Helped by warmer than seasonal norm temperatures and high wind generation on the Island; the wholesale cost of power in Ireland remained relatively steady for the best part of November, continuing on from where October finished up.
On average, prices in the SEM Day Ahead market increased by ~5% month-on-month. November’s outturn was €143/MWh, compared to €136 in October.
As temperatures and wind generation in the UK and Ireland dropped at the tail end of the month, NBP spot prices climbed steeply upward. As expected, the cost of power in Ireland followed suit.
1. High levels of storage and higher temperatures kept demand lower than usual
Pricing and Supply
- High levels of storage in key European markets and higher than average seasonal temperatures, kept demand for gas lower than expected at the beginning of November. This resulted in relatively low prices in European spot markets during that period.
- A combination of colder and calmer weather forecasts and delays in the return to full capacity at Texas Freeport LNG terminal sparked an upward tick in the gas markets during the month. A particularly steep climb in NBP spot prices saw the gap between the spot market and the month ahead market all but closed by the end of November; reflecting the shift to net gas withdrawals alongside increased real time demand for power.
- China was active in the LNG forward markets during November, securing significant long term LNG supply from both Qatar and BP. With LNG replacing most of Europe’s Russian fed pipeline gas recently, expect increased competition in the LNG space.
Storage and Consumption
- As recently as mid November, European gas demand was around 25% lower than the seven-year average.
- As the month progressed, the delayed annual shift from net injections to net withdrawals was taking shape.
- European Commission announced last week that, based on historic withdrawal patterns, Europe is likely to comfortably exceed the mandated minimum 45% storage fullness level on 1 February imposed by the European Commission.
- This target is considered one of the key storage milestones that will see Europe successfully mitigate the loss of Russian gas this winter
EU gas price cap decision rumbles on
- A decision over price caps on gas has not yet been reached in the EU.
- A proposal was put forward by the European Commission in November to cap gas prices if the European gas benchmark TTF month forward contract exceeds €275/MWh (amongst other key conditions). For context, the TTF month+1 was trading at around €135/MWh at the end of November and would have exceeded €275/MWh at it’s August peak.
- Applying the cap to the month+1 contract, and not the spot or OTC markets, is focused on the need to ensure that supply of gas to Europe is not impacted.
- The lack of a final decision in November reflects the complexity of the issue. The European Commission is set to meet again in December, but many feel a decision may not be reached on price caps in 2022.
- With energy costs set to rise across the colder winter months, calls for a cap by its proponents will likely become louder. They see it as critical step in controlling inflation in the wider EU economy.
Energy market reform and security of LNG supply
- If price cap on gas is to be implemented, it will likely be a temporary fix only.
- As a longer-term solution, the European Commission wants to form a new LNG price benchmark in Europe and has asked EU energy regulators to launch one by March 31, 2023.
- Historically, the Dutch TTF gas price has been used as a benchmark for LNG deliveries into Europe. But the reduction of Russian gas supplies in 2022 has made the TTF price extremely volatile, and often more expensive than LNG prices in other regions.
- The Commission feels that pricing mechanisms should reflect a market that includes much more LNG, as opposed to pipeline supply, which the TTF is most concerned with.
2. Renewables contributed 48% of the mix in October
- Renewables, in the form of wind, contributed 48% of the Generation Mix again in November, after a similar contribution in October.
- As mentioned before, wind plays a critical role in keeping the Irish wholesale power cost down. The graph below shows that when wind generation was up during November, the wholesale cost of power was generally down
3. Outages down again in October
- Outages in November, although higher than the same month in 2021, have been kept at a manageable level.
- As we head into the more energy intensive months, it is critical that this level of offline capacity is controlled.
- From a forward pricing perspective, November was a month of two distinctive parts.
- Our estimated 12-month average forward power price continued its bearish run from October into November and then took on a more bullish trajectory in the later two thirds of the month, as markets reacted to uncertainty around the return of Freeport LNG terminal in Texas, to more noise coming from Russia around further cutting flows through Ukraine and also to increased global competition form LNG supply.
- As the dreadful war in Ukraine escalated again in November and myriad geopolitical factors remain in play, it can be assumed that a high level of risk premium remains in the near future.
12 month forecast
We have compiled a list of the key factors we feel have the highest potential to influence power prices over the coming 12 months and rated as follows:
Green = Price reducing impact and highly probable.
Amber = Risk of increased power prices and of lower concern.
Red = Significant risk to 12 month forward price outlook, with medium to high probability.
The risk of increasing energy prices over the next 12 months has increased from October to November with amber and red factors now out-numbering greens.
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