In the past 18 months wholesale energy markets have seen a period of severe turbulence, bringing about considerable swings in prospective business energy costs. Unsurprisingly COVID-19 has offered a strong steer, with its insidious effect bleeding into both commodity and non-commodity market dynamics,.
Below we review market action over this period, offering our expectation for subsequent direction for coming months.
2020-21 Market Dynamics
Through Winter-19, buy-side market participants enjoyed a period of prolonged bearish market action, precipitated by a glut of globally shipped Liquefied Natural Gas (LNG).
Into 2020 markets remained reasonably quiescent, with little concern for the worsening global COVID-19 picture. As the human impact of the pandemic came to light and lockdown measures were brought, markets tumbled. Between Mar- and Apr-20, commodity markets underwent a period of strong devaluation, brought about by the shutdown of major economies suppressing demand.
Firm lockdown measures of the Summer-20 period weighed not only on prompt energy markets but bled into future period valuations. Reassessment was led by the likelihood of (a) prolonged lockdown measures, and (b) demand destruction in the face of major economies in recession.
This devalued market assessment prevailed for much of the Summer-20 period, with gradual easing of lockdown measures doing little to buoy wholesale markets. Into the Winter-20 period, markets found a bullish footing. Confidence in demand recovery came about as a multitude of COVID-19 vaccines brought about hopes of a quick exit from lockdown. Fiscal measures offered further buoyancy to the marketplace, with massive stimulus packages by major economies designed to stabilise macro-economic uncertainty supporting assumed consumption demand.
Through Q1-21 the bullish market sentiment of late 2020 took a firm grip, with future dated contracts for gas and power rising sharply. Gains in the marketplace weren’t driven only by pandemic sentiment however, with much of the gains led by surging carbon markets. This commodity – tied to the trajectory of regional climate change goals – has risen to record levels in 2021. This emissions-based commodity weighs on wholesale valuation, with power assets liable to carbon market compliance passing on costs to the marketplace.
As we’ve moved into the Summer-21 period, optimism surrounding easing lockdown measures and volatile carbon pricing has continued to hold a vice-like grip on market direction. In contrast to 2019, gas market fundamentals have offered a bullish signal to wholesale markets, with a relative dearth of LNG and depleted regional storage levels elevating gas-fired power premiums along the curve.
UK Gas Market
UK Power Market
Future Market Outlook
As we stand, wholesale energy market remains in a period of considerable turbulence.
In the absence of a third wave (associated with the Indian COVID-19 variant), pandemic dynamics offer continued upside to far-dated contracts. The Bank of England has forecast a 7.25% growth in UK Gross Domestic Product for 2021, as the gradual reopening of the economy releases pent-up buying pressure. Globally, markets remain wary of the COVID-19 picture. In focus, crude oil markets – a barometer to consumption demand in the energy complex – have failed to capitalise on gains made in 2020, with the ongoing pandemic suppressing assumptions of a return to normal for 2021+.
Toward carbon markets, a more uncertain short-term trajectory exists, even in the face of more assured long term upside risk. Much of this uncertainty comes about from the start of the UK emissions market, separate from the EU scheme that relevant UK installations were subject to pre-2021. With appetite for UK carbon permits uncertain, we could see some pullback from the severe bullish gains of 2021. In the long term however, strengthening national, regional and global climate change action offers stark upside risk,. Announcements leading up to, and actions within the Nov-21 UN COP26 climate change meeting will provide as-yet uncertain direction. With the UK hosting this climate change conference, it’s ambition to be a climate pioneer could see assumptions over future carbon market fundamentals steer energy markets higher in 2021+.
Though uncertainty prevails from the basis of emissions markets and pandemic trajectory, some downside potential remains through gas market fundamentals. With storage levels and LNG import rates depleted for the European hub, the downside potential currently outweighs the upside risk of further supply limitations. Further loosening the fundamental picture is the expected completion of the RUS-GER Nord Stream 2 natural gas pipeline, with Russia confident of bringing this asset online by the end of 2021. Should this completion come to pass, Northern European contracts from prompt to futures would be pressured lower, on the promise of greater gas supply in the region.
