News and Society Blog-Energy: A Summer of Fluctuating Fortunes

ByGraham N Paul

Tough economic forces and lousy summer weather seem to be determined to try and take charge of the wholesale energy supply market. Prices tumbled throughout the middle of June to new lows. Annual gas prices are now 15% lower than the same time last year, while annual power prices fell to a two-year low and are 22% down year-on-year.

Falling power prices dragged annual spark spreads down 7% to ?3.4/MWh, and even that reliable stalwart coal is having a hard time of things, with slipping prices buffering the fall of dark spreads slightly to a ?17.9/MWh premium to spark spreads.

So what's been setting off these price crashes? Well, concerns about debt in the Eurozone nations hasn't helped. Greece lurches from crisis to crisis and even the election of a new government is doing little to allay fears about its long-term future. But it's slowing economic growth in the US and China that has really pushed international energy markets downwards. Brent crude oil tumbled to $97.6/bl, its lowest level since January 2011, and annual API coal dropped to a new 20-month low of $95.4/t.

However, all of this is good news for consumers. While we may be missing out on that 'BBQ summer' the forecasters promised us, both domestic and commercial end-users have seen energy prices drop in real terms. A fall in inflation has also helped to stabilise the retail market, but the big difference has been at the pumps, where motorists have finally started to see the numbers on the forecourts going down instead of up. This, combined with lower electricity and gas costs, has given the British economy a short respite, during which it has a chance to push up production and keep the fragile heart of UK PLC beating for a while longer.

Biomass - holding the fort?

Ironically, it's been the biomass market that has held the fort. Despite biomass contracts dropping, with prices for 2013 down 1% to ?88.5/t, prices are still around 6% higher than this time last year. They've recovered from their four-year low and are at their highest level for five months. This boost has been helped in no small measure with the approval of the plans for a 40MW staw-fuelled biomass plant in Snetterton, Norfolk, which have finally been given the go-ahead.

The weather outside is frightful...

The real headline grabber throughout June and into July has been the atrocious weather the UK has experienced. Lower than average June temperatures and storm after storm has resulted in a rise in UK gas demand. Supply peaked at 223.1mcm on 11th June, in the middle of the bad weather. Industry watchers believe that the unseasonably bad weather has encouraged many people to do something they wouldn't normally do in June - they turned the heating up. The result was that although the national system decreased 0.1%, the regional system climbed 2.2%. To date, summer demand (measured from April 1st) was down 7.8% on the national system but up a staggering 31.1% on the regional system, compared to the same time last year.

What this indicates is that while gas demand for power generation is down year-on-year, consumption by households and small businesses has risen. This means that gas consumption is acting as a barometer for the productiveness of the UK economy and while the big users may be struggling, homes and businesses are continuing to ride out the worst of the economic storm, putting a more positive face on what has been a difficult few months.

How prices will fare in the next few weeks will depend on three things - the resolution (or otherwise) of the Eurozone crisis, and the economic condition of the US and China. If they start to wobble you could see prices start to climb back up again.

Graham Paul - Services Delivery Director (EDW Technology). EDW have a long history developing, implementing and supporting best-of-breed software solutions. Since 2000, their electricity pricing system - part of ERS (Energy Retail Suite) has enabled energy retailers with powerful and highly competitive IT systems, transforming customer experience, improving business efficiency, reducing costs and boosting profits.

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