Energy Hub – Powered by GET – November 2023

Monthly electricity stats In October, wind power was the dominant source of generation, accounting for 33.7% of electricity. Gas was our second largest fuel source with 27% of electricity being generated by gas. During October, 54% of electricity came from zero-carbon sources, peaking at 84% on 3 October at 12:30pm. We saw the highest level of demand at 5:30pm on 30 October. Coal contributed towards 1.6% of electricity, a reduction from 3.9% during the same period in 2018, enabling us to achieve 150 consecutive coal free hours. Weather Spot prices in the UK and Europe increased following a revision to the previous weather forecast, showing a drop in temperature from the weekend onwards. The latest EC46 forecast shows temperatures to drop sharply below seasonal norms from this weekend onwards and is expected to remain below for the remainder of the run. The most likely scenario through early December is for predominantly changeable weather, with spells of rain or showers and strong winds interspersed by short-lived drier, brighter periods, although there is a lower chance of more prolonged settled conditions developing. Rainfall amounts are likely to be near or above average, with the heaviest, most persistent, rain likely to be in the northwest at first, perhaps shifting further south towards mid-December. Temperatures in Asia are relatively similar to last year, mild and unsettled. This is helping ease LNG prices, due to low demand in Asia and Europe. I know it’s not the best for getting out and about all this wet and windy weather, but it could not be better for gas prices, as demand is low and renewable generation is high. With a record-breaking October marking an alarming trend in global temperatures and puts 2023 on track to become the hottest year on record, experts at EU’s Copernicus Climate Change Service warned on Wednesday. “We can say with near certainty that 2023 will be the warmest year on record and is currently 1.43C above the pre-industrial average,” said Samantha Burgess, deputy director of the Copernicus Climate Change Service.

Storage Europe’s record gas inventories continue to climb even higher as a warm start to autumn delays the onset of heating demand while high prices discourage industrial use and encourage continued imports. But prices for gas delivered at the height of winter in January 2024 have started to slide as the record levels of inventory weigh on the market. Normally we start to draw down on storage towards the end of October, last year we did not extract until the 11th November and this year has been on par with last year, draw down starting on the 8th November.  Inventories across the European Union and United Kingdom hit a record 1,146 terawatt-hours (TWh) on Nov. 5, according to Gas Infrastructure Europe. Part of the reason is that Northwest Europe has experienced a mild start to the autumn with temperatures at Frankfurt in Germany 3.5°C above the long-term average in September and 2.5°C in October. At the same time, futures prices and calendar spreads have remained strong, despite record stocks, discouraging resumption of industrial use and encouraging continued imports of liquefied natural gas (LNG). Europe’s storage sites were 99.6% full on Nov. 5, a record for the time of year, or any time of year, and gas has continued to be added later than usual owing to the warm weather. Since then, however, spreads have strengthened as traders have been able to store extra gas in Ukraine and on LNG carriers off the coast to avoid storage space running out. Europe still needs to conserve gas this winter but given how much is now in storage there is almost no chance stocks will fall critically low whatever the weather. Based on the current storage level and historical depletions over the last decade, inventories are projected to fall to around 575 TWh before the end of winter 2023/24 leaving storage sites 50% full. At this early point in the winter heating season, there is still significant uncertainty about average temperatures and the amount of depletion ahead. But even with a very cold winter, inventories are very unlikely to fall below 368 TWh (32% full), and if the winter is mild they could end as high as 795 TWh (69% full).

LNG The spot market for liquefied natural gas (LNG) is calmer than usual for this time of year as inventories in both Europe and Asia are high, and the weather is still mild.  Demand in Europe and Asia is rising in November compared to the warmer October, but LNG spot prices in Asia have dropped in the past three weeks, and the benchmark prices in Europe have also declined in recent days amid eased concerns about Eastern Mediterranean supply and nearly full EU natural gas storage sites. However, the calmness in the LNG market could turn into volatile turbulence again if fresh supply concerns emerge and if this winter is really cold in Europe and/or Asia.  Governments and markets should be anything but complacent as the winter approaches as risks of tighter markets and soaring prices remain, analysts and forecasters say. Imports in Asia are set to rise to 22.67 million metric tons in November from 21.18 million tons in October, with China leading imports and gains. Japan’s LNG imports are estimated to be flat this month compared to last month, while Indian imports are expected to drop from October as higher prices last month may have discouraged price-sensitive Indian buyers from purchasing more LNG for November. The LNG market seems calmer than usual for November when heating demand is typically rising in both Europe and Asia. Yet, no one can predict how cold this winter in the northern hemisphere will be. Last winter was mercifully warmer than usual in Europe just as the continent was scrambling to import higher LNG volumes despite spiking prices to replace the lost Russian pipeline gas supply. It’s not certain this winter will be equally warmer than usual, and weather will be the driving force behind the LNG market and prices. As we should now all be aware the LNG markets are driving gas prices, over in Asia prices have been trading around 4.5p/kWh, whereas in the UK and Europe prices are trading around 3.8p/kWh and just to rub salt into the wound US prices are around 0.7p/kWh. As long as we do not see spikes in demand and having to bid on spot cargo, UK and EU prices will stay below Asian prices. But if we see demand spikes due to low temperatures in Europe then prices will increase to Asian levels to encourage cargo to berth here rather than Asia.

