2020 UK wholesale power and gas market outlook - Energy HQ
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2020 UK wholesale power and gas market outlook
2020 UK wholesale power and gas market outlook
Introduction
The following details some of the possible market scenarios that could develop over the coming year.
Please note that these market development scenarios represent the individual views of each of the
Optimisation Desk Client Portfolio Managers (CPMs) and should not be taken as advice.
For more information, contact our Optimisation Desk team at optimisation.desk.team@npower.com
Ropa Manyanhaire Lee Tucker Sam Hill
Client Portfolio Manager Client Portfolio Manager Client Portfolio Manager
npower Business Solutions, Energy HQ npower Business Solutions, Energy HQ npower Business Solutions, Energy HQ
Lucy Hearn
Client Portfolio Manager
npower Business Solutions, Energy HQ
energy-hq.co.uk 2
2020 UK wholesale power and gas market outlook
Gas
Liquefied natural gas (LNG) Global relations Demand
LNG supply for 2020 is forecast by Platts Ukraine and Russia have now signed a new Weather – despite initial forecasts that
to grow at its slowest rate since 2015. five-year transit agreement, which will see this winter could be an extremely cold
However, demand is unlikely to grow at a Russia continue to ship in the region of 40% of one, significantly cold weather is still yet to
significantly fast enough pace to provide any its European gas deliveries through pipelines materialise. Globally, 2019 was the second
tightness in the global gas market. For the that run through Ukraine. This has already seen warmest year ever, and the past decade was
next six months at least, the UK looks likely to much of the risk premium associated with Q1 the warmest ever. Latest shorter-term forecasts
continue to see an abundance of LNG deliveries, 20 gas prices eroded as supplies to Europe are are showing above-average temperatures into
notably from the US. US exporters of LNG are effectively secured. However, the deal does the start of February. There is a chance of a
heading into 2020 after a record year which not include Crimean assets. So, in the event of cold spell towards the end of February and into
saw exports soar by more than 40%. further tensions between the two neighbours March. However, it is thought that any such
However, growing concerns about softening following Russia’s annexation of Ukraine’s event will be short-lived and it does not look
global demand and heavy competition could Crimea, we could yet see some upside risk like there will be any ‘Beast from the East’
see that growth number slow at the back end to prices in 2020. type scenarios.
of the year. Despite this, the US still remains
on track to become the biggest global LNG Political tensions surrounding the Nord Stream Generation – demand for gas-fired generation
exporter by 2024 (as reported by Reuters). 2 pipeline are likely to intensify in 2020, with in the UK is expected to remain relatively
the US already placing sanctions on companies strong. However, Platts has reported that the
As a result, prompt prices in Europe have involved. The US has been strongly opposed to UK may see Combined Cycle Gas Turbine (CCGT)
sagged with both the National Balancing Point the building of the Nord Stream 2 pipeline, as it generation online as much as 30% lower
(NBP) and Title Transfer Facility (TTF) posting increases the EU’s dependency on Russia and this summer compared to the summer
heavy losses. The Japanese Korean Marker potentially (in their view) on Europe’s national of 2019. This is due to a new interconnector,
(JKM) has fallen close to 40% year on year, security. Notably, it could allow Russia to take the ElecLink, with France scheduled to come
resulting in cargoes heading to Europe instead further sanctions against Ukraine. However, online in early 2020, which is likely to favour
of Asia, as falling Asian demand reduces the proponents of the pipeline will argue that the higher imports over domestic gas generation.
incentives for cargoes to head to the Far East. completion of the pipeline will provide cheaper This is a continuation of the trend we have seen
However, traders are likely to continue to gas to European customers than American LNG. recently as new interconnectors such as NEMO
pay close attention to the JKM in 2020 with Any delay to the pipeline’s completion is likely to increase the UK’s interconnectivity with the
any increase in price potentially acting as a provide some upside risk but this is only likely continent and ultimately help to source cheaper
precursor to an uptick in Asian demand. to provide a temporary blip in the face of power generation. The new interconnector is
At present, it seems likely that it would take continued oversupply. likely to further weigh on UK hub gas prices.
something unexpected such as a policy change
or a weather event to reroute cargoes back
to Asia. Therefore, it seems likely that any
excess supply would be absorbed by European
storage facilities from spring onwards.
