The UK is vulnerable to more spells of below seasonal-normal temperatures, with storage stocks dropping to five year lows after managing previous cold snaps seen in late February and mid-March. European gas storage levels are also at five-year lows as the cold snap failed to ease on the Continent. High demand lifted prices in Europe last week which led to a sharp drop in exports to the UK. Interconnector flows reversed with Britain on occasion sending gas to Belgium. Flexible supply will be needed to cover any more short-term rises in demand.
LNG deliveries have risen, with seven tankers now expected for March, the most since July last year. However, medium-range storage is just 20% full. Extensive storage injections in the UK and Europe will be needed over the summer to rebuild stocks. Forecasts had shown cooler temperatures lingering into April with the potential for keeping gas demand higher than expected for several weeks. However, the outlook has turned milder today, reducing the likelihood of a severe cold snap. April gas prices dropped 3% this morning on the change in forecast.
Forward electricity contracts largely mirrored the gas market as the energy network braced for the possibility of a third cold snap in less than a month. Annual power contracts remain elevated with the 2018 contracts rising to new highs for the year.
Higher gas prices during the summer season to cover for injection demand will raise the costs for gas-fired power generation. Coal burn has also risen in cost after a substantial rally in the price of carbon allowances.
With carbon costs at seven-year highs of over €12/tCO2e, burning coal will be more expensive. This could encourage more gas-fired generation, which would add to gas demand, potentially pushing prices up further.
In the short-term, Day-ahead power prices are expected to fall as the start of British Summer Time (BST) leads to a sharp drop in demand. Peak power demand hit 49GW last week but has dropped to just 41GW today. Longer evenings will reduce lighting demand and available solar generation will begin to play a larger role in the summer season.