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UTILITY Week 27th June 2014

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UTILITY WEEK | 27Th JUnE - 3rd JULY 2014 | 27 Markets & Trading This week CCGT renaissance 'will be short-lived' Resurgence of gas-fired power generation in the UK energy mix will wane by autumn, say analysts The recent resurgence of gas- fired power generation within the UK energy mix will prove short-lived, market analysts have warned, with strong coal-fired power expected to return within the next four months. Historically low wholesale gas prices have bolstered the use of gas-fired power generation over the past month, allow- ing CCGT (combined cycle gas turbine) use to trump the typically cheaper coal-fired plants in terms of economics. This comes in stark contrast to previous years when the UK has relied on coal-fired power for around 40 per cent of its total generation, while gas-fired power has been limited to around 25 per cent by the strong price of wholesale gas in a competitive global market. But over the coming months, market analysts at Thompson Reuters Point Carbon predict a return to form. The steadily falling price of coal for delivery later this year and into 2015 will see coal-burn return to its position as the dominant UK generation source, the analysts predict. "The renaissance in gas-fired power generation will be short-lived," Point Carbon gas analyst Oliver Sanderson confirmed. "In gas prices we've seen a typical summer price slump, which has been hastened and intensified by low Q1 consumption. As a result, storage levels will be refilled far quicker than normal, reaching 100 per cent by September, by which time consumption should rise again as the weather cools," he said. On Tuesday aernoon, National Grid data showed CCGT use at 37.9 per cent of the energy mix, while coal- fired power was at just 15 per cent. JA Gas Ukraine pipe blast affects UK market Last week's gas pipeline explo- sion in Ukraine could signal the start of increasingly volatile trade on the UK's gas and power markets, traders have warned. The blast did not result in any supply disruption of Russian gas exports to Europe and occurred at a time of ample gas supply across Europe and low summer demand, but still triggered a dramatic surge in pricing levels on the UK's gas market. Traders have voiced con- cern that as political tensions between Russia and Ukraine mount, the incidence of sabo- tage could increase, which dur- ing the winter could have a more severe impact on pricing levels. "That's what everyone is afraid of," a trader said. In addition, analysts have suggested that UK utilities are unlikely to succumb to political pressure to reduce retail tariffs while market uncertainty persists. EnErGY 'Problem' suppliers slow to pass on cuts "There is a problem" with the energy suppliers being slow to pass on falls in wholesale costs to consumers, according to the energy secretary. Speaking in an opposition day debate on energy prices last week, Ed Davey admitted there was a "lag" in falls in wholesale electricity and gas prices being passed on to energy customers. He said: "I think there is a need for intervention." However, the energy secre- tary rejected calls from Labour to give the regulator powers to force suppliers to cut their prices when wholesale prices fall, saying the proposal would be "nothing short of a disaster". Davey said Labour's proposal was "the exact opposite of a price freeze" and would result in energy prices tracking the "very volatile" wholesale markets. He said the "right approach" was to back the "independent experts" at the Competition and Markets Authority "to ensure that our markets work for consumers". ELEcTrIcITY South Staffs Water and EDF agree deal EDF Energy and South Staf- fordshire Water have signed a five-year, fixed-price energy deal. The first of a kind, £50 million contract will run until 2020 when South Staffordshire's next investment cycle finishes. The contract fixes the major- ity of the water company's electricity costs from the day the deal was signed in February 2014, meaning the prices will be held from the start of the deal in 2015 until 2020. Four square: CCGT plants dominating energy mix Tricks of the trade Jillian Ambrose "The markets look set to take direction from news" No-one should make a habit of feeling sorry for traders. The reasons for this are too plentiful and too obvious to be detailed in this column. But from this start- ing point I would say: let's spare them a thought this summer. The energy markets are mak- ing headlines for all the wrong reasons; record lows have been seen on gas and power markets, with persistent fresh lows seen on coal. At the same time Brent crude has been seen breach- ing the $115/barrel mark before almost 1 pence per therm higher in the space of just a few hours. The pipeline, it turned out, wasn't even in use. As a gas trader aptly relayed via Twitter: "Session digest: Empty pipeline self-combusts. Traders buy at crazy prices. Half get fired. Half take Xanax. One just tweets sh*t." I wouldn't want to put any money on what the next move will be in the Russia/Ukraine, Sunni/Shia, Isis/Maliki conflicts. But that's exactly what trad- ers will need to do. then posting some of the biggest intraday losses in almost a year. With market volatility comes the opportunity to make money, of course. But the nature of vola- tility is becoming decidedly more unpredictable. Put away your spreadsheets, folks – this sum- mer the markets look set to take direction from news headlines as much as analyst forecasts. Military flare-ups in Ukraine and Iraq have le traders scrambling to keep up with spiking prices, despite the fact that exports from both countries have remained consistent. A suspected terror attack on one of Ukraine's many gas pipe- lines was enough to drive prices

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