Outlook - January 2017

2016 was a year in which we saw the electricity and gas market get even more competitive. The old style tender process is dead now with supplier margins on the floor and no real difference between suppliers in mark up terms (with some exceptions when poorly informed buyers choose the wrong tariff). With the tender process dead, what's left? Well timing the market and buying at the right time remains important. We have been advising clients to stay variable over the past two years and that worked out very well as SMP (electricity price at the power station gate) and gas prices fell hard in that timeframe.

In ballpark price terms quotes for fixed electricity prices from suppliers in early 2015 (two years ago) where in the region of 7.0 -7.5c per kWh. This summer (2016) SMP prices fell to a low point of 3.6c/kWh. UK natural gas prices where approx 48p/therm Jan 2015 and this summer fell to a low of around 27p/therm. Sometimes we get feedback from clients that they prefer to fix prices for budget certainty over the year which is fine but understand that if you fix at the wrong time it will be an expensive purchase. In our experience the best approach is to stay variable most of time (as it is the cheapest way of buying your energy) but remain flexible and fix if you see some risk in the market.

If you have been reading my recent newsletters, you will know precisely such a set up occurred this year and we felt the need to take some risk off the table and lock in winter gas at low summer forward curve prices. Late summer I locked in most of our procurement group clients at forward curve gas prices around 38-42p/therm. Some clients joined the group later in the year (after Sept) and we bought at higher prices.

These numbers roughly correspond to a SMP price between 5c & 6c/kWh. (note there are other variables to consider such as the amount of wind on the grid etc in going from gas price to electricity SMP price). As I type forward gas curve prices for Jan-Mar 2017 are 53 p/Therm so our timing looks good so far. Now we sit back and see how winter plays out.

Renewable energy is winning

2016 was characterized by remarkable progress in the growth of renewable energy. In Ireland, renewables accounted for 25% of gross electricity consumption (wind 21.1%, hydro 2.5%, biomass and renewable waste accounted for 1.0%, landfill gas for 0.6%, biogas for 1.0% and 0.01% from solar). Just recently on a windy Christmas eve, Ireland hit a peak of nearly 70% of its electricity from the windpower. While good, other countries have surged well ahead of Ireland.

Portugal may actually be the first country in the world to go close to 100% renewable energy for its electricity at some near point in the future. Portugal ran on 100% renewable (wind, solar and hydro) for four and a half days (107 hours) this past summer. Overall, they got 50% of their electricity from renewables in 2015 and are also leading the way in showing how reliable renewable supply can be achieved with a network of strategically placed interconnectors linking the windy Atlantic cost to solar output from North Africa. There are two schemes underway at the moment - DESERTEC and MEDGRID designed to export North African solar to Europe which are v interesting and could play a role as precursors to a European supergrid.

More information on these exciting developments is available here

The UK particularly Scotland has also been surging ahead. New figures published by the UK’s Department for Business, Energy & Industrial Strategy in its Energy Trends December 2016 report Electricity generated by renewables has accounted for 25% of the UK’s total electricity generation for the third quarter, while the same report reveals that renewables accounted for nearly 60% of Scotland’s electricity needs in 2015. Electricity generated from coal in the UK is now down to just 3.6%, down from 16.7% a year earlier. A few years ago many economists and other commentators suggested this level of renewables was impossible on both grid stability and economic grounds.

The rapid growth of renewables in the UK is good to see given that the UK govt is not known to be particularly friendly to the sector. Theresa May is reportedly a climate change denier and has shown favouritism for expensive nuclear and offshore wind (much more expensive than on-shore). But Scotland will continue to surge ahead in 2017 with even more wind coming on-line and the launch of the Meygen tidal project which is the first tidal turbine going operational (200MW) at Pentland firth.

Bottom line - renewables have been winning the energy war against nuclear and fossil fuels. This is great news from a global warming perspective. Much of the credit for this needs to go to those countries who supported wind and solar in the early years such as Germany and Denmark who did much of the initial heavy lifting to prove the technologies. If anything Ireland is not realizing its renewable potential and has some catching up to do. Exporting windpower generated electricity to Europe is an opportunity that needs to be exploited.

World Energy Outlook

Oil started the year around $30 a barrel, prices plunged to $26 in February -- the lowest since 2003 -before climbing back above $50 this month on a rare OPEC agreement. Prices should stay above $50 if oil producing nations stick to their guns and cut supply by nearly 1.8 million barrels per day. However OPEC's record is not that good.

Gas Market

Gas prices have rallied over the past 2 weeks, helped by colder weather forecasts, low LNG deliveries, poor wind generation and an increase in oil prices.

Irish Electricity Wholesale Prices

In line with what we reported for last month prices the average for Dec was 5.95c/kWh. The 500 MW East West interconnector between Ireland the the UK has now returned to service which corresponded with the recent drop in SMP prices. It will be interesting to see how this influences prices over the rest of the winter.

Currency Market Outlook

EURGBP is still trading in a familiar range. The main issue currency markets are concerned with now is the Italian banks. To add to that the prospect of a Marine Le Pen French Presidency (another euro sceptic) will keep markets on edge through the April and May elections. These developments suggest sterling could strengthen against the Euro despite Brexit concerns.

New Content

As we go into next year I will insert some video content into the newsletter on specific topics which should make it more engaging. If you have any idea's for what you think would be useful, please let get in touch.