Wholesale gas prices decreased to a ten-year low in 2019, while the introduction of the new SEM marketplace in October 2018 is starting to have a dampening impact on wholesale electricity prices.
According to Naturgy’s 2019 Annual Energy Review and Forecast 2020, wholesale gas prices in 2019 were over 40% lower than in 2018.
“Gas storage supplies exceeded 90% capacity for much of 2019, thanks to the mild weather and high deliveries of Liquefied Natural Gas (LNG) into Europe”, said Naturgy’s Energy Analyst, Lauren Stewart.
“LNG has been the most influential factor for the price decrease. By July 2019, cargoes of LNG into Europe had exceeded the total number of cargoes received in 2018. LNG imports into European hubs are up 44% year on year. Favourable Asian price spreads means that Europe will continue to opt for LNG as cheaper alternative to imported pipeline gas. Usually gas reserves would have somewhat depleted by Q4, but mild weather to date and a healthy supply picture has kept storage levels full. It’s good news for businesses. These higher than expected reserves should keep prices neutral into the new year,” she added.
Meanwhile, wholesale electricity prices also ended 2019 42% lower than in Q4 2018. Lower gas prices and increased renewable generation have been contributing factors as businesses can now access cheaper sources of electricity.
“In 2019 we clearly saw the impact that better utilisation of wind capacity had on wholesale electricity prices,” said Naturgy’s Operations Team Lead, Megan Nolan.
“Our analysis has shown that during periods of high winds, average electricity prices fell considerably. In fact, on the 50 most windy days since the start of the SEM, the wholesale price averaged €38.57/MWh. However, on the 50 least windy days, the wholesale Day-Ahead price was almost double, averaging at €65.60/MWh.
When forecasting ahead for 2020, Naturgy’s Billing Commercial and Pricing Manager Keith Donnelly said we are starting to see a decline in wholesale electricity prices as a result of the spark spread narrowing.
“The spark spread is the difference between the wholesale electricity price and its cost of production using natural gas. The spark spread is beginning to narrow as the market becomes more accustomed to the new SEM marketplace. For businesses, this means forward power hedges in early 2020 should become cheaper as the same risk premium is not required by generators to cover future costs,” said Mr. Donnelly.
But he warned the PSO levy may rise, if wholesale power prices continue at low levels.
“The Public Service Obligation levy or PSO levy is charged to all electricity customers in Ireland – domestic and commercial. The money is mainly used to subsidise and support renewable energy generation. The Commission for Regulation of Utilities (CRU) sets the PSO levy each year.
The amount that customers are charged for the PSO levy depends on a range of factors, the biggest of which is the wholesale price of electricity. In general, if the wholesale electricity price is high, less money is needed to subsidise renewable energy generation.
Conversely, when wholesale prices are low, more money is needed to subsidise PSO schemes. With power prices being relatively low, the PSO levy in 2020/2021 may need to be increased as renewable support prices are higher than current market prices,” he added.
Macro Economics
The macroeconomic environment over the past twelve months has been marked by large periods of uncertainty and a considerable fall in global economic growth. However, there has been improved clarity on two ‘big ticket’ issues – the recent agreement between the US and China on the ‘Phase One’ trade deal and Brexit, following the recent UK election result. These developments could be viewed as positive for global growth in 2020 and this in turn will impact energy prices.
“Energy has become much more of a global commodity and responds to availability of physical supplies as well as general economic sentiment,” said Bryan Hennessy, Head of Wholesale Markets and Regulation at Naturgy Ireland.
“Most of the energy traded in Europe is now denominated in euro and currency fluctuations are priced into any commodity denominated in Sterling. The impact of a stronger pound has an adverse impact for energy users in Ireland paying for their gas in euro, as the majority of natural gas is being imported from the UK,” he added.
Oil
Brent oil prices closed near the year end at $66.24/bbl, 11% higher than the end of 2018. The average Brent oil price for 2019 was $64.08/bbl, 11% lower than the 2018 average of $71.69/bbl. It is possible that Brent oil prices will continue to trade around current levels during 2020, with slowing economic growth and geopolitical concerns failing to create waves in the market according to a recent statement by Goldman Sachs. However, recent tensions in the Middle East will likely put upward pressure on prices.
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