energy-hq.co.uk 3
2020 UK wholesale power and gas market outlook
Power
Price development April/May. The Hunterston B reactors are offline for a graphite inspection
The graph below shows how the Sum20 and Win20 power prices developed following the discovery of cracks in the core. After being permitted to run
over the last year and how the spread between summer and winter changed. for 4 months last year, reactor 4 should come back online as predicted
(around March). However, reactor 3 has not been online for almost two
years and so its return is more dubious. With statutory outages at Heysham
Price development for 2020 contracts 2-8 (February), Heysham 1-1 (April) and Torness R1 (July), aside from any
Win-20 BL power Sum-20 BL power Summer/Winter spread unplanned outages, we would expect nuclear generation to remain fairly
62 20
steady through the year at around 6.7GW. Forecasts for 2020 suggest
18
57 renewables will increase again to outweigh contributions from coal and
16
gas sources as renewable installed capacity is now higher than fossil fuel
14
£ spread
52 capacity as of November 2019.
£/MWh
12
47 10 On the coal front, the start of this year sees the closure of two more coal
8 plants, leaving just four operational from April 2020 onwards. This could
42
6 cause firmer prices if we were to get extreme cold temperatures similar to
37 4 the 2018 ‘Beast from the East’. However, as indications are for a mild start
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Key drivers - EU
Having remained range-bound for most of the year, both contracts broke Disruptions to supply caused by French nuclear outages are likely to have
through in November and the downwards trend escalated in December. a strong bullish impact on prices. The last four years have seen incidents
The drop in prices was most dramatic for the summer contract which of interruption to supply, or in the case of 2019, uncertainty around
reached £53.20/MWh at its highest point in July 2019 and a low of £38.85/ potential maintenance requirements. As the French fleet continues to age,
MWh at the end of the year. The winter contract saw a drop of £10/MWh the likelihood there will be a period of elevated prices on the back
over this period so still a significant fall. Unless there are any major bullish of nuclear issues is increasingly likely.
drivers taking effect, this softening of prices may continue into 2020.
There is a new Norwegian interconnector expected to come online in 2020
The spread between summer and winter also increased towards the end with 1.4GW capacity. There is also additional capacity from France with
of the year from around £6/MWh to over £10/MWh in December. As the the ElecLink (1GW) and IFA2 (1GW) interconnectors expected this year.
increase in spread escalated rapidly towards the end of the year we This additional capacity allows greater movement and balancing of power
expect this trend to continue at least for the remainder of Q1 20. across Europe. One complication to this could be the outcome of Brexit,
as the interconnectors are currently governed by EU legislation that
Keydrivers – UK would cease to stand once the UK leaves the EU if ‘no-deal’ is in place.
UK renewables grew during the last year by nearly 10%, but this growth However, the event of a no-deal scenario was discussed in March 2019 and
was balanced out by restricted nuclear generation due to outages. The two contingencies were drawn up to allow a similar agreement to continue if
reactors at Dungeness B are currently on statutory outage, due to return this came to pass.
energy-hq.co.uk 4
2020 UK wholesale power and gas market outlook
Underlying
commodities
Oil
The 18-month long trade war between China and the US stunted oil Tensions rose between the US and Iran after Iran’s most powerful military
prices in 2019. Brent crude traded in a narrow $15/bbl range all year as commander, General Qasem Soleimani, was killed in a US air-strike on
the global demand outlook was weak. OPEC and Russia-led supply cuts Friday 3rd January. Iran retaliated and targeted US troops with missile
buoyed oil prices and kept Brent crude within the $60/bbl range for most strikes in Iraq. The recent turn of events in the Middle East poses a risk to
of the year. On the 15th January, phase one of a trade deal was agreed crude supply as oil facilities could be targeted and more sanctions could
between the US and China. The latest agreement keeps tariffs in place on be placed on Iran. Oil prices rallied to $70/bbl and we witnessed an uptick
Chinese imports and will continue to do so until at least the US election in in gas and power prices. However, the impact was outweighed by the
November. Oil weakened slightly following this news as it is perceived that oversupply of gas in Europe at the moment. OPEC members and Russia
the tariffs will limit Chinese demand for manufacturing. The US Presidential have been curbing production in order to support oil prices as there is
election later this year could, therefore, be a key driver of oil prices, as it is currently a supply gut, as the US has been ramping up its production.
possible that should Donald Trump fail to win, his successor could reduce Therefore, despite the geopolitical risks, oil prices have struggled to
the tariffs. break beyond $70/bbl. In the near term, upside movement in oil prices is
unlikely to impact gas and power prices significantly, due to the rise and
Demand for oil is expected to be higher in the first six months of 2020. abundance of LNG.
