Utility Week

28 | 1ST - 7TH AUGUST 2014 | UTILITY WEEK Markets & Trading This week Geopolitical volatility rocks energy markets Unease over tensions in Russia-Ukraine region drives instability in gas and electricity markets The UK's gas and power markets surged by 2-3 per cent in a matter of hours on Monday a ernoon, before slumping back again on Tuesday morning as concern over mounting tensions in the Russia-Ukraine region sparked greater market volatility. The market price for gas and power this winter rallied to highs not seen since May in what traders described as an "aggressive correction" in market position. But gains proved short-lived as bearish fundamentals brought prices back to earth on Tuesday morning. Over recent months the market price for gas has repeatedly set new multi-year lows under pressure from ample available gas storage and increased lique‚ ed natural gas (LNG) deliveries. This trend was at play over Monday morning's trad- ing session, with gas for delivery this winter slipping down 1.52 pence to 59.48 pence per therm from an open- ing price of 60.10p/th. But by late morning the market changed direction, climbing steadily to prices 3 per cent higher than intraday lows. An analyst from price-reporting agency Platts con- ‚ rmed that Monday's close of 61.65p/th for gas delivered this winter represents a 2.2 per cent premium day-on- day, and is almost 12.5 per cent higher than its lowest ever price, on 10 June. Wholesale power prices for the winter tracked the same trend, rising over 2 per cent from Friday's close to £50.55/MWh at the end of Monday, its highest close since 12 May, Platts' data showed. JA ELECTRICITY UK capacity market plans approved The European Commission has approved the UK's plans to secure supply through a capacity market. The Commission said the UK's plans "embrace the princi- ples of technology neutrality and competitive bidding to ensure generation adequacy". The capacity market is designed to ensure that the UK has enough capacity to prevent blackouts during periods of high demand, such as winter cold snaps, as supply margins stead- ily shrink amid plant closures and delayed deployment of new low-carbon capacity. At the end of June, the government announced plans to procure a total of 53.3GW of electricity generating capacity through capacity mechanism auctions. The ‚ rst capacity auction, to be held in December this year, will auction oœ 50.8GW of capa- city. The rest will be auctioned oœ in late 2017, for delivery in 2018/19. These volumes represent more than 80 per cent of peak electricity use in the UK today. Successful bidders will be entitled to capacity payments, in addition to existing com- mercial revenues, for 15 years if the capacity is new, three years if the existing plant has had signi‚ cant refurbishment, or a rolling one-year period for other existing plants. ELECTRICITY Capacity market will boost coal power The UK capacity market will prolong the lives of some of the country's oldest coal power sta- tions, according to analysis from Bloomberg New Energy Finance. Bloomberg says the policy will do little to encourage invest- ment in new gas-‚ red plants, or demand-side response in the short or medium term. Bloomberg's analysis predicts that 56.2GW of eligible legacy capacity will enter the ‚ rst capacity auction in December – more than enough to meet the government's target of 53.3GW, meaning there would be no need for new gas-‚ red capacity. Monne Depraetere, power analyst at Bloomberg New Energy Finance, said: "Coal-‚ red generation still accounts for 40¤per cent of the UK's electri- city. Those plants' construction costs are sunk, and so they will be able to underbid developers of gas-‚ red power stations that have yet to be built." Bloomberg New Energy Finance calculations suggest that an existing coal plant would need a capacity payment of at most £45 per kilowatt per year to break even. A new gas-‚ red project would need a subsidy of at least £49/kW per year. Surges and slumps in gas and power markets Tricks of the trade Jillian Ambrose "The beleaguered power hub is a key area of focus" The UK's electricity market is fast becoming the problem child of the energy complex, and the Competition and Markets Author- ity (CMA) has taken notice. This week, the CMA pin- pointed the beleaguered power hub as a key area of focus in its wide-ranging market probe (see page 19 for more), standing it alongside the much-maligned likes of the retail market and sup- plier pro‚ ts as one of the least trusted areas of a very distrusted sector. So not a great week, then. faulty ETS all contributing to a distorted market price signal, the government should not be surprised when companies would rather self-supply. Even the CMA noted that the competition probe itself could be muddied by the continued intervention of Ofgem's liquidity measures and the impact of the upcoming capacity auctions. But this isn't to say market players aren't in favour of some CMA intervention: but let's start by breaking up the big six. That said, it's not been a great few years for the UK power market, as it's been forced to play sulky little cousin to the far more e¦ cient and warmly embraced UK gas market. The CMA is satis‚ ed that there's nothing amiss when trad- ing gas, but the power market found itself described by turns as "harmful","opaque" and even "perverse". With so much focus now on the power market's lack of active participation or transparency, it's easy to forget how it found itself acting up in the ‚ rst place: too much regulatory intervention. With subsidised renewables, prohibitive carbon tax and a

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