Wholesale Electricity Market Report

Transcription

1 Wholesale Electricity Market Report Vol 8 - Published November - data collected throughout October 2014 The wholesale electricity market is where generators and suppliers meet to trade electricity that is then sold onto domestic and business consumers, regulated by Ofgem. Total power traded over October increased relative to September; largely due to increase in traded power in seasonal products. Following the historical trend there is a greater volume of trade for near term delivery than in the longer term, though there was continued liquidity for the season ahead. This is to be expected; all companies trade to manage risks and suppliers shape their portfolio to meet expected consumer demand. From the perspective of a supplier, forecasts that are closer to delivery are more accurate than the longer forecasts which entail greater risks. As a result, interest lessens in trades further out, although this has to be balanced against the need to hedge to meet consumer demand for fixed price products. Generators have dierent drivers and tend to want to secure income to meet the fixed costs and capital requirements of their assets. There was a large month on month increase for wind generation, with nuclear generation declining in part due to outages. Generation Mix In September, GB electricity generation 1 came from: Coal: 33.09% Gas power stations: 31.22% Nuclear: 15.51% Wind: 9.50% Hydro: 1.22% Interconnectors: 5.63% net (including exporters) with 3.77% from France and 2.87% from Holland GB Generation Mix: May - October 2014 Source: National Grid Via GridWatch 1 Transmission Connected. Does not include small scale renewable, other o grid generation or Northern Ireland however, under transparency reforms from Janurary 2015, electricity distribution networks will publish aggregated data on small scale generators. 1

2 Volume - Total Power Traded What this shows: This graph sets out the volumes of electricity traded/day which is to be delivered in the shown months, broken down by how far in advance the electricity was traded. Total Traded Power for Last 3 Months Source: ICIS Heren & EDF Forward Curve Volumes What this shows: This graph shows that there is a greater volume of trades for near term delivery (day ahead, month ahead) than in the longer term season ahead, year/s ahead. Forward Curve Liquidity Source: ICIS Heren & EDF 2

3 Prices Combined Prices Source: London Energy Brokers Association, APX, ICE What this shows: This graph illustrates how purchasing electricity at dierent times can aect the average price you pay and the volatility you experience by showing the price of power if you had purchased: a 4 season ahead contract two years ago; a 2 season ahead contract one year ago; a season ahead contract six months ago; a month ahead contract one month ago and; a day ahead contract one day ago. When companies buy and sell power in forward contracts, the value represents a view of how prices will act on average over that future period; this can be higher or lower than the actual price. For example during the beginning of 2013 short term products were more expensive than many seasonal long term products that delivered over that period; over this summer short terms products have been noticeably cheaper than seasonal products. 3

4 Four Seasons Ahead The price of electricity to be delivered over winter 2014/15 averaged at 56.28/MWh from October 2012 to March 2013, compared to 55.64/MWH the previous winter. On a *weighted basis, the price for electricity to be delivered over 2015 averaged 55.23/MWh. ICE Season+4 Index Source: ICE (Intercontinental Exchange) Three Seasons Ahead The price of electricity to be delivered over winter 2014/15 averaged at 55.32/MWh from April 2013 to September 2013, compared to 53.19/MWh the previous winter. f f The price of electricity to be delivered over summer 2014 was 51.69/MWh, compared to 51.31/MWh the previous summer. On a *weighted basis, the price for electricity to be delivered over 2015 averaged 54.71MWh. ICE Season+3 Index Source: ICE (Intercontinental Exchange) *54% consumption over winter, 46% over summer 4

5 Two Seasons Ahead The price of electricity to be delivered over winter 2014/15 averaged at 54.64/MWh from October 2013 to March 2014, compared to 54.46/MWH the previous winter. The price of electricity to be delivered over summer 2015 averaged at 49.44/MWh from April 2014 to September 2014, compared to 49.46/MWh the previous summer ICE Front-Season+2 Index Season Ahead Source: ICE (Intercontinental Exchange) The price of electricity to be delivered over winter 2014/15 averaged at 49.81/MWh from April to September 2014, compared to 54.33/MWH the previous winter. The price of electricity to be delivered over summer 2014 averaged 47.73/MWh, compared to 49.32/MWh for summer LEBA Front-Season Index Source: London Energy Brokers Association 5

6 Month Ahead The price of electricity to be delivered over November 2014 averaged 47.97/MWh in October 2014, compared to an average of 50.00/MWh for next month delivery in So far, electricity for next month delivery has averaged 44.13/MWh in LEBA Front-Month Index Source: London Energy Brokers Association Day Ahead Electricity for next day delivery averaged at 44.56/MWh over October, compared to 43.04/MWh over September. The average for next day delivery was 50.08/MWh over 2013 and so far it has averaged 41.81/MWh over Day-Ahead Auction Source: N2EX and APX 6