China’s oil imports rose towards the back end of 2019, due to increased
demand from new refineries and the nation storing oil in its strategic
petroleum reserve (SPR). However, the stockpiling is expected to ease later Brent Crude
on in the year which raises demand concerns. The International Maritime 77
Organization (IMO), a shipping agency, has banned the use of fuel oil with
72
high sulphur content in ships. Previously, ships could use fuel with 3.5%
sulphur and now the maximum allowed is 0.5%. This increases demand for
Price $/bbl
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light and sweet crudes such as Brent Crude and West Texas Intermediate
(WTI), as companies adjust to the new regulation. However, in the second 62
half of the year, the increase in oil demand due to IMO is expected to wear 57
off, once ships are fully compliant.
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energy-hq.co.uk 5
2020 UK wholesale power and gas market outlook
Coal and carbon due to the uncertainty to delays with Brexit, it meant that UK carbon
Coal prices were bearish in 2019 and we expect the trend to continue in auctions were suspended in 2019. The Government has not distributed its
2020, as more coal to gas switching takes place in Europe. In the UK alone, free ETS allocation to market participants yet. This could mean once a deal
all coal generation will be phased out by 2025. RWE will be closing down is agreed by January 31st, 120mn to 130mn carbon allowances could be
their coal power plant Aberthaw B at the end of Q1 20 after 50 years of dumped into the market before the deadline in April, which will pressure
operation. SSE will also be closing down their last coal-fired generator, prices. The EU ETS scheme is currently in its 3rd phase and market
Fiddler’s Ferry, in March 2020 as they are making a £40million loss a participants await new guidelines for Phase 4 which will start in 2021. If the
year. Therefore, the UK will only have four operational coal generators. EU set more ambitious goals for the next phase, then this will potentially
The UK relied less on coal this winter due to low demand from milder reduce demand for carbon permits, as large carbon emitters will have to
temperatures, high wind generation and favourable gas prices. In addition take bigger measures to curb emissions. With the shutdown of two coal
to this, the rise in carbon permits tightened margins for coal generators. generators in the UK in 2020, it means weaker demand for carbon permits.
Coal Carbon
90 31
85 29
80
27
Price $/tonne
75
Price € t/CO2e
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65 23
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Fluctuations in carbon prices were one of the key drivers behind upside Overall, underlying commodities are likely to be bearish in 2020 due to
in gas and power prices last year, mainly due to the uncertainty of Brexit weak demand across the board. The US continues to ramp up its crude
negotiations. Now that the Conservative Party has won a majority in production and if it was not for OPEC members and Russia curbing their
Parliament, it increases the likelihood of a Brexit deal being agreed. production, oil prices would have been lower. Whether the UK leaves the
Previously the UK signing a deal with the EU would have meant the UK will EU with or without a deal, it is likely that carbon prices will fall as a result.
continue to participate in the European Union Emissions Trading System
(EU ETS) and that would have been a bullish driver to prices. However,
energy-hq.co.uk 6
2020 UK wholesale power and gas market outlook
Foreign
Exchange
Recent events and developments throughout 2019 and over the last three would have a negative impact upon the Euro as well, so potentially could
years will continue to have knock-on effects on the global economy into see some strength for the pound against the Euro depending on the view
2020. Brexit will be a driving force for the pound and euro exchange, the for traders. We would likely see the pound slip against the dollar and other
US-China trade war looks set to be resolved, and heightened tensions in global indices.
the Middle East will impact commodity prices as well as currency.
The US–China trade tensions rumbled on through 2019, as we head into
Focussing on the UK, with the Brexit departure date set for the 31st of 2020 there may be some light. This month both parties are expected to
January, the future trade negotiations and deals will be top of the agenda. sign ‘phase one’ of the trade pact. One of the major developments has
Britain’s post-Brexit transition period expires at the end of 2020, and the been that the US has stepped back from labelling China as a currency
Prime Minister has vowed to make no further extensions. This pressurises manipulator, deliberately keeping its currency value low to make its
both sides to reach a deal in the coming months. The EU plans to have its products cheaper for export. These trade tensions have been one of the
negotiation mandate agreed for March 1st, with sign-off hopefully done bigger drivers of slowing global growth and an end to the tensions could
in the February 25th meeting. June will be an important month as this will see some bullishness return to the market. One to keep an eye on this
be the last chance for the UK to extend the process, although both sides year for sure.
