2016 Energy Review and Forecast 2017 by Naturgy Energy
- The average wholesale price of electricity decreased by 17.9% in 2016
- Wind generation met on average 21% of electricity demand during 2016
- There has been a bullish start to 2017 for wholesale gas and electricity prices
Monday, 16 January 2017: The cost of buying natural gas on the wholesale market in 2016 dropped on average 19.2% compared to 2015 according to the 2016 Energy Review published by Naturgy Energy. The average day-ahead price was 34.6p/therm (1.38c/kWh) in 2016 compared to 42.8p/therm (1.71c/kWh) in 2015.
The first six months of the year was dominated by multi-year low gas prices as markets were impacted by the impending vote on Brexit, strong supply and weak demand. Day ahead prices ranged between 28p – 31p per therm in February, the first time in over 4 years that day-ahead prices for any month were sub 30p. However, towards the end of the year, prices gradually increased as winter demand kicked in, coupled with concerns about long term supply. 2016 day-ahead prices peaked on the final trading day of the year the 30th of December. Curve prices also strengthened as the year came to a close. Oil was the main driver as OPEC, and non-OPEC oil exporting nations agreed to curtail exports of crude oil starting in January 2017. Winter-17, the next traded winter contract, rose 8% over the course of December mirroring the prompt market and closing the year at its highest traded price. Fortunately for large energy users in Ireland, the drop in sterling benefitted end users buying gas in euro.
Keith Donnelly, Senior Analyst at Naturgy stated that lack of storage played a major role in energy prices for 2016. “The NBP* was hit with a major shock in July in the form of an extended outage at the UK’s largest and only long term gas storage facility (Rough). The immediate impact of the suspension of gas injections at the Rough facility was a spike in winter prices. Rough can supply up to 10% of the UK’s peak winter gas demand, so any issue will have a serious impact on supply. Long term concerns remain for Rough and will likely play a hand in Winter-17 gas prices and further out. Oil was also a key driver as OPEC, and non OPEC oil exporting nations agreed to curtail exports of crude oil starting in January 2017. However, on a more positive note, high levels of supply should help dampen some of the bullish sentiment”.
2016 Electricity and Wind Energy Update
The average wholesale price of electricity decreased by 17.9% in 2016, driven by significantly lower gas prices and a strong renewable presence in the fuel mix. The average wholesale price of electricity in the Irish market in 2016 was 4.18c/kWh compared to 5.08c k/Wh in 2015.
During the first 4 months of the year electricity prices dropped month on month, primarily due to falling gas prices. During Q3, electricity decreased again due to increased renewable energy on the grid and falling gas prices. However, the market saw an acute increase in electricity prices during the month of October due to a number of contributing factors. The final quarter of the year saw the electricity market move in an upward trajectory as seasonal demand and unforeseen developments in the French nuclear power market put pressure on prices, in addition to a 9% rise in oil prices in October. Wind generation during the month of November had notably declined which would have applied further upward pressure on prices. Wind generation met on average 21% of electricity demand during 2016, reaching a peak of 2,827MW on 23 December having the potential to meet over 56% of total electricity demand on the island of Ireland at that time.
2017 Outlook – Gas
2017 opened with a bullish tone reflecting the mood on the European markets as 2016 came to a close. Britain will start the year with 30% less gas in storage than 2016 following on from the issue at the Rough storage facility. This puts the UK in an unprecedented situation with stocks never before being so low since liberalisation of the UK market. This should see the UK gas trading at a premium to the other hubs in Europe in order to force flows into the UK via the Interconnector.
The impact of Brexit on the NBP is unclear, but foreign exchange markets will become more volatile as they react to each development. This will feed through to the NBP and affect companies backed by euros or dollars, and influence on the level of trading they will complete on the curve, potentially providing a bullish undertone to the curve. Looking across Europe, demand has increased in 2016 by some 6% compared to 2015, and that increase is expected to continue into 2017 with gas fired power generation leading the increase. With demand expected to be robust across Europe, there is a high risk of a price spike. Gas stocks across North West Europe (“NWE”) are historically low and any prolonged cold snap will exasperate the issue.
2017 Outlook – Electricity
The main price drivers of electricity will again be energy commodities and the amount of renewables present in the fuel mix. “Demand will also be a crucial price driver in 2017. There is a relationship between economic growth and electricity consumption, with demand usually increasing as the economy grows. According to the OECD, the Irish economy is expected to grow by 3.4% in 2017. However, it should be noted that the effects of this might at least be partly offset by increasing energy efficiency. That being said Eirgrid has forecast an increase of approximately 3.3% in electricity demand in 2017 for the Republic of Ireland and an increase of 2.6% for the Island of Ireland” stated Keith Donnelly.
As part of the EU Renewable Energy Directive (2009/28/EC) 20% of gross final energy consumption in Europe must come from renewable energy. Ireland’s target within this agreement is 16% of all energy consumption to be green by 2020, and from this, 40% of all electricity consumption must come from renewable sources. In order to meet this target a significant amount of additional renewable generation will have to be added to the fuel mix.
The Integrated Single Electricity Market (I-SEM) is set to begin trialling systems in Q4 2017. Initially I-SEM was expected to go live in October 2017; however this date has been revised to May 2018. Under I-SEM the current Single Electricity Market (SEM) will undergo a significant transformation due to changes in the European Legislation designed to create a uniform wholesale electricity market across the EU, enabling the free flow of energy across borders.