7 The Wholesale Market The Report what it does The Wholesale Market Report sets out the picture at the season ahead and covers the wholesale price of power for dierent dates of delivery and volumes, traded on the wholesale market. It also sets out the volumes of power traded over the last three months and the generation mix for the preceding six months, including wind and hydro-electricity. The Wholesale Market Report illustrates relationships between: Price/Delivery Date: prices of electricity for dierent dates of delivery (up to two years ahead). Volume/Demand: volumes traded on the wholesale market compared with demand. The Wholesale Market Report also: Shows what is happening in the traded market in the short and long term. Sets out the wholesale price being paid for base load power. Charts the price movements according to both the season and demand. The Report what it does not does not do: Provide a daily price. Provide the price of electricity for suppliers under dierent hedging strategies. Provide any forecast or commentary on expected future wholesale price movements. Frequency The Wholesale Market Report is produced monthly. Background information In 2013 Power consumption (excluding losses and energy industry own use) across the economy was Terawatt hours (TWh), split into three groups: Industrial TWh Domestic TWh Commercial premises, public administration, transport and agriculture TWh. The average electricity consumption per household in 2013 was 4,170 kilowatt hours (kwh) 2. One kilowatt hour is approximately enough to boil a kettle nine times, so an average household s electricity use over a year is equivalent to boiling a kettle 37,500 times. 2 DECC Energy Consumption in the UK, this figure is unadjusted for temperature, the figure adjusted for temperature was 4,192 kwh 7

8 How the wholesale market works The wholesale electricity market is where generators and suppliers meet to trade electricity that is then sold onto domestic and business consumers, regulated by Ofgem. Only very few large energy users will purchase direct through the wholesale market most will receive their electricity from an energy supplier. A supplier needs to estimate the demand of electricity from the customer base, to every half hour. It must forecast accurately as the electricity system must be in balance at all times. When the supply does not equal forecast demand, National Grid will take balancing actions through procuring more electricity generation or issuing a request for a generator not to supply, for which they will be compensated. The costs of these actions are billed to either the generator or supplier that caused the system to be potentially out of balance. Suppliers can purchase contracts for generation bilaterally, through financial exchanges or through brokers. Purchasing long term contracts gives certainty and allows suppliers to oer fixed price deals to customers; however, as there is less information available, prices can be higher or lower than spot prices and there is both risk and potential benefit to both parties that trade. Dierent companies will have dierent collateral requirements and risks driving their hedging strategy, which will further aect forward prices. Baseload products are generally traded further due to certainty around requirements, which means a supplier will still need to purchase short term peak products to shape their portfolio to the changing demand of their customers within day. Short term products can be purchased bilaterally or through brokers, but can also be traded through Day-Ahead Auctions (run by APX and N2EX) as well as the Spot Market (run by APX) from 48 hours before a settlement period; the prices reported on these markets are generally reflective of the least expensive available generation required to meet demand in each settlement period. 8

9 How the wholesale market is changing Market design/structure Electricity Market Reform (EMR) legislation will lead to many changes to the wholesale market. The two most significant changes are the Capacity Market, which will give incentives to provide generation capacity to enhance security of supply, and Contracts for Dierence which will become the main mechanism for incentivising future large-scale low carbon generation by oering a fixed price for power. Europe By connecting together markets operated by Power Exchanges; Market Coupling boosts liquidity, transparency and price convergence. A report published by the Commission estimated a benefit of billion per year if Market Coupling is implemented across the whole of Europe. Great Britain has been fully coupled with the continent since February 2014 when market coupling went live in the North West Europe region. In May 2014 the Market Coupling solution was extended to form Multi-Regional Coupling and now covers 16 countries (NWE, SWE and the Baltic), with aims to expand into further European countries; Italy and Switzerland expect to join in Q1 of 2015 and Ireland is undergoing reform to be compatible with market coupling, expected to be complete in Market Coupling means power on the Day-Ahead Auction is now brought and sold optimally at a European level, constrained only by the level of interconnection between systems. Currently the GB system has 4GW of interconnector capacity; 2GW to France (IFA), 1GW to the Netherlands (BritNed) and 500 MW to both Northern Ireland and Ireland (Moyle Connector, East-West connector), with plans to double that capacity by

10 Additional Info Additional data on wholesale market activity can be found on the following links: Supply and demand data BM reports Market Index Data: Gridwatch: Prices data Spot Exchange prices APX UK: N2EX: Forward Exchange prices NASDAQ: The ICE: Over-the-Counter (OTC) prices London Energy Brokers Association (LEBA): Price Reporting Agencies ICIS Heren: Argus Key Definitions Baseload: The minimum amount of electric power delivered or required over a given period at a constant rate. Churn ratio: Here means the ratio for a specific time period between; volumes of trades to deliver on that period and; the total demand over that period. Typically volumes traded are over 10 to 20 times demand in the gas wholesale market, whereas for the electricity wholesale market the ratio is typically less than 4. Day ahead: Electricity traded for delivery the next day. DECC: Department for Energy and Climate Change. EFA calendar month: Electricity Forward Agreement calendar month, which splits the year into four and five week months. Liquidity: A liquid market is one where there are ready and willing buyers and sellers and where what is being bought and sold is easy to price and can trade without a significant price impact. Liquid markets are ones where there is a high turnover and where volumes traded are significant. Month ahead: Electricity traded for delivery in the next month. Season ahead: trade for electricity delivered in a particular future season summer or winter. Seasons: There are two season for wholesale energy: Winter which runs from October to March and; Summer which runs from April to September. Traded electricity: Wholesale electricity that has been traded over various periods of time. Energy UK Charles House 5-11 Regent Street London SW1Y 4LR