are looking to avoid this. By 26th November, the EU has said a trade deal
must have been negotiated (if there have not already been extensions), 2020 looks set to follow 2019 in terms of growth. Any gains for the pound
as by the mid-December EU summit it will be too late. If no agreement and the economy following the most recent election results will likely slip
has been reached by the end of December, then Britain will fall onto WTO away, as uncertainty around Brexit returns to the market. Most economists
rules, essentially a no-deal Brexit. This would be a negative situation for expect no change in terms of growth, with some seeing perhaps a little
both the UK and the pound, which would likely slip. If quick agreements upside. Interest rates are also likely to remain where they are with so
and a smooth deal are hashed out in the following months, we could see much uncertainty floating about.
further strength for the economy. Arguably, however, a no-deal Brexit
energy-hq.co.uk 7
2020 UK wholesale power and gas market outlook
Policy
Targeted Charging Review (TCR) ruling by the European Court of Justice (ECJ). This meant the UK could
Ofgem announced its TCR in November 2019 and this will change how not hold any CM auctions or make any payments to capacity providers
residual charges are recovered. Ofgem is looking to recover residual during the suspension period; as the European Commission carried out
charges for Distribution Use of System (DUoS) and Transmission Network a formal investigation. Much to the energy industry’s relief, the European
Use of System (TNUoS) as a fixed charge. For non-domestic customers, Commission concluded that the current scheme was compliant in October
this would be based on their consumption if on a low voltage connection 2019, but they made recommendations for BEIS to implement an attempt
and on their capacity if on high voltage or extra-high voltage (EHV). The to incentivise more sustainable and low carbon capacity participants to be
aim is to reduce the incentive to adapt behaviour to align with residual involved in the auctions. Plus, the government is looking to streamline the
charges. These changes will not be implemented until April 2021, but in process for capacity providers as part of the five-year CM review. Some
the meantime, we may see shifting behaviours as businesses either work of the changes that the Department for Business, Energy and Industrial
to maximise the benefits they can make while the current system is in Strategy (BEIS) has been requested include:
place or they transition to adapt to the new process. Under the current
• Lowering the minimum threshold capacity to qualify to less than 2MW
system, large importers are incentivised to avoid importing at peak hours
as they are able to greatly reduce their charges, these charges are then • Allowing European capacity providers to bid in capacity auctions directly
spread amongst those who are not as flexible. The changes are thought to via interconnectors
dis-incentivise business from investing in onsite, often renewable, energy • To allow for wind, solar and unconventional generators to participate in
projects because they will no longer be able to use these to reduce their capacity auctions
charges. TCR changes also impact the embedded benefits paid to small • To ensure the scheme is compliant with the EU electricity regulations
generators with less than 100MW capacity, causing a drop in the benefits
• Making long-term CM agreements accessible to all participants
generators receive and hence dis-incentivising investment in generation.
dependent on CAPEX thresholds
Overall, the uncertainty in the implementation timeframe and exact impact
of the review is likely to make investment in new generation plants riskier Not all of the changes will be implemented this year, as 2020 auctions
and providing flexibility services less appealing. Both of these factors could are expected to abide to the current scheme regulations. However,
lead to a rise in prices as the system has to account for lack of supply and wind and solar generators will be allowed to participate in 2020 auctions.
flexibility by relying on CCGT and coal to fill the gap. This is good news, considering two coal plants will be shut down this
year and nuclear power plants are ageing and soon approaching the
Capacity Market (CM) end of their lifecycle. T-1 auction had to be postponed as a result of
CM was introduced in the UK to guarantee security of supply by the suspension and is now scheduled to happen in late January 2020.
remunerating parties that guaranteed supply during times of system Alongside the T-3 auction which was scheduled for the end of January 2020
stress. It was also designed to incentivise investment into new generators but they have had some issues which has led to some of the mock auctions
without increasing the cost for consumers, as old generators were being being cancelled. The new changes are expected to have an impact on
decommissioned. CM auctions were suspended in 2018 following a clearing prices and certainly change the dynamics of the auctions.
energy-hq.co.uk 8
2020 UK wholesale power and gas market outlook
Client Portfolio Manager
(CPM) views
Sam Hill – cautiously bearish With the Russia-Ukraine transit agreement extended just before the new
With so much downside throughout 2019, year, some of the premium attached to the Q1 20 contracts has already
it’s reasonable to think that there will be evaporated. However, the continued flow of LNG arrivals to Europe
a bounce at some point. US foreign policy shows no signs of slowing, notably as US LNG is expected to continue its
and hard Brexit scenarios could be the expansion into 2020 and will likely keep prompt contracts under pressure.
