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28 | 3RD - 9TH JULY 2015 | UTILITY WEEK Markets & Trading This week Drax earnings hit by falling gas prices Coal generation is less attractive compared to gas, and there is little sign of that changing soon Investors expect earnings from generating giant Drax to fall as much as 25 per cent below expectations as low gas market prices squeeze profit- ability of its coal generating units. In a recent investor note from RBC Capital, analysts said their forecasts for Drax Ebitda could fall between 20-25 per cent below initial estimates, as the UK energy market shis away from coal towards a greater use of gas-fired power. Market experts at energy price reporting agency Icis said that the historic lows on the gas market are set to push the generation mix towards greater use of gas. Icis head of power Zoe Double said the profit margin from gas-fired generation (the spark spread) was more attractive than usual relative to coal ("dark green spreads") because of the lower gas prices which should result in greater fuel switching over the summer. "Commodity markets are working against Drax, and we see little prospect that the weakening in dark green spreads will reverse," said RBC Capital. Double added that the bearish outlook for market prices is set to continue into the winter as the risk premium over supply disruptions of Russian and Dutch gas sources shrinks amid "relatively relaxed" market sentiment. In addition, RBC Capital noted that the generator was still waiting for "full clarity" on the contracts for differ- ence support of its third biomass conversion project. JA ELECTRICITY Interconnectors 'will see prices fall' New interconnectors will help significantly bring down UK power prices in 2020 and beyond, analysts have predicted. Vice president and sen- ior analyst at Moody's rating agency, Graham Taylor, sug- gested new interconnection with continental Europe, where average wholesale prices are more than £12/MWh cheaper, "could grow from 3GW to 7.4GW by 2020". This, he suggested, would result in a drop in UK power prices towards European levels in periods of low demand, which would have a "significant impact" on average prices. Taylor said he expected average power prices to remain significantly above those in mainland Europe, "largely as a result of UK carbon taxes". However, this differential would "drive significant growth in interconnection" and, by 2020, interconnectors will "set lower overnight prices" in the UK. The company also pre- dicted that the "explosion" of distribution-connected solar, including 1.3GW installed in the first quarter of 2015, would "lead to a larger fall in transmission demand". Taylor said: "More distributed generation will create ongoing investment opportunities for distribution network operators, which will need to reinforce their networks." ELECTRICITY UK's low-carbon generation rises The share of low-carbon genera- tion in the UK mix rose in the first quarter of this year, com- pared to early 2014, according to official data released by the government. The share of low-carbon options pushed above the 40 per cent mark to 41.4 per cent in Q1 2015, compared with 37.3 per cent the year before. The Department of Energy and Climate Change (Decc) put this increase down to higher renewable energy and nuclear output. Nuclear generation rose from 17.6 per cent of the total mix in the first quarter of 2014 to 19.1 per cent in the first quarter of 2015, Decc data shows. In addition, renewable energy grew its share of the mix from 19.6 per cent in the first quarter of 2014 to 22.3 per cent in the first quarter of 2015. At the same time, the UK displaced some of its coal-fired power with greater levels of gas, further reducing the carbon intensity of the sector. Coal's share of generation fell from 37.0 per cent to 31.3 per cent. Drax: doubts over CfD support for biomass conversion UK power market enters summer lull 60 55 50 45 40 35 30 ONE-YEAR FORWARD ELECTRICITY PRICES, ICIS 10 Jun 2014 10 Aug 2014 10 Oct 2014 10 Jan 2015 10 Feb 2015 The UK's power and gas markets have shrugged off concern over Dutch gas productions cuts, lower available storage and continued tensions along the Russia-Ukraine border, with prices easing into a summer lull. One UK power trader told Utility Week that near-term contracts in particular had softened due to mild temperatures and ample gas supply. Market experts at Icis have assessed the Icis Power Index at just below £45/MWh. 10 Jun 2015 10 Apr 2015 IPI value £/MWh 20-day rolling average Linear (IPI value £/MWh) North Sea gas field outage with tighter supply surplus boosts prices Netherlands caps domestic gas production to July, reducing supply Russia and Ukraine sanctions activity cause concern over winter gas supply Gas concerns ease as Russia resumes supply to Ukraine with interim agreement Gas oversupply, low oil prices and warm temperatures depress prices Concern over potential UK gas storage shortage boosts prices Seasonal changeover; 2015 season prices include higher carbon price support level Source: Icis