Utility Week

UTILITY Week 18th December

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Markets & Trading This week Low oil price 'fuels import dependence' Prolonged low oil prices could do long-term damage to the North Sea gas industry T he plummeting price of Brent crude could crush UK wholesale gas prices and deepen the UK's depend- ence on imported gas. Icis gas market expert Ben Wetherall said Brent crude prices below $40/ barrel could "exert strong downward pressure" on the future cost of whole- sale gas. But while this will make gas imports cheaper, the lower price could hasten the decline of North Sea gas production and increase the UK's import dependency. Brent crude prices fell to 11-year lows on Monday, to below $36.70 a barrel for the first time since December 2008. Prices are now 13 per cent lower than they were before Opec's 4 December meeting in which the cartel agreed to maintain production despite the growing global glut. For utilities with upstream oil and gas activities, the weaker market environment has already hit profits. But Wetherall said that all gas suppliers could feel the impact of a growing dependence on gas imports if fall- ing prices make it more difficult for North Sea developers to maintain production. Gas prices are also set to come under pressure as exports from Australia and the US are due to surge, causing a similar glut in gas supply. As a result, gas for delivery in 2017 may be "only marginally higher" than prices for next year, Wetherall said. JA WATER Competition could tempt big six into play for water The big six energy companies may become interested in buy- ing water firms if competition is introduced in the domestic water market, according to PwC water analyst Richard Laikin. He told Utility Week the big six have not shown much interest in non-household retail because it's "too small a market", but they may become interested if it included the entire domestic customer base. The water sector is expected to see an increase in merg- ers and acquisitions because the Competition and Markets Authority and Ofwat have recently relaxed the rules, removing the need for an auto- matic competition referral. If domestic competition is introduced, the "era of converg- ing utility retail may be a step closer", said Laikin. "Any new entrants are more likely to come from outside the sector than is the case in the non-household market. This will present its own licensing chal- lenges for Ofwat and competitive challenges for incumbents," he said in a column for Utility Week. "We should expect significant interest from the energy sector again, but this will be tempered with healthy scepticism about timing and the political will to go all the way." Domestic competition was last mooted about ten years ago. ENERGY Two-year auction ban for power plant Ofgem has stripped a small-scale gas generator of its capacity agreement, and banned the firm from re-entering the rule-break- ing units into capacity market auctions for another two years. Generators Adret and Beran- gere, both owned by GF Energy, falsely claimed to have all the required planning permission before the government's first capacity auction in 2014. Ofgem found that Berangere – which secured contracts for three generating units – did not have planning consent for one of them. The unit will have its capacity agreement terminated and Berangere will be banned from entering it for the next two years. Adret also falsely claimed that one of its three units had planning permission – but it was not successful at auction. GF Energy said that in one case planning permission was subsequently granted months before Ofgem began its investi- gation. In the other, it said it had written communication from the planning authorities saying the sites in question were accept- able. But the firm admits that it was still in breach of the rules. Glut: oversupply is swamping world market UTILITY WEEK | 18TH - 24TH DECEMBER 2015 | 21 Markets 12 14 10 8 6 4 2 0 -2 PROFIT PREMIUM OF COAL OVER GAS GENERATION IN THE UK Dec 2014 £/MWh Mar 2015 Jun 2015 Sept 2015 Dec 2015 In the UK, historic lows in the price of gas are proving to be a plus for decarbonisation efforts. Data from Bloomberg shows that for the first time since 2011, gas-fired power generation was more profitable than burning coal aer gas prices tumbled about 26 per cent over the year. Although good for the environment, the trend has proved more worrying for supply margins, which are set to tighten even further with the loss of about 6GW of coal- fired capacity in March 2016. Source: Data compiled by Bloomberg

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