Energy Market Update - Friday 9th June 2023
In the news this week
On Monday this week, the European Commission announced it has elected to not prolong the emergency measures introduced last year to shield consumers from record high energy prices, as they had helped contribute to the calming of European energy markets. The measures included electricity demand reduction targets, retail price setting rules and revenue caps for power plants. Falling electricity prices and reduced volatility has been given as the reasons for removing these measures, as they believe price spikes observed in 2022 are less likely to occur over the coming winter. However, the measures put in place to curb gas demand will still remain until March 2024. These reports are unlikely to provide much electricity market direction in the short term, but lack of incentive to reduce consumption could spell volatility over the winter months.
Electricity generation from hydro power fell in Europe, Asia and North America in the opening months of 2023 when compared to same time period last year. In Q1 23 alone, global hydro power generation dropped by 4% due to output falls from key hydro producers, such as China, the U.S. and India. The effects of the hot and dry weather have been strongly felt in Asia, which has 43% of global hydro capacity. Europe, which has 22% of global hydro capacity, has seen mixed changes in output, with most countries seeing a decline, while a select few have actually seen an increase in output. It is likely that global hydro generation will drop further as we reach the peak summer temperatures. Weak hydro generation will likely equate to more fossil fuel generation, which could in turn lead to upward price action in European energy and carbon markets.
One of the benefits of the incredibly high prices experienced last summer was an increase in the installation of solar panels by domestic and industrial consumers both here in the UK and in our nearest European neighbours, namely France, Belgium, and the Netherlands. The issue we now face is that on sunny weekends and bank holidays (where demand is lower) the amount of energy generated can potentially exceed that being taken from the grid. On Monday, we were forced to export the surplus to our near neighbours to balance the UK system, but as these countries also had a surplus themselves, National Grid ESO had to pay up to £550/MWh with the total payment around £9.4m. In order to meet our renewable targets, it is clear that a better UK management system is required.
Current Market Drivers
Though only five LNG vessels are currently set to arrive in the UK over June, an abundance of vessels are expected to arrive in North West Europe over the coming weeks, strengthening European gas supply.
Temperatures are set rise significantly above seasonal norms this weekend, while wind generation is also set to rise, applying some bearish/downward sentiment to day-ahead energy contracts.
Near curve and seasonal gas contracts are seeing some bullish/upward price action this morning, as concerns over the Norwegian outages possibly being extended.
We are running our last webinar before the summer break on the 29th of June. Nick Gauntlett will provide an energy market update and advice for October renewals contracts. Click here to register.