Energy Market Update – September

As of the 12th September, Gas and Electricity Year Ahead Wholesale costs were higher when compared to last month’s report.

Oil is up from $59 to $60 a barrel, showing little movement during the period. A lack of forecast economic growth counters OPEC and Russian attempts to maintain a high Oil price, by extending their production cuts through to March 2020. Despite some signs of progress, the trade dispute between the US and China continues.

Coal prices fell further. European imports were down 19% and it is expected there will be weaker demand through Asia in the short term. This may result in production cuts in order to stabilise and stimulate prices. Coal provided 1% of our Electricity generation in August.

Electricity prices have increased over the last few days following news that there may be safety issues with Nuclear reactors in France. We have since had more optimistic reports, but we await an official position from the French authorities. Their closure could mean Electricity shortages in France, the need for them to import rather than export and additional demands on other sources of generation, such as Coal and Gas.

Gas has also seen price pressures. The Dutch government announced the early closure of the Groningen Gas Field and legal restrictions have been placed on Gazprom’s use of the German OPAL pipeline, which supplies Gas from Russia. Alternate arrangements will likely be made.

Over the next couple of weeks, the Met Office is forecasting average temperatures. There will be a split between the south, where it is generally expected to be warm and dry, with colder nights and the north, having more unsettled wet and windy conditions. Nothing here to cause demand issues.

The National Grid have said that a Brexit deal will not impact on our Interconnectors to Europe. There is more uncertainty as to what may happen if we exit without a deal on the 31^st October, which the government still says is a possibility. Sentiment can be a big factor for Wholesale costs.

What does this mean for me…?

Wholesale prices had been lower before the recent events. Their direction will to some extent depend on the outcome of the EDF Nuclear reactor issues in France. Positive news should allow for a gradual correction to lower prices, although our graphs show that historically prices start to tick up in the Autumn into the Winter.

The influence of higher third-party costs is increasingly noticeable in Electricity contracts. These include, Transportation, Distribution and government policy levies. It is estimated, the Wholesale element makes up in the region of 45% of the Electricity bill and that is excluding the supplier margin, metering and VAT.

Gas Market

On the 12th September, the Gas Year Ahead Wholesale cost was 47.63 (p/th), from 44.20 (p/th) in last month’s report and 32% lower than 2018.

Prior to the announcement of safety concerns within French Nuclear reactors, prices had been lower. The implication for Gas being, a potential greater demand on it for generation. We await further details, so please contact us for the latest position.

The early closure of the Groningen Gas Field and supply restrictions of Russian Gas via the OPAL pipeline, have also impacted on costs.

August saw another fall in LNG deliveries, although these have increased into September. Storage levels are 91% full, which is a positive position, in readiness for colder spells.

Electricity Market

On the 12th September, the Electricity Year Ahead Wholesale cost was 52.30 (£/MWh), from 50.05 (£/MWh) in last month’s report and 22% lower than 2018.

Prior to the announcement of safety concerns within French Nuclear reactors, prices had been lower. The implication is that other generation sources may need to be sourced internally and from neighbours, inflating demand and costs. We await further details, so please contact us for the latest position.

Wind increased in August to 20% of generation, whilst in September this has been in the region of 22%. Nuclear accounted for 22% from 19% and remains high so far this month. Coal moved higher to just over 1% and remains an important source of supply, before its closure in 2025.

These supply increases helped to lower Gas demand, at 38% of generation, the lowest in 2019.

Third Party Charges continue to increase regardless of how the Wholesale element changes, which has been very evident as we look to secure contracts for customers. These charges typically pay for the mechanisms, securing generation at peak periods.

Water market

Since the 1st April 2017, it is estimated that 1.4 million sites have had the freedom to choose the Retailer for their Water and Wastewater retail services. This became effective in Scotland in 2008.

This means, you can contract your Water services in a similar way to how you already negotiate your Gas and Electricity costs. The local Wholesaler, who provides the Water and takes away your Wastewater, will remain the same, but the key difference is that you will be able to choose the Retailer to handle your meter reading, billing and customer services.

A further significant change, is that a range of new licensed Retailers have joined the market. These new-entrants are competing against the existing, established Wholesalers, some of which also set up as Retailers.

There has been consolidation amongst Wholesalers to form larger Retailers and indeed Thames and Southern sold their customers, not wishing to enter the market. The largest Retailer, Water Plus, consists of the former United Utilities and Severn Trent. Wave, being Anglian and Northumbrian. Castle Water, includes Thames and Portsmouth, whilst Business Stream bought Yorkshire Water’s customers, making a Big Four in the market.

Despite the large number of customers who can access competition, only about 4% of Water and Sewerage supply points switch Retailer annually and 6% by Water volume. Market research shows a lack of interest by customers and brokers, after the initial enthusiasm. The recent monthly rate of switches is up slightly, in the region 10,000. Ofwat report that just 4% of those that switched are receiving Water efficiency services.

Just 10% of the Water bill is for the Retailer services, so they have very little scope to offer significant reductions, as the other 90% are fixed. Industry feedback so far has been that through switching, the benefit is potentially just 0.5% to 4%. If you spend £150,000 each year, you may save £3,000 per annum with a typical 2% saving. We have seen examples of misleading headline claims of savings, which when you look at the details, clarify the reduction is purely a % off the 10% retail element and far less attractive. There are also large numbers of complaints directed at Retailers.

The rewards at this stage for carrying out a full tender exercise are limited, but it is hoped that in time, as happened in Scotland, the % saving opportunities will increase.

Those companies that do wish to engage, may at this stage be better advised to contact their Retailer and look for short term price reductions and added value services, such as better billing.

Market research suggests, some Retailers have expanded too fast, causing a drop-in service levels, providing an incentive for customers to look at other options, rather than focus on a cost benefit.

Get in touch if you would like any more information.