But it isn’t just the wholesale market to consider. Non-commodity costs (also known as “third party costs”) now make up over half your business energy bill. If your business is one of many that has successfully implemented Triad avoidance strategies to manage or reduce your electricity distribution (DUoS) and transmission (TNUoS) charges, you may have been able to keep your rates relatively low. However, Ofgem have concluded that the current set up gives consumers too much opportunity to avoid paying “their fair share” of the infrastructure costs.
To ensure all businesses are charged fairly, Ofgem is working to introduce the Targeted Charging Review (TCR). This changes the way residual costs are recovered by replacing the consumption-based charge with a simple, fixed amount. This means that those with more rigid production processes unable to switch off at peak times are not at a disadvantage compared with more flexible users.
All changes were set to come into force in April 2022, but Ofgem has recently proposed delaying the implementation of the transmission element of TCR to April 2023. This delay means organisations will now have time to plan how to mitigate the challenges presented and consider the wider energy opportunities available to your business.
The Triad system (the current charging mechanism for TNUoS) will be scrapped at this time. Therefore, sites that could formerly load manage to avoid Triad charges and peak distribution charges will still be able to do so but the resulting savings will be much less than before.
The new charge will be heavily based on a business’s Agreed Supply Capacity (ASC), fixed regardless of time or season of use. Your ASC level is usually set when your supply is connected to the grid, so it is sensible to check that these are still relevant and set correctly in relation to each site’s demand.
We know that many organisations are facing increased financial pressures right now, but with a little bit of support, you can make sure that your business doesn’t get caught out with new charges and your budgets don’t become too complex or inaccurate.
Key points and recommendations:
- Energy market remains in a period of considerable turbulence
- Pandemic dynamics offer continued upside to far-dated contracts
- Some downside potential remains through gas market fundamentals
- Energy buyers should review current energy contract arrangements now regardless of contract expiry date and consider contract options that could provide protection from ongoing energy price volatility
- Understand the impact TCR charges will have on your business by calculating the cost changes.
Inspired Energy’s Market Research and Intelligence Centre brings together a wealth of information, data and news to support the development and implementation of successful long-term energy management strategies. From understanding the latest wholesale market changes to any new carbon reporting regulation, we have all the answers to the questions you need.
To discuss current market conditions and the best procurement options for your organisation, get in touch on 01772 689 250 or email firstname.lastname@example.org.
-  https://inspiredenergy.co.uk/covid-energy-market-impact/
-  https://inspiredenergy.co.uk/the-covid-19-impact-on-the-energy-market-an-update/
-  https://www.reuters.com/article/us-global-oil-crash-explainer-idUSKBN22301M
-  https://extranet.who.int/pqweb/sites/default/files/documents/Status_COVID_VAX_18May2021.pdf
-  https://www.bbc.co.uk/news/business-56019033
-  https://inspiredenergy.co.uk/rising-carbon-prices-and-new-ets/
-  https://www.bankofengland.co.uk/monetary-policy-report/2021/may-2021
-  https://www.bloomberg.com/news/articles/2021-02-02/andurand-sees-carbon-tripling-as-funds-turn-bullish-on-pollution
-  https://www.gov.uk/government/publications/participating-in-the-uk-ets/participating-in-the-uk-ets
-  https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035#:~:text=The%20UK%20government%20will%20set,today%20(Tuesday%2020%20April).
-  https://ec.europa.eu/clima/policies/eu-climate-action/2030_ctp_en
-  https://ukcop26.org/
-  Based on Ofgem’s open letter (dated 1st April 2021) outlining the potential delay to the implementation of Connection and Use of System Code (CUSC) Modification Proposal CMP343 ‘Transmission Demand Residual bandings and allocation (TCR)’.