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In the last quarter of 2016, the UK wholesale power market experienced several significant spikes in its half hourly price. Charlie Ward, New Stream Renewables, and Hugh Unwin, Foresight Group, outline some of the factors that affected the market recently and present a more positive outlook for 2017.
During the last quarter of 2016 the UK wholesale power market experienced several significant spikes in the half hourly price, peaking at £862/MWhr on the evening of 2 November 2016 (compared to a season average of around £45/MWhr).
While the increases were partly caused by fundamental changes (e.g. foreign exchange movements and fuel commodity price increase), the volatility highlighted the tightness of capacity margins on the UK system. However, could this continue into and throughout 2017?
Following the referendum vote to leave the EU on 23 June 2016, the weakened British Pound vs. US Dollar and the Euro, led to an increase in the cost of imported power and gas.
With gas coming from Norway, Europe and Liquefied Natural Gas (LNG) tanker deliveries, the UK is very dependent on gas as the marginal power producer (and therefore price setter). As such, its pricing is the biggest driver of short term power prices.
Coal-fired generation has increased significantly to account for 12% of the total system output. This has increased the potential of the coal price to affect power prices once more, with a 40% increase in coal price, corresponding to a 2% rise in baseload price. In addition to the sharp rise in the coal price we have seen the price of EUA Carbon certificates continue to rise on the back of unexpected demand.
In the second half of 2016, following quality concerns, a number of French nuclear plants were taken offline for extended periods. France is typically a net exporter of power to the UK and elsewhere, but the outages drove record power pricing in France and meant that, rather perversely, the UK exported power to France for significant periods (including several during periods of peak demand in the UK), reducing the UK capacity margins.
On 7 November 2016, National Grid issued and subsequently cancelled its second capacity market notice within a week, signalling very tight capacity margins; balancing / cash out market prices rose to around £2,500/MWhr.
The capacity market was introduced by National Grid to ensure that the UK system is balanced with supply meeting demand as more volatile and unpredictable renewable energy generation comes online. Participating generators are called on to provide additional capacity / grid support at times of network stress.
On 20 November 2016 damage to the French interconnector (Interconnexion France-Angleterre (IFA) Link) halved its available capacity and was not expected to be fixed until February 2017.
Four of the eight cables were severed and the damage is thought to have been caused by a ship's anchor dragging along the sea bed during Storm Angus. This further reduced the ability of the UK to import French power during periods of tight supply.
Most of the nuclear reactors were expected to return to the French grid by the end of January 2017, with latest data showing availability expected to reach 93% on 1 February 2017. This would ease French power pricing and should mean the interconnector once more imports French power, easing UK capacity margins.
Predicted warmer weather will suppress demand as we move into Q1, easing the capacity margin further.
An increase in crude oil pricing will flow through to gas contracts and hence UK electricity pricing, but only if OPEC (Organization of the Petroleum Exporting Countries) can successfully control supply.
The net effect is that, although baseload power prices may be supported by the oil price and continued weakness in sterling, the likelihood of seeing similar price spikes is reduced as capacity margins widen.