Eneco market reports mid-February 2022

Energy costs:

February has continued the trend of volatile energy markets with competing forces driving its position. This has included increased renewables, milder weather conditions and stronger winds as opposed to EDF reducing its French nuclear output, bullish carbon and the ongoing geopolitical tensions around Russia and Ukraine.

Wind output has averaged 11GW, making it the single-largest source of power over the last fortnight. Around 35% of the total. This contributed to lows not seen since the start of the year. Additionally, nuclear outages in France resulted in the UK becoming a net exporter to France with around 250MW exported daily to France whilst an average of just 66MW was imported.

Outlook:

  •  By the end of February around 8.2 GW of French nuclear capacity will have been taken offline for work lasting at least a month, with several outages expected to last into Q3.
  • The UK government will hold Contracts for Difference (CfD) auctions on an annual basis from March 2023 – up from every two years currently – with an aim to speed up new renewable capacity. CfDs are used to support renewable projects by guaranteeing a price for the electricity they produce.
  • A proposed 2.2GW nuclear reactor at the Bradwell B site in Essex has moved a step closer after the UK’s Office for Nuclear Regulation (ONR) and Environment Agency approved the use of a reactor design from China that is planned for this site.
  • A forecast from Elexon – the balancing manager for UK power – indicated wind farm generation will average just under 11GW over the final two weeks of February.

Gas costs:

UK gas prices continue to ease as LNG deliveries remained strong and demand stayed consistently low due to milder weather conditions, although the geopolitical tensions in Ukraine resulting in volatility in Russian pipeline supply, coupled with relatively low storage, had a negative impact towards the middle of the month.

Gas demand has been consistently below seasonal norms and windy conditions have meant gas plants only accounted for 26% of UK power supply compared to around 40% throughout January.

LNG deliveries have been consistent also, accounting for some 30% of UK gas supply and imports from Norway were also up when compared with January, with fewer unplanned outages affecting supply. Russia’s Gazprom has still not delivered any volumes into Germany through its Yamal pipeline this year and transit flows through Ukraine and into Slovakia have started to drop since 10 february. Whilst these do not directly affect UK supply, the market is closely connected to mainland Europe and the affects on the market have fed through to UK prices.

Outlook:

  • Norwegian summer maintenance will be relatively heavy in Q2 this year with capacity restrictions set to kick in from 20 April. This is likely to reduce flow into the UK through to the early part of May. UK import via Norway tends to be more affected by maintenance than other market influences.
  • Caudrilla has been ordered to plug and abandon its two horizontal shale wells at a Lancashire exploration site by the UK Oil and Gas Authority (OGA).
  • From April the Ofgem price cap for dual fuel gas and power customers is set to rise by more than 50%.
  • Mild weather remains forecast until at least the end of February – providing some assurance that a late winter demand spike is now unlikely and that European storage sites may not be completely drained by the end of Q1.

Factors supporting Increases:
Gas storage
– European storage volumes remain low, although are not expected to be drained by the end of Q1.
Carbon – Surging carbon added strength to the April ’22 Annual as UKAs edged up from just under £83/TCO2e at the start of February to more than £87/TCO2e for five days – before dropping to around £84/TCO2e in the middle of the month.

French Nuclear Power – EDF has reduced its output forecast for 2023
Nord Stream 2 – Ongoing licencing concerns exist with Germany with no clear sign-off date in sight.

Russia/Ukraine Tensions – Ongoing tensions continue whilst some reports indicate a withdrawal of Russian troops

Factors supporting decreases:
LNG –LNG deliveries remain consistent contributing to some 30% of supply.
Oil markets – Oil has increased slightly at around $94/barrel.
Supply outages – Unplanned Norwegian outages continue to impact, although at a reduced level
Weather/Wind – Mild temperatures and low wind generation are expected this week, although this is expected to improve towards the end of the month.

Non-energy costs:
On the electricity side organisations will see further increases in pass through costs from both government and industry infrastructure providers from 2022 onwards due to pandemic-related demand destruction. Levies normally collected via unit rates have fallen short of expectations and have fed through to further increases in ROs, FiTs, EII and other transportation, distribution and renewable investment charges. In addition to this the Targeted Charging Review (TCR) is coming into effect from April 2022 and is being priced into renewal contracts now. Projections are available on our website via the links below.

What is the Targeted Charging Review (TCR) electricity –
TCR is a change to both Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges you will find within a supply contract.
DUoS: changes in effect from 01/04/2022 (delayed from 2021)

  • Paid to the associated distributor (DNO), the cost covers installation and maintenance of local distribution networks.
  • At present, a DUoS charge is based on the volume of electricity consumed at site, which has passed through the distribution network.

TNUoS: changes in effect from 01/04/2023 (delayed from 2022)

  • Paid to National Grid, the cost recovers the cost of installing and maintaining transmissions systems.
  • At present, the charge is based on a meter’s share of demand on the network during 3 peak periods, known as Triads. These 3 Triad periods occur between 1st Nov to 28th Feb each year. It’s assessed during this time as demand on the grid is at its highest.

Why the change? A lot of businesses have Triad avoidance techniques in place. During November to February, the 3 largest consuming days will affect a TNUoS charge for a whole year, therefore it pays to be savvy in cutting down consumption on days which would otherwise have been large consuming. Ofgem want to eradicate an unfair grid, therefore both DUoS and TNUoS charges will be veering away from a consumption-based charge to a daily-based charge, determined by voltage type (where you connect to the network), measurement class (Half-Hourly/Non-Half-Hourly), and maximum agreed capacity.

It’s a complex change and difficult to assess the impact on individual meters as suppliers are allocating charges differently. although many are wrapping TCR into increased standing charges. However, to summarise, meters with high capacity but lower usage will be worst affected. For example, a sports stadium will have a high agreed capacity to account for large peaks on event/match days, yet for the most part will have a relatively small usage compared to this capacity. If you want to discuss this further, please call into the office to speak with Abby.

Is your organisation covered by the new Streamlined Energy and Carbon Reporting (SECR) scheme from the Environment Agency?

Designed to replace in part the Carbon Reduction Commitment (CRC) which ended in 2019 and to follow on from the energy savings recommendations generated by ESOS compliance. Note, SECR will cover a wider scope of organisations than CRC and ESOS do. SECR requires all large enterprises to disclose within their annual financial filing obligations to Companies House, their greenhouse gas emissions, energy usage (from gas, electricity and transportation as a minimum), energy efficiency actions and progress against at least one intensity ratio.

If your organisation qualifies, participation in this scheme is mandatory. Eneco Consulting are happy to provide assistance with your regulatory obligations. Full details are available on our website on the link below.

Are you eligible for an EII rebate?

Under current rules, if you qualify at an industry sector level and your business passes the 20% electricity intensity test you may qualify for exemption to CFD and RO charges. Please see the attached Government RO/CFD guidance document and update and give Abby a call on the main number to discuss this further.

Rolling 6-Yeart Gas and electricity prices to Mid-February 2022

A copy of our environmental charges and Climate Change Levy rates from 2012 to date: Industry and Environmental Pass Through Charges including CCL p/kWh Updated 31082021

A copy of RO/CFD guidance document: RO_CFD_Guidance_Revised_July_2018

SECR: SECR EA Guidelines

TCR Charges (Targeted Charging Review this will be revised in November 2021 when Ofgem releases its review): TCR Charges (Targeted Charging Review) TNUOS bandings and Current Ofgem Costs now for 2023 onwards