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2017 Annual Vayu Energy Report: Global Economics expected to be key to Energy Sector in 2018

Keith Donnelly

Keith Donnelly

Senior Energy Analyst

December 2017: Irish wholesale electricity and gas prices finished the year at elevated levels, reflecting the uncertainty that prevailed throughout much of 2017 according to the Annual Naturgy Energy Report published today. 2017 saw the expected and subsequently realised impact of storage on prices, with the closure of Rough, leaving the UK without any long range storage options. The Corrib gas field was also taken off line during processing for safety reasons and climate volatility throughout the year also impacted the sector.

Prices in December were over 15% higher than average Day Ahead prices in 2016, with prices closing 38% higher than the average for the rest of the year. While a considerable jump, these increased prices are more due to market corrections, coming off the back of eight year lows in 2016 and saw prices more in line with most other years.

Commenting on the report, Naturgy Senior Energy Analyst, Keith Donnelly, said: “Overall, the outlook for 2018 looks largely positive for the global economy as improving financial conditions and supportive fiscal policies look to continue into the New Year. There are some factors that may have a negative impact, like continued political jitters surrounding the UK and Germany, combined with the Chinese government continuing to manage their economic slowdown through 2018 also.”

Mr. Donnelly added: “If the euro continues to perform well against the pound this is good news for energy users in Ireland. Generally speaking, for energy users in Ireland buying gas in euro, a potential weaker pound augurs well, as the majority of natural gas is still priced in pounds.”

Speaking about the electricity market Mr. Donnelly said: “2018 will be a year of change for the Irish electricity market, with global economics playing an integral role and the Integrated Single Electricity Market set to go live. For the most part, the world’s largest economies are performing reasonably well, which in turn is having a positive impact across the rest of the globe.”

Mr Donnelly continued: “Improving financial conditions, low inflation, strong global trade and encouraging fiscal policies in countries that have experienced many years of austerity is lending to the revival of the global economy. The global economy grew 3.3% annually in Q3-2017, which outperformed Q2-2017, with a growth rate of 3.2%. This is the strongest growth for the global economy in nearly four years.”

Market overview

Average day ahead gas prices are up 28% year on year in 2017 according to the Naturgy Annual Energy Report issued today. Gas prices finished the year at elevated levels. By the 15th of December, prices were over 15% higher than where Day Ahead finished 2016, with prices closing 38% higher than the average for the year. While a considerable jump, these increased prices a more due to market correction coming off the back of 8year lows in 2016, which sees prices more in line with most other years.

If December 2017 is a precursor for Q1-2018, we may be in for a volatile period ahead. Wholesale prompt gas prices experienced a major spike the week beginning the 11th of December after an unplanned shutdown of the Forties oil and gas pipeline (Britain’s largest oil pipeline) in the North Sea. This exacerbated ongoing supply outages and higher demand due to colder than normal weather. The adverse impact from the current Forties outage on UK domestic gas production is a reduction of around 35 mcm/day which is circa 10% of normal daily demand at this time of the year, the duration of which is expected to last 3 to 4 weeks.

Electricity and Wind Energy Update

Looking to 2018, the main price drivers of electricity will be energy commodities, demand on the system and the amount of renewables present in the fuel mix, as well as the introduction of the Integrated Single Electricity Market (I-SEM) in May. The latter half of 2017 saw steady increase on the gas market, peaking on the 12th of December and early 2018 gas prices are forecast to remain around current levels, but with the potential for increased volatility. Electricity prices should follow suit and remain at current levels for the near term.

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