Winter Outlook for the UK Energy Market

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
  • METHODOLOGY
• ANALYSIS
  • Forward gas curve to be bullish and volatile
  • Forward electricity curve to track gas, regardless of coal price
  • Temperature drives demand swings during peak period
  • Demand-side response is an important tool in managing peak load
  • A cold winter will be most keenly felt in the balancing market
  • Dwindling North Sea output and rising import reliance drive underlying wholesale price rises
  • Few capacity constraints are likely if planned infrastructure arrives on time
  • Gas will not necessarily follow NBP price signals
  • Asset utilisation remains the key intangible
  • US gas prices may still have a role to play
  • Project delays offer massive upside to wholesale prices
  • Rough failure is undermining market confidence
  • Continental shippers are not obliged to ship gas to Britain
  • Import infrastructure cannot meet peak demand by itself
  • Offshore producers will seek to maximise upstream profitability
  • The spark spread will determine generator strategy
  • Suppliers will seek to mitigate exposure to balancing costs
  • MEU buyers must hedge and respond quickly to market movements
  • Domestic users should expect further tariff hikes
• APPENDIX
  • Further reading
  • Ask the analyst
  • List of Figures
    • Figure 1: The forward wholesale price of gas delivery in the UK
    • Figure 2: The forward wholesale price of power delivery in the UK
    • Figure 3: National Grid gas demand scenario forecast: Winter 2005/06
    • Figure 4: Winter Outlook: base cases and maximum capacity
    • Figure 5: Winter 2006/07 gas import infrastructure
    • Figure 6: IUK imports last winter versus the UK-Belgian spot price spread
    • Figure 7: Snapshot: US and UK forward gas curves versus Isle of Grain LNG import capacity
    • Figure 8: Potential shortfall: project delays would threaten physical delivery and fuel trader speculation
    • Figure 9: Rough deal: key storage facility is unlikely be filled to the levels achieved last winter
    • Figure 10: The importance of storage withdrawals in Winter 2006/07
    • Figure 11: Fuel switching margins: coal versus gas-fired plant
    • Figure 12: Potential exposure to the winter balancing market
    • Figure 13: Wholesale purchasing minefield: MEUs must mitigate exposure by hedging
    • Figure 14: Wholesale versus retail: margins will continue to be squeezed in Winter 2006/07