Energy Hub – Powered by GET – January 2024

Monthly electricity stats In December, wind was our largest source of generation, accounting for 41.2% of electricity. We achieved a new maximum wind record of 21.8GW of electricity on 21 December between 8 – 8:30am. Wind accounted for 56% of Great Britain’s electricity generation during this period. High levels of wind throughout December helped 60% of electricity come from zero-carbon sources, peaking at 87% on 28 December at 2pm. December was our greenest month of the year with electricity being generated at an average of 122 gCO2/kWh. Demand for electricity peaked on 1 December at 5pm. Weather At time of writing, you’ll be happy to know this is as cold as it’s going to get in the near term. The latest EC46 forecast shows temperatures rising sharply going into the weekend and then remaining above seasonal norms well into February. Wind forecasts currently suggest that this too will pick up and remain above normal levels for this time of year for at least two weeks. In summary we are entering into a new phase, with the cold spell drawing to a close, and a milder, wetter and potentially quite wild spell incoming in the nearer term. This is very positive for energy prices. Excuse the pun, but we’ve weathered this cold period very well! Just to show how ridiculous things could get , one of the GFS models suggests the temperature at midday on the 23rd reaches 16.8C in London.  Not only would such an outcome absolutely destroy the daily record, it would even put the all time January record of 18.3C at risk if the model did under-estimate the temperature as it is known to do on occasion, or if somewhere outside London was fractionally warmer. With the warm sea temperatures there’s definitely the ingredients for some extraordinary temperatures here in the UK. 12C here in Leeds, 14C almost everywhere in the Midlands south, and 16C in London. Interesting to see just how mild it gets next week.

Storage EU aggregated gas storage currently sits at 79% full, having seen heavy drawdowns over the last week due to cold weather across Europe. We are still near the top of the five-year maximum capacity for this time of year. If we carry on this trajectory and follow average temperatures for the rest of this winter, we could outturn as much as 65% full by April. This would be significantly above the five-year average and well above last year’s exit capacity of 55%. Existing at these levels would give the market confidence that we should easily get to the 90% and surpass this level, as seen this year. With the additional storage used this year in Ukraine, this facility could be utilised much more next winter. As Ukraine storage only reached 40% capacity or 125TWh, and EU aggregated storage reached 99.63% or 1,136TWh, you can see how much additional storage Ukraine has to utilise. If the EU can afford to utilise this additional storage, then this will help keep prices lower and less volatile if there are supply constraints or Geopolitical influences. One must remember that this winter, to date and last winter have been very mild. It’s yet to be seen how well the EU and UK would cope with a prolonged cold period or beast from the east scenario. Aisa too has been very mild with very little demand put onto global LNG supplies.

LNG If we take all of the above into account, it’s very clear that there has not been additional demand for LNG here in Europe and also in Asia. In fact, LNG prices are trading around 2.5p/kWh here in the UK and EU and around 3p/kWh in Asia. If we compare them to last year on the 18th of Jan 2023, the UK and EU were around 4.6p/kWh and 7.2p/kWh in Asia. When we hear the BBC trying to talk up LNG prices, and clearly diverting shipment around the cape will incur additional costs,  please let’s just look at the facts. Also, it would be good of Ofgem to take note of where gas and power prices are and seriously look at the price cap. We do not seem to have any competition on the domestic market now, as it would seem that Ofgem have created a maximum price to charge, a cartel, and all the suppliers are happily following. Where does the problem lie, if you look at the prices for the next quarter a quarter before and in that one week there are issues and the prices momentarily spike, this is the time that you set the following prices cap. One needs to use some judgement and clearly for Q1 24 they have got it very wrong. We digress, but just want to mention that this has had a big effect on inflation and fundamentally will influence when and by how much interest rates will move! As LNG now replaces Russian piped gas, the price that LNG trades for sets the tone for UK and EU gas prices. With Qatar now diverting shipments around Africa, interestingly we seem LNG prices fall by £2MWh between Tuesday and Wednesday. Now that the US supplies more than 50% of the UK’s shipments, Qatar is not our main supplier.

