To Fix Or Not To Fix?

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TO FIX OR NOT TO FIX?

Fixing electricity contracts beyond 2015

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Welcome!Now is an ideal time for businesses to guarantee certainty over medium-term electricity prices by renewing their electricity contracts.

Favourable market conditions mean that businesses can take advantage of falling wholesale prices and secure better deals on their electricity contract and reduce risk by removing the uncertainty around future market movements.

Find out more about how you could take advantage of these in “Our unique perspective on To Fix or Not To Fix” or by speaking to your Relationship Manager today.

Thank you for choosing EnergyQuote JHA.

Andrew HillHead of Analytics, Risk and Trading

Following the completion of a Master’s degree in Energy Economics and Law in 1996, Andrew worked in consultancy for both Petroleum Economics Ltd and Wood Mackenzie before taking up a role as Head of Oil Markets Analysis at Enron Corp in Houston. After this he became Editorial Director at Heren Energy and then Director of Energy Markets at Datamonitor before joining EnergyQuote JHA in 2010.

A Unique Perspective | Fixing electricty contracts beyond 2015

EnergyQuote JHA, 66 Hammersmith Road, London W14 8UD United Kingdom.T: +44 (0)20 7605 2300 E: [email protected]

Andrew Hill

Gas and power prices are at relative lows on the wholesale

market

The annual October 2015 power contract has fallen by around

9% since the beginning of the year


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Falling wholesale pricesGas and power prices are at relative lows on the wholesale market. The first quarter of this year saw seasonably mild temperatures, which kept the demand for gas relatively low and the system well balanced with strong imports and healthy storage stocks moving forward into the summer.

This had a downward impact on gas prices, and as gas sets the marginal cost of power, electricity prices have also been driven down, with weaker coal also impacting. Agreement between Russia and Ukraine over gas supplies this winter has also had a downward impact, as this allayed fears over possible supply disruptions to Europe.

The annual October 2015 power contract has fallen by around 9% since the beginning of the year and it is around 6% less than if the forward annual October contract had been purchased this time last year.

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50Apr13 Jun13

Historic 1 and 2 year wholesale power contracts from 2015

October 2015 - 1-yearOctober 2015 - 2-year

FORECAST

2016

2017

Aug13 Oct13 Dec13 Feb14 Apr14 Jun14 Aug14 Oct14 2016 2017

£/M

Wh


Indicative TNUoS charges suggest an average increase in England and Wales of around 7% in 2015/16

The cost of the governments EMR will ultimately be borne by consumers and is expected to increase rapidly from April 2015


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20%

15%

10%

5%

0%

+7%

+5%

+10%

+14%

+15%

+5%

+10%

+14%

TNUoS DUoS RO FOT/CFD

Forecast annual average increase in non energy costs

2015/162016/17

£/M

Wh

Non-energy cost price uncertaintyUpgrades to the electricity network at the national and local levels are likely to see further increases in transmission network and distribution use of system charges (TNUoS and DUoS) over the coming years as investment is undertaken. Indicative TNUoS charges suggest an average increase in England and Wales of around 7% in 2015/16, with a further average increase of 15% in 2016/17. Estimates suggest an annual average increase of around 10% for DUoS.

Under the government’s electricity market reform arrangements, contracts for difference will support new renewables capacity. While the total cost will be capped under the Treasury’s levy control framework, it will ultimately be borne by consumers and is expected to increase rapidly from April next year as new capacity is commissioned.


Subsidies will also continue to be provided to small-scale renewable projects through the feed-in tariff mechanism. Rising levels of micro-generation capacity and existing renewables capacity through the Renewables Obligation will also support the cost of subsidies, which will continue to be passed-through to consumers.

Future riskSo far this winter mild temperatures have helped to curb the demand for energy and supplies of gas and power are healthy. This has weighed on the wholesale energy market.

Relatively mild conditions are currently forecast to continue, which should help to minimise significant wholesale energy price increases, but any significant cold spells are likely to support as prompt sentiment impacts on contracts further out on the curve.

National Grid and Ofgem have warned over security of supply as electricity generation margins narrow in the short to medium term. Coal plants have been forced to close under environmental legislation and until additional renewables capacity and gas-fired plant is commissioned the generation margin will narrow. This summer also saw the closure of some nuclear units for inspection following a boiler fault. While these are expected to return to service before the end of the year, any delay could support prices, and while ongoing checks continue they are likely to run at below full capacity in the short term, further adding to the squeeze.

A number of new reserve measures have been introduced that will allow National Grid to balance the system in times of system stress. Payments will be made on the supply and demand side in return for increasing generation or reducing demand during peak times. This tight supply is also expected to support prices in the medium term.

Coal plants have been forced to close under environmen-tal legislation and

until additional renewables capacity and gas-fired plant

is commissioned the generation margin

will narrow


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Any escalation in tensions between Russia and Ukraine may also support curve contracts as this could interrupt supplies of gas from Russia to Europe. Agreement has yet to be reached on gas supplies beyond next March. The parties have both lodged arbitration cases to review their gas transit contracts and the outcome is not expected until late next year.

The oil market has fallen to multi-year lows as healthy supplies outpace weakening global demand. OPEC’s decision in late November to leave oil production unchanged put further downward pressure on prices.

Time to fix?We believe therefore that now is a good time to consider fixing electricity contracts in order to minimise the risk of rising wholesale prices and take advantage of the current favourable market conditions. Further, it suggests businesses should consider supply contracts that fully fix the non-energy costs in order to provide budget certainty and remove the risk of non-energy cost increases being passed through to the end user by suppliers.

Find out more about how fixing your electricity contract past 2015 could help your business. Contact your Relationship Manager today.

Tensions between Russia and Ukraine may also support curve contracts


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To Fix Or Not To Fix?