Weather Outlook 2019 - Energy HQ

Weather Outlook 2019 - Energy HQ
Outlook 2019
Weather Outlook 2019 - Energy HQ
Weather Outlook 2019

                  As we head out of winter and into spring, it is a good opportunity to
                  reflect on the weather we were anticipating this winter, both here
                  in the UK and across Europe, against what we actually experienced.
                  We will also look ahead to what we can expect this summer and
                  what it could mean for UK wholesale gas and power prices.
                  Ben Spry
                  Head of Risk Management
                  at Energy HQ, npower Business Solutions                                                                                             2
Weather Outlook 2019 - Energy HQ
Weather Outlook 2019

                  Winter 2018/19
                   Winter 2018/19 was originally predicted to be particularly cold, with fears that a weak polar vortex
                   and low sun spot activity would bring a cold winter to the UK. However, it was the United States that
                   bore the brunt of this weather phenomenon, caused by a weakening of the vortex that allowed cold
                   air to escape from the North Pole and form over the Midwest United States. This sent temperatures
                   plummeting to life-threatening levels with cities such as Chicago having experienced temperatures
                   far in excess of minus thirty degrees Celsius. Therefore, fears surrounding the vortex were correct,
                   with the UK and Europe lucky to avoid such severe cold weather that could have led to
                   a substantial premium on gas and power prices.

                   In fact, the UK experienced a warm winter and February in particular had a record number of days
                   above the expected average temperatures for the month. Tuesday 26th February reached the highest
                   levels since records began, with a high of 21.2 degrees Celsius recorded in London, against a typical
                   average of only 9 degrees. Overall, this was the UK’s second mildest February since records began.

                   Perhaps more significantly for gas and power prices, milder temperatures were also
                   experienced in Asia and this had a substantial knock-on effect to the landscape of the
                   European gas market.

                   The warmer temperatures reduced premiums for LNG gas in Asia, resulting in the stockpiling of gas
                   earlier in the year in a bid to avoid a repeat of the winter 2018, also ensuring that there was plenty
                   of LNG supply this winter. This sent the Japan Korean Marker (JKM), the benchmark price for spot
                   physical cargoes delivered into Japan, South Korea, China and Taiwan, tumbling. As a result, the
                   reduced financial incentives for cargoes to head to Asia, led to a rerouteing of cargoes to Europe,
                   which has been one of the biggest surprises and a significant driver of softer wholesale energy
                   prices this winter.                                                                                                                        3
Weather Outlook 2019 - Energy HQ
Weather Outlook 2019

          Looking ahead
          to summer 2019
                  The latest scientific research suggests the world is getting warmer,
                  with the Met Office stating that the UK is likely to experience a
                  very hot summer every five years. However, the weather remains
                  notoriously difficult to predict, even this close to the summer.
                  The latest Met Office long range forecasts are predicting that temperatures for this spring are
                  looking more likely to be above seasonal average, than below. This has fuelled some sentiment
                  amongst traders that the UK summer could be as hot, or even surpass, last year’s heat wave.

                  In the most extreme scenarios, climate scientists and meteorologists have raised the prospect
                  that in the event of an El Niño, it is entirely possible that 2019 will be the hottest year ever.

                  An El Niño is the biggest fluctuation in the Earth’s climate system and can trigger
                  significant weather events across the globe. It is widely used to describe the warming
                  of the sea surface temperature that occurs every few years, typically in the central-
                  east equatorial Pacific. Despite forming so far away, this can have a huge impact on the
                  weather that we experience here in the UK and is certainly a story to keep an eye on.

                  This year’s relatively dry February has lowered water levels in the River Rhine in Germany, with
                  hydrologists voicing their concerns that we could see a drought later in 2019. Reduced water
                  levels also increases the risk that barges could face difficulties transporting cargoes upstream
                  in the summer, raising the prospect of prices rising for commodities such as coal and gas.

                  During periods of prolonged high temperatures and low wind output, there is an increased
                  reliance on nuclear power stations. However, last year’s heat wave also caused problems for
                  Europe’s nuclear fleet. Water is the so called ‘Achilles’ heel’ of nuclear power stations, as a
                  vast amount of cooling water is required before being returned back to the rivers, lakes or the
                  sea from which it came from, albeit at a much warmer temperature. This caused substantial
                  environmental problems, with the French Government placing restrictions on the amount of
                  water being used, as raising water temperatures can cause a significant threat to marine wildlife.
                  This then led to a reduction in French nuclear capacity at a time where renewable generation
                  was also at low levels and a premium across European power prices as more expensive forms
                  of power generation were sourced and demand for power on the Continent intensified.                                                                                                                               4
Weather Outlook 2019 - Energy HQ
Weather Outlook 2019

                  Countries with hot climates can see their electricity profile soar in times of extreme heat due to increased demand
                  for air conditioning. This leads to greater upward pressure on power. In France, for example, hot weather is estimated
                  to boost demand in the region of 2GW in the summer months.

                  The UK is now also beginning to see its demand profile shift. Traditionally demand only spiked during periods of
                  cold weather, however, as shown last summer the UK is also beginning to feel the effects of extreme heat. A study
                  by Dr Iain Staffell of Imperial College London, has found that for every degree rise in temperature during June 2017,
                  electricity demand rose by 0.9% or 300 MW, with the very hottest days of summer requiring the grid to deliver an
                  additional 1.5 GW of power. Subsequently, this can lead to swings in the within day markets, as last year the UK
                  experienced relatively strong within day prices when compared to 2017, as shown below.

                                                                        APX Outturn 2017 versus 2018








                                                                                     APX BL Outturn 2017                                                              APX BL Outturn 2017                                                                                                                                                                                                                                                                            5
Weather Outlook 2019 - Energy HQ
Weather Outlook 2019

                  In summary, the UK has seemingly dodged a bullet this winter
                  with the extreme cold weather impacting the Midwest of the
                  United States. The mild temperatures here in the UK, Europe
                  and Asia has led to a significant rerouteing of cargoes and
                  largely explains the price falls we have seen in Q1 2019.

                  What is in store for the UK and Europe this summer remains
                  difficult to predict. Latest long range forecasts suggest the UK
                  will experience an above average summer but these forecasts are
                  liable to change. In the most extreme scenario, another heat wave
                  could pose further difficulties for Europe’s ageing nuclear fleet,
                  particularly if water temperatures begin to rise.

                  Within day prices as shown last year were impacted by the climbing
                  temperatures, but to what extent this was due to the summer heat
                  wave increasing demand, as well as the fundamentally strong
                  prices at the time, is difficult to gauge.                                                                                          6
Weather Outlook 2019 - Energy HQ
Thank you
             For more information about the Weather Outlook for 2019, contact us
             and a member of our team can guide you through the next steps and
             answer any questions you may have.

             Contact us

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                     npower Business Solutions                              Energy HQ, npower Business Solutions

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