COMMENT : Brian Rickerby Joint Managing Director
Energy prices have reached unprecedented peaks with oil price more than doubling in less than a year. When you consider that demand for oil is falling, while supply is gradually rising, standard economic principles of supply and demand would suggest that prices should not be rising at the level they have been. Does this mean that the rise is led by market sentiment and not market fundamentals? Despite intense analysis on trader activity they have successfully argued that they are not responsible for the increase. The International Energy Agency said that rising demand in the emerging markets of Asia, Latin America and the Middle East were the primary drivers of increased cost.
What the true reasons are behind the meteoric rise in energy prices is very difficult to determine.
As North Sea oil and gas reserves deplenish we are increasingly dependent on imports from Continental Europe. Prices need to be high to attract gas into this country: after all why should gas suppliers ship gas into the UK if there are more lucrative markets on the continent?
Those in the industry that talk about “the bubble bursting” may be proved true but only to a point.
Prices may well reduce from their current highs, but we do have to come to terms that high energy prices are here to stay.
New Legislation
Not only do companies have to comply with rising energy prices, as part of the governments drive to reduce energy, they also have to comply with a plethora of new legislation designed to reduce energy levels across the UK.
This new legislation will introduce additional costs, however it will also identify where energy savings can be made (which is the whole point of it).
energyTEAM have been active in training all our engineers as low carbon consultant through the Chartered Institute of Building Services (CIBSE) ensuring that we can assist our clients comply with new legislation that affects them.
A brief overview of legislation that could effect your organisation is as follows:
Energy Performance Certificates (EPC)
From the 1st July all vendors of commercial buildings with a total useful floor area greater than 2,500m2 and all other commercial buildings from October 1st will need an EPC when a building is sold leased or rented.
The certificate will provide a rating of the energy efficiency and carbon emissions of the building from A to G, where A is very efficient and G is very inefficient. In addition they require an accompanying report which details recommendations to improve the energy rating of the building.
An energy assessor, accredited to produce EPCs for that type of building, is the only person able to produce EPCs and accompanying reports
Display Energy Certificates (DEC)
Display Energy Certificate energy assessor training still held up by the Department for Communities and Local Government DCLG
60,000 public authority buildings over 1000 sq m will need to display a Display Energy Certificate and have an advisory report before October 2008.
Similar to the EPC detailed above the certificate will provide a rating of the energy efficiency and carbon emissions of the building from A to G, where A is very efficient and G is very inefficient
Carbon Reduction Commitment (CRC)
Organisations that use more than 6 Million kWh of half hourly monitored electricity (with some exceptions for those already in Climate Change Agreements or the European Emissions trading scheme) will need to comply with the CRC from 2010.
2008 is the base year for calculating energy reduction targets for those organisations that will be caught by the Carbon Reduction Commitment planned to start in January 2010. It is likely to have a big cash impact in the first year as participants will need to buy carbon credits in year one 2010 and will only find out how much they will have returned to them based on their overall performance against energy reduction targets at the earliest 15 months later.
All forms of energy use will need to be monitored and reported on a regular basis - issues will arise where organisations have a large amount of non half-hourly electricity supplies and other fuels where the consumption is not automatically read. This is likely to lead to the need for installation of automatic meter reading equipment, which will need to be budgeted for.
Energy Information – Via Our Website
From April all our clients are now able to access information on their half-hourly meters via password protected access on our website. Graphs showing consumption data in various formats will help your organisation manage your energy consumption: a pre-requisite to reducing your company’s carbon footprint.
Graphs are derived from half hourly data, which dependent on your data collector may not show current months figures. energyTEAM have arranged with IMServe, the UK’s largest data collector to obtain the most up to date data. Changing to IMServe will not involve additional cost.
If you would like to arrange data collection to IMServe or you have any problems accessing this service please do not hesitate to contact us on our normal number or our dedicated help line: 01444 460522
Electricity Market Overview
Electricity prices showed a meteoric rise over the quarter although they have just started to stabilise due to a slight fall in the commodities market and the fact that some power stations and gas pipelines have recently returned to output.
