Market Pulse
Following the German Economic Ministry clearing a major hurdle to Nord Stream 2, and Putin showing his appreciation by announcing he will increase gas supplies on the 8th November, the forward markets have acted with reasonably volatile uncertainty. The market has witnessed sizeable increase and decreases across front month contracts for both gas and power – but it’s overall position remains roughly the same as at the end of last week. This is because the market is waiting to see whether the extra flows will begin on the 8th of November as planned. If they do go ahead then there might be a significant drop across the forward market, but if they don’t, we could see a volatile spike in these markets. This may explain why we are seeing ‘nervy’ moves up and down, but could also explain why the market is returning to roughly the same level and not charging one way or the other. At the time of writing on Thursday, Front month NBP is at 200.5p/therm, an increase of 12.5p/therm. Front month UK Baseload is at £187/MWh, an increase of £10/MWh.
Wind generation has been extremely healthy over the past few weeks, frequently above 10GW. However, Tuesday experienced a dramatic crash in wind, with generation dropping to below 2GW and leading to similar conditions to what we saw earlier in September.
Low winds and an already low de-rated margin that decreased throughout the day provided lucrative conditions for flex and gas assets. Day ahead prices of over £1293.70/MWh during the evening peak meant the majority of assets were already on physical notification. However, National Grid had to make sure they had plenty of supply in case there were any significant trips, so they started instructing some coal units at £4,000/MWh from 10:30 am. This sparked a flurry of market activity as CCGT’s were able to react, removing their initial physical notification and deciding to sit in the Balancing Mechanism to gain even higher prices during the evening peak. This created an extremely short outlook for this period and meant National Grid had no choice but to call these CCGT’s on prices between £3,800- £4,000/MWh. This resulted in system prices spiking to just below £4,000/MWh. To put these market prices into context, system prices reached above £3,000/MWh for the 15th settlement period this year. There have been 0 between 2016-2020. Similarly, the market saw Day Ahead spreads of above £1,000/MWh for the 6th time this year. Again, there have also been 0 between 2016-2020.
Wind returns to healthy levels of generation for the rest of the week, much to the relief of those at National Grid who are responsible for balancing the system.
OFGEM published an open letter to suppliers on Friday setting out short and longer term initiatives it will undertake following high prices and failing suppliers. The most interesting will be the review of the price cap methodology. Here is a summary: Ofgem will publish a consultation on the ‘price cap methodology’ in November to propose amendment – to ensure it fully reflects costs, risks and uncertainties of suppliers. They will then take a decision in February 2022, which could be implemented from April 2022 onwards. In regards to the Supplier of Last Resort Levy, Ofgem will shortly publish a letter setting out steps it is proposing to expedite the SoLR levy claim process; to facilitate faster payment to suppliers and enable the SoLR process to continue to protect customers. Ofgem have also announced that they will pause new market entry for a period of at least six months, while