased by 8.27% to close the review period at £57.29/MWh. Gas prices for the equivalent period increased 9.76% to close the review period at 47.90 p/Therm.
Increased carbon pricing has underpinned much of the increased costs we have seen in wholesale energy markets over the past year. This trend continued in March with the Dec ’21 EUA contract closing at €42.05/tonne, a monthly increase of 12.80% (remarkably a year-on-year increase of over 130%).
There are a multitude of factors driving these increases. However, the catalyst has been the EU commission’s proposed plans to increase their emissions reduction target to 55% below 1990 levels (from 40%). Meanwhile, market volatility and favourable sentiment emanating from a number of hedge funds has seen speculative buying, whilst price hedgers have had to dive in to cover positions. The cost of carbon is a significant price driver as it is priced directly into UK wholesale markets.
Multiple supply disruptions have ensured that prompt prices remain, which has offered support to near term pricing. Some colder weather, the temporary blockage of the Suez canal (preventing Qatari LNG imports) and a cluster of Norwegian outages, all helped to support gas pricing. Meanwhile, an unscheduled outage at the BritNed interconnector stemming imports and shutdowns at multiple gas-fired power stations, and the Ratcliffe coal-fired plant, squeezed electricity supply.
Day Ahead electricity prices averaged £56.99/MWh in March, compared to £31.67 /MWh for last year’s equivalent. This brings to a close a tumultuous winter supply season characterised by cold snaps in Europe, Asia and the US which heavily increased competition for global LNG. The impact of this has been to support the front seasonal summer contract, as traders are reluctant to bet short whilst prompt prices remain high. A difficult winter delivery also ensures that risk premium is retained into subsequent winter periods.
High gas demand and tight LNG supply has seen European gas storage levels close the winter delivery season at 30% fullness, compared to 54% last year. In absolute terms European gas storage is at its lowest level since 2018 for this equivalent period. Low gas storage implies high summer gas demand, as this is the period at which gas stocks get re-filled. This will support near curve prices, and may support this coming winter if injection levels are sluggish.
It remains to be seen if prices will correct lower as we move through summer. However, much hinging on carbon prices, it is safe to say that the outlook is highly uncertain. All will depend on whether there is a natural ceiling to a market which has been on a seemingly unstoppable 12-month bull-run. Further clarifications around the UK-ETS and the beginning on auctions in May could also have an impact on price development.
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