Baseload Electricity Prices (Graph)
Gordon Brown Pushes for More Nuclear Power
The Prime Minister has called for at least eight new nuclear sites to be built over the next fifteen years with “no upper limit” on the number of nuclear plants to be built in Britain. John Hutton, the Business Secretary, in addition to supporting the PM’s plans on nuclear, also supports the construction of new build coal-fired power stations, although this is contested by Hilary Benn, the Environment Secretary.
Carbon Prices Set to Rise
The price of European carbon allowances (known as European unit allowances EUA’s) are set to increase. They have risen modestly this year to about € 27 tonne but market pressure could force this price up to € 100 a tonne or even higher. EUAs allow large users to emit a specified amount of carbon. If they go above their limits they can purchase allowances or they can sell the excess. However very few are emitting below their allowance causing a fundamental imbalance in supply and demand. The effects of re-pricing carbon could have similar effects to the high price of oil, gas and coal, i.e. increasing the price of production.
New Energy Ombudsman Appointed
OFGEM has appointed the Ombudsman Supply Limited (tOSL) to become the new independent ombudsman for gas and electricity customers. The new ombudsman service will replace the voluntary scheme that OFGEM ordered the service industry to put in place in 2006 with a statutory scheme that all energy companies, including network companies, must join.
The new statutory ombudsman will settle disputes between energy companies and customers and retain the powers to award customers up to £5,000 in compensation. The coverage of the scheme will extend to small businesses as well as domestic customers.
EDF Buys ‘Nuclear’ Land
EDF, Europe’s biggest power company, has been buying up land around nuclear sites in England and Wales, ahead of its attempts to buy British Energy, the nuclear generator. A report in The Financial Times states that farmland close to two nuclear plants: Wyfla on the island of Anglesey in North Wales, and Hinkley Point in the South West of England. EDF has not yet begun what would be a long process of applying for planning permission to build reactors in the land it has bought; however, the land deals create a viable, if not complete alternative to buying British Energy.
Gas Market Overview
Gas supply lines to the UK are now back on line and storage is at near capacity, which resulted in a slight reduction in prices over the last few days. However despite the fact that supply overall was plentiful the cost of gas showed huge rises over the last three months on the back of high oil prices.
Wholesale Gas Prices (Graph)
Bid to Increase Gas Storage
Canataxx, a privately owned US company, has re-submitted its application to build a controversial £300m gas storage facility in salt caverns at Preesall near Fleetwood Lancashire. If it goes ahead it will increase the UK’s gas storage facility by 30%.
Step Increase in British Gas Domestic Rates
As an indication of the rise in prices and unpredictability of the market, an article in the Times on July 7th reported British Gas stating that they will have to increase domestic prices by at least 15%. Followed by another article in the Times on the 18th July, which reported British Gas stating that they will have to increase domestic prices by over 30%!
Oil Market Overview
There has been an unprecedented rise in the price of oil over the last three months, although the price stabilised in the last few days. Oil prices moved back above $130 a barrel after sliding more than 11% in the past four days, with prices dropping $15 a barrel in that period.
Fears of high prices weakening the US economy had sent oil down to one of the biggest weekly falls since 1983.
Oil Prices Brent Crude (Graph)
SOURCE: BBC News – Market Data
FSA Rejects Calls for US Style Limits
The Financial Services Authority (FSA) has rejected US calls to introduce trading limits to the US crude oil futures contract, traded on ICE Europe. ICE Europe, which controls over 30% of the worlds crude oil futures market, has fiercely defended its regulation of the oil markets amid growing criticism that the lack of US style trading limits has contributed to manipulation of the market leading to prices of nearly $150 barrel. A rift has opened between regulators in Washington and London after US Commodity Futures Trading Commission (CTFC) to introduce daily price limits on some oil futures contracts. The Americans want to cap the amount of oil contracts a trader can hold, similar to the US system which was devised to stem sharp price rises in any particular commodity. London regulators, however, believe that the market should determine the price, rather than it being limited by a daily price cap. The FSA is resisting CFTC pressure to impose limits on the positions traders can take on the West Texas crude oil futures contract, bringing British traders in line with their American counterparts. The benchmark light crude oil contract is traded on the ICE Futures European exchange.
