Monthly Price Brief - A Review of European Gas and Power Price Trends: September 2007

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • Winter 2007/08 outlook is positive and holds no surprises
    • The unusually mild weather has played its part in reducing the need for heaters
    • UK gas supplies are buoyant as new infrastructure comes online and flows increase
    • LNG: Norway and IUK are the UK' s key import facilities and have been increasingly on call since the UK became a net importer of gas in 2005
    • The availability of generation capacity also looks strong as the power sector shrugs off 2006/07 uncertainties
    • Rough storage will reach 100% capacity ahead of time, by Q3 2007
    • Gas prices are expected to reflect the stable conditions this winter in contrast to previous years
    • The power curve is also stable and no shocks are in store for traders or customers alike
    • Facilitating the changes has been a challenge during 2007 on the medium- and short-range storage positions
    • Emissions trading gathers momentum in the EU
    • The Kyoto Protocol envisaged global carbon emissions trading
    • EU member states are the key Kyoto Protocol signatories
    • The UK has escaped an EC clampdown on Phase II allocations
    • Trading volumes increase significantly as the Phase I - Phase II spread illustrates efficiency
    • Wholesale and retail interface: price setting is complex and fortunes vary among suppliers
    • Tailored risk management strategies (1) - the ' cap' provides cover for those buyers with an aversion to market exposure
    • Risk management strategies (2) - the collar is a more flexible product aimed at suppliers with a riskier approach
    • Complexities in buying on the forward curve are illustrated by comparing the short and far end of the forward curve
    • A breakdown of the average household bill shows that wholesale costs make up the most significant portion
    • Prices reach 2005 levels as security of supply and gas infrastructure ease fears of a shortage
    • Wholesale and retail price differential indicates that margins are available at first glance
  • Northwest European power prices showed mixed signals
    • Belgian power prices are diverging on the short and near curves
    • French near-end contracts switched direction as monthly prices outstripped winter 2007/08 expectations
    • In contrast to regional sentiment, the German power market showed a slow downward turn on all contracts
    • Bearish sentiment dominated the Dutch power market as contracts fell across the board
    • UK baseload power prices showed resilience, highlighting the most stable period of trading for almost a year
  • The NBP led the way as northwest European gas prices turned downwards amid high confidence
    • UK gas prices turned downwards as fundamental demand and supply conditions aided low UK gas prices
    • Dutch gas prices followed the NBP trend as short and long ends of the curve resulted in falling prices
    • Belgium gas contracts followed the pan-European trend of falling prices
• APPENDIX
  • This brief builds upon Datamonitor' s extensive pricing proposition
  • Glossary
    • This brief contains a number of industry standard terms
  • Our analysis builds on other sources to provide greater insight
    • Further Reading
    • Extended Methodology
  • We assess the profitability of fossil fuel plants across northwest Europe
  • Our bespoke services can be tailored to your specific needs
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Figures
    • Figure 1: Unusually cold weather has not been forecast for winter 2007/08
    • Figure 2: The minimum temperature, month-on-month, has been rising over the last three years
    • Figure 3: Importation and supply infrastructure have increased the flow of gas to the UK, an improvement on winter 2006/07
    • Figure 4: The growth in import reliance has been well supported by Norwegian gas infrastructure
    • Figure 5: Daily gas flows from the UK are facilitated by reverse/forward flows from Belgium via IUK
    • Figure 6: Daily gas flows from the UK are facilitated by reverse/forward flows from Belgium via IUK
    • Figure 7: Rough storage: the UK' s largest long-range storage facility is set to reach full capacity by autumn 2007, in time for the winter ahead
    • Figure 8: Rough storage: the UK' s largest long-range storage facility is set to reach full capacity by autumn 2007, in time for the winter ahead
    • Figure 9: TypeFigTitleHere
    • Figure 10: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 11: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 12: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 13: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 14: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 15: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 16: Pricing expectations from January 2007 show the forward curve in stable form
    • Figure 17: Exposure to the vagaries of the free market can be avoided by locking in to a semi-fixed contract such as the cap product
    • Figure 18: The collar allows prices to fluctuate between a floor and a ceiling limit for customers with a more flexible budget
    • Figure 19: Buying ahead can be used to hedge the level of risk faced, in order to serve customers' energy needs on a rolling basis
    • Figure 20: A breakdown of the average household gas and electricity bill reveals the various components that suppliers have to cost
    • Figure 21: Wholesale gas prices show stability and present opportunities to those willing to speculate on the short-term market
    • Figure 22: Although low wholesale power prices suggest that there is room for maneuver, the picture is more complex
    • Figure 23: Northwest European prices show mixed signals
    • Figure 24: Belgian power prices rebounded on month-ahead contracts as quarterly prices fell
    • Figure 25: French quarterly prices took an abrupt downward turn as month-ahead contracts rose from June
    • Figure 26: German power prices looked on stable form, despite a slight fall in the quarter-ahead price, in contrast to the previous month' s swings
    • Figure 27: Year, month and quarterly contracts fell this month in Holland as a bearish sentiment to prices prevailed
    • Figure 28: UK contracts on both the short and far end of the curve highlighted price stability and halted the bearishness of H1 2007
    • Figure 29: The NBP leads the way as northwest European gas prices turned downwards amid high confidence
    • Figure 30: Uncertainty regarding the UK' s security of supply for winter 2007/08 has been eliminated
    • Figure 31: Dutch gas curves also illustrate a bearish pattern similar to that of the UK and the Title Transfer Facility (TTF)
    • Figure 32: Gas prices at Zeebrugge all turned downwards, as Europe-wide confidence in gas supply and demand balances returned
    • Figure 33: Energy pricing proposition
    • Figure 34: Generation spread methodology