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UTILITY Week 23rd May 2014

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28 | 23rd - 29th May 2014 | UtILIty WEEK Markets & Trading Tricks of the trade Jillian Ambrose "Disruption of gas supplies would benefit some" Long before there is any real sign that gas pipelines transiting Ukraine will run dry, analysts have been scrambling to assess the possible damage a supply disruption from Europe' biggest supplier might bring. But per- haps the most interesting piece of analysis to have surfaced in recent weeks comes courtesy of Moody's, offering a fresh take on the supply-shock scenario: not just of market and retail prices surging higher, but generator profit margins rising too. nuclear and renewable genera- tion, Moody's found. It makes sense. The recent flurry of weaker than expected financial statements has shown just how damaging the impact of bearish market conditions can be to energy company earnings. In an inverse scenario of high demand, constrained supply and rising prices, it turns out the only ones who should be cower- ing in fear are the end-consum- ers. The likes of Drax, Centrica and SSE should be just fine. A prolonged and ill-timed disruption to Russian supplies would send both wholesale and retail markets to dizzying heights. But although the price of UK power would follow the trend set by gas, it would then offer very attractive returns to those not reliant on gas as a fuel source. Imagine avoiding the higher costs of gas, but still enjoying the higher market value of your generation. Imagine being Drax. Even utilities such as Centrica and SSE, which would take a hit because of their gas-fired power assets, would find these losses more than offset by the gains to be made through This week Warm spell depresses UK gas prices further the mild winter is being followed by a warm spring, sending gas prices to four-year lows P rices on the UK's whole- sale gas market tumbled further over the week as warm spring weather dampened already weak demand, sending gas for prompt delivery to levels not seen since 2010. Over Tuesday morning the price of gas for immediate delivery fell 4 per cent to lows of 43.40p/th, traders said, pricing levels not seen in almost four years. Meanwhile, gas for day-ahead delivery edged back down towards the near three-year low seen last week at 43.80 pence to change hands at 44 pence. An analyst note from gas flow specialist Bentek said the UK's gas system opened with an oversupply of avail- able gas due to lower than average seasonal demand causing prices to slump. Also, pricing agency Icis notes that three liquefied natural gas (LNG) vessels are due to arrive in the UK over the next week, which could result in further losses to the price of gas for delivery in June. Tuesday's bearish trading session follows weeks of downward trading activity due to the mild winter and ample remaining storage levels, meaning there is little need to buy gas now to replenish storage in time for the coming winter. Tuesday's low of 44 pence for day-ahead gas is 4.5 per cent lower than the average month-to-date price of 46.08p/th seen over May, data from price reporters at Platts shows. In turn, the average price this month is over 30 per cent lower than the average price for May 2013. JA Gas Long Russian gas outage 'could profit UK utilities' Prolonged Russian gas supply disruption of more than six months could benefit British utilities with nuclear, coal or renewable generation capac- ity, a report from Moody's has claimed. The credit ratings agency said a supply cut was unlikely, and would have a limited impact on utilities if it lasted for six months or less. However, should supplies be disrupted for between six months and a year, Moody's pre- dicted that market prices for gas could soar by as much as 50 per cent, which in the UK would drive up wholesale power prices too. This could significantly increase margins for non-gas plant. ELEctrIcIty National Grid expected to hike imbalance charges National Grid is expected to increase the charges levelled against energy suppliers that fail to supply enough power to meet customer needs, in a bid to boost security of supply ahead of the country's looming capac- ity crunch. Last week, Ofgem gave the green light for National Grid to propose steeper charges to call on stand-by capacity when demand threatens to outstrip supply, and significantly higher charges in the event of a supply disruption. Ofgem said current "cash out" charges were based on the average cost of managing an imbalance between supply and demand, but under its proposals National Grid would be able to charge based on the most expen- sive action that might be needed to prevent a shortfall in power. ELEctrIcIty European market coupling moves on The ongoing project to integrate Europe's electricity markets moved forward this week with the successful coupling of northwestern and southwestern European market regions, in a bid to increase the efficiency of cross-border power flows and improve security of supply. Markets spanning Europe, from Portugal to Finland, are now linked through a price calculation system to allow the simultaneous calculation of electricity prices and cross- border flows across the region to create a common market for power bought for day-ahead delivery. The project partners include the official energy exchanges across all relevant countries. Demand low and storage full

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