A change in weather and new North Sea interconnector nears optimisation
Market Pulse
A shift in the pressure system disrupts the markets
Following a long spell of sunny weather and high temperatures as a result of a high pressure system, a new low pressure system has moved over the UK bringing with it cooler temperatures and cloudier skies. Starting on Wednesday evening, there was a sizable drop in temperatures from the late 20’s to mid teens. It has also had an impact on solar generation, with Thursday recording the second lowest levels since May 25th. Low solar generation reduces the amount of power demand that is offset by embedded generation, whilst lower temperatures result in an increase in the need for energy. Consequently, demand during the morning peak was over 15% higher on Thursday and Friday compared to on Monday. This has meant that the more expensive assets, such as gas peakers and hydro pumps, have to be called upon more frequently to supply the National Grid and therefore market prices have risen.
Volatility within the forward market continues
The forward power market has traded down this week due to a combination of falling Carbon and Gas prices. There was another UKA auction this Wednesday, and as has been the case with each auction so far, both EUA’s and UKA’s have taken a bit of a plunge. Significantly, for the first time since its release, the UKA has dipped below the Cost Constraint Mechanism of £44.74/mt. This means there hasn’t been three consecutive months with the price above the Cost Constraint Mechanism and means the Treasury won’t have to take action to artificially reduce this price. Gas prices have also traded down due to an increase in supply alongside losses in the wider commodities. Gas levels across Europe are rising at a steady rate which could add further pressure onto these Gas prices. This has meant that UK Baseload Winter-21 has dropped by £2.45/MWh across the week and now sits at £83.25/MWh.
The North Sea Link (NSL) interconnector will begin testing this month
A new power interconnector, between Norway and the UK, will begin testing this month and is expected to be online by September 2021. This interconnector will be 765Km long, making it the longest in the world. It will have a capacity of 1.45GW, which will provide low cost and low carbon energy. Norway is one of the most advanced countries in the world in terms of its renewable energy, leveraging a high volume of hydro power they are powered by 98% renewable energy. A further 9 interconnectors are under construction or in planning, with 5 expected to go live in the next 4 years. It was made clear in the Government’s Energy White Paper that Interconnectors will play a big part in reducing costs and carbon in the UK. This is because they import energy when it is at a surplus from Europe, meaning it is cheaper, whilst reducing the reliance on gas and therefore reducing emissions. By 2030 the goal is to reach 18GW of interconnector capacity, which could equate to 25% of future energy demands.
Outlook for next week
Temperatures are forecast to drop by a couple of degrees, whilst the low pressure system will result in less solar generation. Wind is ramping up from this week and is forecast to average around seasonal expectations, at 6-7GW. Compared to last week, there is a drop off in both Nuclear and CCGT availability but the system will still be well supplied going into next week.