This week, as of 30th September, Winter 21 trading came to a close and we officially entered the delivery period. Recent weeks have made sure that this period of trading will be etched in history as the UK seems to be entering the brink of an energy supply crisis. The market experienced further unprecedented rises across both power and gas trading, seeing Winter 21 NBP and Baseload prices increasing by 27% and 31% respectively this week and we saw the largest ever increase in Baseload power prices, jumping £40.50/MWh between Monday and Tuesday. Winter 21 power prices finished trading at an astonishing £245.00/MWh,to put this into context, this had never passed the £100/MWh mark since the market was formed in 1990. This is a result of all parties scrambling to secure these contracts in order to hedge their risk coming into a highly anticipated winter period where we expect to see a continuation of extremely high prices. The recent volatility experienced earlier in September has generated concern as to what the markets will look like in winter if we see a similar period of low wind, combined with higher demand as the colder temperatures move in. The UK has already seen 12 energy companies collapse due to these incredibly high prices, and this is adding further upward pressure to the prices. This is because a new energy company will take on the customers from these companies and have to hedge the risk of these new customers joining their books. There was also news that a 600MW nuclear power plant would no longer return in October, with this date pushed back to the beginning of 2022.
Gas prices have also come under increased upwards pressure with Winter 21 trading coming to an end. This has been accentuated by a ruling from the anti-monopoly federation in Russia, ordering Gazprom to increase their domestic gas flow. Russia has been facing a gas crisis itself as they are behind their domestic volumes needed for winter. Last winter was very cold and prolonged in Russia, which drained their supplies and meant they started with a significant deficit when trying to prepare for the upcoming winter. This has resulted in a reduction to European gas flows and a resultant bullish reaction in the market. Throughout this year these high prices have been seen as a political ploy by Russia, and in many cases this can be argued, but the extent of these high prices is a result of extreme tightness which Gazprom would be troubled to alleviate even if flowing at maximum capacity.
The UK carbon allowance scheme (UKA) has also taken off this week, peaking above £75/mt. This is driven, in part, by an increased reliance on coal and gas to keep the lights on , resulting in an increase in demand for these allowances. The UKA is now trading at over £20/mt to the European equivalent (EUA) and this is due to the liquidity of both markets. The EUA was set up in 2005 and has been oversupplied for many years, meaning there are plenty of carbon credits waiting in the reserves. As a result, when there is a demand crunch, there has always been sufficient reserves to suppress any price spikes. However, the UKA market is young (launched May 2021), and it has been drip fed auction supplies and is therefore highly illiquid. This means that as demand for these credits has shot up, the supply has stayed around the same level. This is the main driver as to why the UKA is now the premium carbon credit scheme in the world.
Significantly, this price is way above the Cost Constraint Mechanism that was introduced in order to regulate the price of the UKA – there is a high chance of government intervention to reduce the price of the UKA. One way this may occur is by pulling in supply from future auctions to try and increase availability and hope the increased volume will reduce these prices. However, this won’t have any effect until December (at the earliest) so these premium prices may remain.
In other news, National Grid has released the indicative procurement targets for its Dynamic Containment Low Frequency service for November. Since its inception, Dynamic Containment has been the premium ancillary service, commanding prices of £17/MW/hr. However, the changes proposed by National Grid will see procurement split into EFA blocks as opposed to whole day, and overall demand for the service will drop by 68% compared to last month. We therefore expect to see prices fall from the current levels as the market will become saturated. There will potentially be up to 3 times the volume compared to the demand, suppressing prices.
Catherine Newman, Limejump’s CEO, was invited onto BloombergTV again this week to give her expert insight on the continuing ‘power market crisis’.
Check out the interview here: https://www.bloomberg.com/news/videos/2021-09-28/u-k-energy-crisis-isn-t-fault-of-renewable-energy-says-limejump-ceo