Annual gas and power prices have diverged in the last week. A tight power supply network has caused electricity prices to rise sharply. While the issue was a short-term factor, and the gains were focused on contracts for delivery close to the present, it has raised concerns for the coming winter. However, there has not been a corresponding jump in the value of gas, and contracts for both commodities beyond the coming winter have remained largely stable.
Going into this week, National Grid had been forecasting tight electricity supply margins, due in part to expected plant outages of over 8GW. However, the scale of the difference between supply and demand tightened further this week, with a drop in wind generation the main factor. Margins for Tuesday were only 1-2% while those for Thursday had been negative. This caused prices to rally at the start of the week before the contract for delivery on Thursday surged further to hit ten-year highs of £158/MWh. The power prices for delivery for the rest of 2016 followed the Day-ahead contract up on concerns of what the tight margins may mean for the winter. However, an improvement in margins for the end of the week as a result of increased wind generation has seen over £100/MWh drop from the Day-ahead price this morning.
There was not a similarly strong reaction in the gas market, however. The gas system has been generally oversupplied, despite continued strong exports to the Continent. The use of medium-range storage and LNG has contributed to the oversupply. LNG use is being aided by a recovery in the delivery schedule, with eight cargoes already booked for September compared to five for all of August. Meanwhile, while storage is being used, medium-range stocks are still at comfortable levels going into the winter. While this might be putting downward pressure on gas prices, there remain concerns over the winter supply-demand balance. The problems at Rough long-range storage means the UK has reduced supply flexibility for the winter, which could mean it relies more on imports, which will come at a cost.