Infrastructure A major Japanese corporation is planning a massive investment in what would be the world’s biggest green hydrogen project. The move is a sign that the industry is persevering and pursuing the construction of clean energy projects even as costs have increased. Japan’s Mitsubishi Corporation, a giant trading house, plans to invest around $690 million in a green hydrogen production plant planned in Rotterdam’s Europoort industrial area. The project, Eneco Electrolyzer,  will have a capacity of 800 megawatts (MW) and produce up to 80,000 tons of hydrogen every year. This would be a production capacity almost 30 times higher than any of the currently operational green hydrogen projects anywhere in the world. The Eneco Diamond Hydrogen joint venture of Rotterdam-based energy firm Eneco and Mitsubishi will build and operate the project, which will use renewable energy from solar parks and wind farms to produce clean hydrogen that’s initially aimed towards the industrial sector. Eneco submitted its planning application in November 2023. The application calls for construction beginning in 2026. The green hydrogen plant is currently scheduled to start operating in 2029. The biggest expansion of nuclear power for 70 years has been unveiled in a move ministers said would reduce bills, support thousands of jobs and improve UK energy security. The plans included exploring building a major new power station as big as Sizewell in Suffolk or Hinkley in Somerset, which are capable of powering 6 million homes each. The Government said its Civil Nuclear Roadmap will give industry certainty of the future direction of the UK’s nuclear programme. It sets out how the UK will increase generation by up to 4 times to 24 gigawatts (GW) by 2050 – enough to provide a quarter of the UK’s electricity needs. Plans to streamline the development of new power stations and introduce smarter regulation could speed up the overall process and the delivery of nuclear power in the UK. Secretary of State for Energy Security and Net Zero, Claire Coutinho, said: “From large gigawatt projects to small modular reactors, the UK’s wider nuclear revival will quadruple our nuclear capacity by 2050 – helping to power Britain from Britain.”

Geopolitical drives The Organization of Petroleum Exporting Countries produced more crude oil in December than it had in November, according to the group’s latest edition of its highly anticipated Monthly Oil Market Report. For December, the group produced 26.7 million barrels of crude oil per day, up from 26.628 million barrels of crude oil per day the month prior. The output hike was primarily due to increased output from Nigeria, which saw its production rise from 1.319 million bpd to 1.418 million bpd, according to OPEC’s secondary sources. Iraq also saw its production increase from 4.269 million bpd to 4.292 million bpd. Other OPEC members saw their output drop, including Saudi Arabia (-12,000 bpd), Kuwait (-23,000 bpd), Iran (-11,000 bpd) and others.   OPEC may be battling internally its members’ compliance to its own production cuts, but it also must battle outside forces, including U.S. crude oil production, which rose by nearly 1 million bpd in 2023, according to OPEC’s latest estimates shared on Wednesday. According to OPEC, U.S. production is estimated to have reached 12.89 million bpd last year—up .98 million bpd from the year prior. OPEC sees U.S. crude oil rising even further this year, to 13.23 million bpd, and to 13.61 million bpd in 2025. This is close to the EIA’s projections, which call for 2024 production of 13.21 million bpd. Meanwhile, Chinese demand growth for crude oil is slowing, CEO of commodities trader Mercuria Energy group said on Wednesday. According to Mercuria, OPEC could need to cut production even further than it already has in order to keep prices at current levels. Iran carried out a missile attacks in the western part of its neighbour, nuclear-armed Pakistan, targeting sites linked to militant group Jaysh al-Adl, and adding another flare-up to the already tense situation in the Middle East. Jaysh al-Adl is considered the “most active and influential” Sunni militant group in Sistan-Baluchestan, according to the office of the U.S. Director of National Intelligence. The group is designated as a terrorist group by Washington and Tehran. This is the third strike in one week from Iran on another country in the region, after attacks on targets in Iraq and Syria in recent days. Despite the most recent flare-up with the Iranian attack in Pakistan, oil prices fell early on Wednesday, reflecting worse-than-expected Chinese GDP data and a rising U.S. dollar. ‘Moderate inflation is generally more tolerable and can even be beneficial in certain circumstances while moderate deflation can lead to a destructive cycle of falling demand and economic stagnation.’ Chinese GDP data is not looking good, the US seems to be heading into a soft recession and the UK is in stagnation if not on the verge of recession. If we do enter a period of recession, investment will be cut and there will be job losses. Global GDP has had a beneficial effect on energy prices and brought them down, but to what point is this beneficial, cheaper energy bills at home, but the possibility of losing your job!

Summary As I’ve said before we are in interesting times, yes energy prices are coming off and seem to be now trading below 100ppt for gas which is very positive. Apart from the odd short term cold period and slight supply worry, we have not had to cope with any major issues. This is where we need not be complacent, as any major supply disruption or Geopolitical influence will still play a major role in affecting prices. If we can maintain good storage levels over the winter periods, GDP does not pick up and supplies remain resilient then prices may well come off further. Governments and central banks would ideally like to increase growth and investment to avoid recession, as well as keeping inflation under control. The central banks will look to reduce interest rates, with the Fed suggesting a three-quarter point reduction for 2024, it will be a balancing act as to when and by how much to avoid recession but also keep inflation in check. If you would like a more in-depth discussion on any of the points raised, please don’t hesitate to get in contact on 02476308830 or email on info@getsolutions.co.uk. Victor Levison.