Speculators Not to Blame
The International Petroleum Exchange (ICE) has stated that the high price of oil is nothing to do with speculators. In its medium term oil market report the IEA said that rising demand in the emerging markets of Asia. Latin America and the Middle East were the main reasons for the high oil price. The agency predicted that global demand would rise by 1.6% per year over the next five years. “The fact that all producers are working flat out, and there is no sign of any abnormal stock build, gives a strong indication that current oil prices are justified by market fundamentals”.
EU Rules Restrict Use of Coal and Oil-Fired Power Stations
The European Union’s Large Combustion Plant Directive (LCPD) sets strict limits on the number of hours that some of the Britain’s largest and most heavily polluting coal and oil-fired power stations can operate before they have to close in 2015. The time is measured in ‘stack hours’ – the length of time that chimney stacks, rather than individual generation units, are in use. The net result is that unless plants are being operated at full capacity, there is a clear economic incentive to shut down plants, rather than operating individual burners. These plants are therefore not turned on unless prices are high enough to justify firing them up. This affects both wholesale prices, and has been cited as a factor in recent power cuts with 500,000 homes across the Country plunged into darkness in May.
OPEC Predicts Fall in Demand
OPEC predicted that as consumers reduce their oil demand through conservation and by turning to alternatives such as biofuels, they may have to reduce investment in its oil fields. Rapid growth in emerging markets will be offset by reductions in the west. Petrol use in the US for example, fell to its lowest level since 2003
DRAX Prepares to Burn Imported Wood
Britain’s largest power station is planning to burn wood from Canada and Scandinavia as part of a plan to generate 10% of its electricity from biomass.
Drax, the coal-fired power station near Selby, North Yorkshire has signed a deal with Alstom, the French engineering group, to build a £50million co-firing facility, enabling it to burn biomass as well as coal in its boilers. The company says that the biomass project will help it to cut its emissions of carbon dioxide by more than two million tonnes a year, and greatly contribute to its plans to reduce the plant’s CO2 emissions by 15% by 2011.
'Green' Energy
US set to overtake Germany as the world’s biggest wind market on the back of an investment boom which saw wind power generating capacity jump by 45% in 2008.
Shell pulls out of planned offshore wind farm. Plans for the world’s biggest offshore windfarm in the Thames Estuary were in disarray after Shell pulled out. Shell declined to give detailed reasons for pulling out of the project which it had an equal share with Eon and Denmark’s Dong Energy. The current situation is that Eon and Dong have now bought out Shell’s interest in the project leaving them both with 50% ownership.
MPs have called for curb on biofuels. Ministers have conceded that they may have to rethink its policy on the increasing use of biofuels because of the effect they are having on fuel prices.
Parliamentary committee backs personal allowances. Personal carbon allowances have been backed by a powerful parliamentary committee. Under the scheme each individual would be granted a transferable emission quota. This could be traded with others according to their emissions needs. Committee chairman and former Conservative environment minister Tim Yeo said the scheme had “real potential to engage the population”. The committee report said that radical measures must be considered if private citizens are to make a ‘meaningful’ contribution to UK emission reduction targets.
Wind energy capacity likely to surpass nuclear. The BWEA, the UK wind industry trade association, believes that installed wind energy generating capacity will have surpassed installed nuclear within the next five years. BWEA chief executive Maria McCaffery said, “Wind Energy is no longer a minority pursuit. With nearly half a gigawatt already installed and a further 8GW of schemes in the pipeline we are now a mainstream supplier.”
Offshore wind tender expected next spring. The right to build windfarms with a total capacity of 25GW in 11 ‘development zones’ identified by the Crown Estate will be tendered with the aim of private companies developing each zone next spring. Rob Hastings, director of the marine estate at the Crown Estate said: “We will have no active ongoing role – our interests will be as a landowner”. However the Crown Estate intends to be ‘more prominent’ with the aim to reduce development time.
Helpful Guides
energyTEAM publish guides on our website www.energyteam.co.uk on the following topics:
(please click on the topic of interest)
energyTEAM Media Coverage
We regularly provide articles for various respected publications on a range of energy-related topics. The following have all appeared in the last three months. (please click on any article listed)
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