catalyst, providing a springboard for oil
At present, there appears to be no significant cold weather risk on the
and carbon prices. The devastating fires
horizon. With any cold spell now not likely to hit until mid-February at
in Australia could have impacts on coal
the earliest, this should mean the UK and the Eurozone have more than
and LNG into 2020 as well. Although, I
enough storage to cope with any sudden increased demand. This raises
believe there is still plenty of downsides.
the likelihood that the market could sell-off quite significantly at the back
With gas stocks at record levels, milder
end of March; a shoulder month to summer trading.
temperature runs and increased renewable generation providing the real
bearish momentum. Every year, National Grid’s connectivity and reliance The summer months could again be the most volatile, particularly if
on additional flexible capacity becomes intrinsic to operations. In 2020 this the market retains the same strong bearish sentiment we are currently
will ease some pressure in the absence of renewables and shave reliance experiencing. As traders may look to start taking profits or cover any
on gas. With all this in mind, my view is bearish, although cautiously so. short positions they may have, in the event of an expected event such as
I believe upside will come in the summer months if at all, with colder an increase in nuclear risk, heatwave and lack of renewable generation;
weather risk at the end of Q1 into Q2 looking 55-60% less likely. something which we experienced in 2019.
Lee Tucker – bearish view but summer may bring The commodity complex looks stronger as we start the new year, with oil
some shocks to the upside markets rallying at the prospect of a US-Chinese trade deal and OPEC’s
The start of 2020 looks likely to see prices continued resilience to constrain supply. With many citing global demand
remain on the back foot, with some for oil may not be as bad as first feared, we could see Brent move back
particular softness at the front of both above $70/bbl in the not too distant future. Carbon prices also continue
the UK gas and power curves. Prompt to remain strong, with the UK increasingly likely to remain in the EU ETS,
contracts for immediate delivery continue EUAs could again test €30/tCO2e. This could mean we see, at times, some
to trade at a significant discount to the stickiness to contracts at the back of the curve, for power notably, in the
forward curve, suggesting that there face of continued weaker gas contracts.
could well be some risk premium yet
to be eroded.
energy-hq.co.uk 9
2020 UK wholesale power and gas market outlook
Lucy Hearn – bearish Ropa Manyanhaire – bearish
With the new five-year agreement between Russia and Ukraine signed, I anticipate a very narrow spread between
I expect less of the price spikes seen towards the end of 2019. With that prices in winter months and summer
hat being said, when Nord Stream 2 comes online, there could be some months considering we have had very low
volatility while deals are being agreed. The ongoing US-China trade deal prices in Winter-19. The high abundance
could cause some uncertainty in the market but with the US gearing up to of LNG supply will continue to limit any
their presidential election in November, focus may shift to more domestic upside gains. Prices are likely to be well
issues. On the UK front, coal plant closures could cause firmer prices if we supported over the summer months,
get extreme cold temperatures. New interconnectors taking the total UK as wind generation will be low and
interconnector capacity to over 8GW could provide more stability to the demand could potentially be higher if
power stack as with the number of interconnectors increasing a fault in any Europe encounters a warmer summer
one of them is likely to have a lesser impact. The latest Brexit deadline day than expected. Overall, I believe gas and power prices will trade
is likely to cause volatility in the Pound and euro at the end of January and sideways in a narrow spread, which will make it more challenging
December as the current leave date (and if this date is pushed back again, but interesting to hedge.
around each subsequent deadline day).
The dollar is likely to see a volatile year as we approach the US elections in
November. LNG has been abundant this year and I expect this to continue
into 2020 with one possible exception. As athletes and fans head to Tokyo
this summer we may see gas prices spike due to the high demand for
air conditioning required for the games. With that being said, the Tokyo
Olympics is aiming to be the first carbon-neutral games so, in theory,
will not have the requirement. However, I wouldn’t be surprised if we see
LNG head east during the summer in search of more favourable prices.
The trend over the last few years has been a widening between summer
and winter power prices with the 2020 contract around £8/MWh higher for
winter. So, even with an overall bearish view, I would expect winter contacts
to maintain their premium. Aside from potential political pinch points
through the year, I expect an overall bearish note to prices.
energy-hq.co.uk 10Thank you
For more information about our 2020 UK wholesale power and gas
market outlook, contact us and a member of our team can guide you
through the next steps and answer any questions you may have.
Contact us
0800 193 6866 nbs@npower.com
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