Energy Market Update March 2016

The anticipated fuel duty increase of 2p per litre across the range of petroleum products did not happen yesterday. With prices at the pump currently at their lowest levels since 2009, even though UK fuel taxes are some of the highest in the E.U, this would have been an ideal opportunity to use an increase in fuel duty to offset declining North Sea Petroleum Revenue Tax. Oil prices for Brent Marker Crude have come down from this time last year when they were around $60 U.S. to around $40 U.S. per barrel although the weaker pound/dollar exchange rate in recent times has offset some of the benefits of these reductions.

Posted on 17 March 2016.

Meanwhile, natural gas prices in the U.K. are at their lowest level for quite some time, remaining at less than 1p/kWh for April delivery on the wholesale market. It is unlikely that these prices will fall much lower and therefore future requirements should be bought at the earliest opportunity taking account of existing contractual arrangements.

Electricity prices are also quite low but much more influenced by environmental charges such as the Carbon Floor price. Steam coal used in the generation of electricity is also at long term low prices averaging around $40 U.S. per tonne which together with low E.U. December 2016 carbon prices of c.five Euros/tonne makes coal a better commercial option for generators than burning gas.

Will Hinkley Point’s proposed new nuclear plant get built? At around £18Bn the cost of the project is more than the present value of French state owned company EdF and they have stated recently that they need further backing from the French government to secure the project. EdF have agreed a “strike price” with the U.K. government of £97/ MWh which is almost three times the present wholesale price for electricity in the U.K. but will be a significant contributor, if built, towards ensuring that the lights stay on as more and more coal fired plants are retired.

The Budget also confirmed the ending of CRC in 2019. The reduced income from scrapping CRC will be made up for by an increase in CCL charged on both gas and electricity.

The Government has just released a consultation on the performance of the Capacity Market. The main reform proposals are for:

  • National Grid to buy more capacity in the next round of auctions in December 2016
  • Tightening of delivery incentives and more severe penalties for those who renege on agreements
  • Holding a further auction this coming winter to bring forward the first year of delivery to 2017/18.

No doubt these proposals are due to concerns regarding the tightening electricity supply margin over the coming years.