Carbon price surge drags up the UK power curve
12th September 2018
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Here’s a summary of the week starting 3rd September:
- Increasing carbon prices drove up UK seasonal contracts.
- High gas prices allowed coal-fired plant into the UK fuel mix for all of week 36.
- Pumped storage hydro generation called upon to reduce system imbalance.
- Rising fuel prices and threat of tight supply margins kept pushing up winter-18 contract.
Prompt prices were turbulent again during week 36, with fluctuating wind generation and a bullish day-ahead gas market the main drivers.
The week’s highest price of £69.20/MWh was for baseload delivery on 8th September, when wind generation was forecast to drop from almost 8GW to 5GW. Solar output was also low, and this was another driver for rising prompt pricing.
The week’s low price of £65.70/MWh was for baseload power on 3rd September, despite low renewable output. Ordinarily, with low levels of wind forecast, prompt prices would rise due to the need for more expensive plant to plug the gap left by cheap wind.
The average of all single imbalance prices during week 36 was £62.47/MWh, up over £5/MWh compared to the previous week. There were no periods of negative prices, as wind output was relatively low for most of the week.
The week’s lowest price of £6.48/MWh was for settlement period 30 (14:30-15:00) on 9th September. At this time, the UK system had excess generation – largely due to high wind output throughout the day. This abundance of cheap wind generation allowed more expensive plant to remove themselves from the UK generation mix during this period. For example, Drax unit 6 paid between £5/MWh and £20/MWh to remove itself, in part at least.
The highest price for the week was £141.44/MWh for settlement period 16 (07:30-08:00) on 5th September, when the UK system was over 300MWh in imbalance. It had been short of generation for several settlement periods in the lead up to period 16, with National Grid likely having to take more and more expensive actions. The final price was ultimately set by Dinorwig, a pumped storage hydro plant that offered to increase generation for up to £150/MWh. The system operator also paid West Burton, a coal-fired power station, to increase output to meet demand.
Renewables and other
Wind output climbed from under 3GW during the first half of the week to over 10GW during the afternoon of 9th September. Levels of solar output peaked at just over 5GW on 7th September, as windy and sunny conditions combined. This meant that the traditional renewable technologies of wind, solar and hydro were contributing almost 13GW of output at their peak.
As previously mentioned, levels of expected wind output had some influence over day-ahead pricing, removing dependency on more expensive, carbon intensive gas-fired generation. When renewable output was high, on 7th and 9th September, CO₂ emissions were noticeably lower. Due to the high price of National Balancing Point (NBP) gas making some gas-fired plant uncompetitive, this allowed coal-fired generation into the UK fuel mix for the entire week.
Secure and promote* (Seasons +1, +2, +3, +4) baseload contracts experienced bullish movements during week 36. The average increase was almost £2.30/MWh from Monday’s opening of the market to Friday’s close. The front season, Winter-18, was on a steep upward trajectory over the course of the week; it made gains of over £3/MWh, reaching almost £74/MWh.
Seasonal contracts across the curve made significant ground during trading on 4th September, driven by the rising prices of gas, coal and Brent Crude oil. The strength across fuel commodities has made coal profitable for the coming winter season, allowing coal-fired generators to compete with gas-fired plant. The increase in the Brent Crude benchmark provided upward impetus for seasonal contracts further into the future.
Trading on 7th September also led to rising prices on the curve, with the European carbon market the main driver. Wholesale power prices increased on the back of carbon prices surging, reflecting the higher costs for fossil-fuelled generators. The winter-18 contract has been trading at a 10-year high since mid-August, due to bullish commodities, and the expectation of tight supply margins in the gas market this coming winter.
*For more information about Secure and Promote, please consult this Ofgem web page.
The annual power graph shows how the value of an annual power contract changes over time. The annual contract value is the average of the front two seasons, currently Winter 18 and Summer 19.
To help you make sense of the industry, you can also use our jargon buster and handy guide to Third Party Costs (currently 60% of your bill). And for interesting articles and useful insights, look out for our blog.
Report written by Thomas Stebbings and Andrew Jarman, Haven Power’s Portfolio Analysts. To speak to them, or the rest of our Flex & Portfolio Management team’s analysts, call us on 01473 707755 quoting reference HP250.
Although we’ve made all reasonable effort to verify the information in this report and provide the highest possible accuracy, Haven Power Limited gives no warranty – express or implied – in respect of this information. Furthermore, our provision of this report does not constitute advice of any kind and readers should not take it as the basis for any commercial or financial decisions. You should make any such decision based on your own records, knowledge and perception of power market data, supplemented with appropriate independent expert advice when required.