Infrastructure Ørsted is ceasing the development of two offshore wind projects in the United States due to supply chain delays and higher interest rates, the world’s biggest offshore wind developer said at the start of this month, which sent its shares plummeting by nearly 20% in Copenhagen. Now Ørsted says that it had taken the decision to cease the development of the Ocean Wind 1 and 2 projects, as a consequence of additional supplier delays and changed project assumptions including tax credit monetization and the timing and likelihood of final construction permits. The final nail in the coffin was due to increases to long-dated US interest rates, which further deteriorated the business case. Last week, BP booked a pre-tax impairment charge of $540 million in the third quarter related to U.S. offshore wind projects as project developers are facing a challenging regulatory and business landscape. For example, the UK’s latest renewables tender was a flop for the industry, not a single offshore wind bid featured in the auction despite the fact that a record number of renewable energy capacity projects were awarded government funding.  In July, a large UK project was cancelled due to surging costs and challenging market conditions pressuring new developments. Vattenfall will not proceed with the development of the 1.4-GW Norfolk Boreas offshore wind project as the industry has seen cost increases by up to 40%, the company said. Interest rate increases here and across the globe could not have happened at a worse time. When we should be full steam ahead with additional capacity, concentrating on renewable generation, many projects are now being shelved and we are looking to be more reliant on existing fossil fuels. There may well be cost savings to be made in the short term, but what will be the additional medium and long term costs regarding the destruction and problems which will be caused from the high levels of carbon being pumped into the atmosphere and ultimate climate change.

Geopolitical drives European gas markets could face an excess of gas supply in the coming years amid an expected increase in production globally, lower demand and higher renewables output. Expectations that Russian supplies should start to increase by 2026 as it was laying pipes eastward to China. Even though little of that would head to Europe, due to sanctions and Russia’s halt in pipeline supplies via Germany after it invaded Ukraine last year, it would free up other gas flows for European consumption. Meanwhile, gas demand has dropped amid conservation efforts from households and lower industrial usage. According to energy industry lobby group BDEW, gas consumption in the continent’s biggest gas consumer, Germany, fell 13% from 624bn kWh in 2021 to 543bn kWh in 2022. As of 19 October, consumption stood at 487bn kWh, it said. In March, the EU agreed to extend an emergency target to cut its gas demand by 15% to safeguard supplies for winter. Last week, Catherine MacGregor, CEO of French utility Engie, said she expected industrial gas demand to remain 10-20% below normal next year and in 2025. Industry was expected to continue to need less gas, said Georg Zachmann of Brussels think tank Bruegel, either because it had grown more efficiently or shut down due to last year’s skyrocketing gas prices amid the energy crisis. “At some moment, we’ll get into these doom loops,” he said. “Demand gets less and less and then the infrastructure becomes more expensive and then gas essentially gets priced out by itself.”  That would have long-range effects, he said. “We lowered the demand curve structurally. There is a significant risk that we are going into a substantial, dramatic oversupply on the gas side.” That would leave traders with tough choices to make between the need to secure gas but not be oversupplied, but the argument remained for long-term contracts to protect against unforeseen price spikes. Announced on the 16th November our government has increased the maximum price for offshore wind projects in its flagship renewables scheme to further cement the UK as a world leader in clean energy. Following an extensive review of the latest evidence, including the impact of global events on supply chains, the government has raised the maximum price offshore wind and other renewables projects can receive in the next Contracts for Difference (CfD) auction to ensure it is performing effectively.  The CfD scheme ensures renewable energy projects receive a guaranteed price from the government for the electricity they generate, encouraging continued investment in the UK. The maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh ahead of Allocation Round 6 (AR6) next year. The government is also increasing maximum bid prices for other technologies, offering certainty for developers, and keeping the UK at the cutting edge of all renewables. These include: geothermal by 32% – from £119/MWh to £157/MWh solar by 30% – from £47/MWh to £61/MWh tidal by 29% – from £202/MWh to £261/MWh3 Contracts for Difference are currently awarded based on the outcome of a competitive auction.  Duncan Clark, Head of UK Region at Ørsted, said: “We welcome this important and positive step towards getting the next auction round right, which is essential for both UK energy security and the wider supply chain. This is a clear indication from the government that offshore wind can and will be the backbone of our future energy mix – providing low-cost, low-carbon electricity, creating jobs, supporting communities and attracting investment into the UK.”

Summary With the Autumn statement being published today, I would hope that Jeremy Hunt would look to stimulate the economy as much as possible as we really need investment and growth. Clearly this is tricky to achieve when trying to reduce inflation. With the indication of tax cuts, I’m not sure this is ideal. Yes, I would welcome a few extra pounds in my pocket, but would this be short term gain and long-term loss. We really want the price of Fuel, energy, groceries, mortgages etc to come down. Looking at making a few small tax cuts will not help the economy and we could end up with a stagnation which could last a long time. If we can concentrate on investment and growth, this would inevitably put more money into our pockets naturally but bringing essential costs down. We need to get out of this cycle of boom or bust, the worry would be entering into a period of deflation, with zero or negative growth, entering a recessionary period. It’s hard to blame one factor, and one could not have foreseen Russia invading Ukraine, but clearly one of the biggest dangers of quantitative easing is inflation. Why do we seem too slow to react, or why can we not become more proactive rather than reactive. Clearly if you pump Trillions of dollars into the economy, you’ll get a big spike in inflation and just the US alone in their phase three covid package called ‘the Coronavirus Aid, Relief, and Economic Security Act’ and nicknamed the CARES Act injected $2.3 trillion into their economy.  There needs to be a reduction in business rates and increase in investment in R&D and education. If this can be concentrated on the low carbon and renewable sector this would be seen as a very positive step. 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.