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Energy Market Fundamentals & Procurement

Energy Market Fundamentals & Procurement. Dean Marsh - Senior Account Executive (North) Gary Ward - Senior Account Executive (South). Energy Markets – what you need to know. Content Energy price build up Market Overview Gas Electricity What Influences price Current market conditions

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Energy Market Fundamentals & Procurement

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  1. Energy Market Fundamentals& Procurement Dean Marsh - Senior Account Executive (North) Gary Ward - Senior Account Executive (South)

  2. Energy Markets – what you need to know • Content • Energy price build up • Market Overview • Gas • Electricity • What Influences price • Current market conditions • Why use a third party? • Fixed vs. Flex

  3. 100% Margin Metering LDZ Charges NTS Charges Swing Commodity

  4. Energy price build up-Electricity

  5. Where does our gas come from? Gas pipeline imports from Norway (Langeled) Netherlands (BBL) Belgium (IUK) Gas LNG imports from - Trinidad &Tobago Qatar Algeria Egypt Imports History 2000 UKCS 99% 1% imports 2005 UKCS 82.7% imports 17.3% 2008 UKCS 61% imports 38.8% (LNG 1.1%,pipeline 37.7%) 2009 UKCS 41.6% imports 58.4%

  6. Market overview - Electricity How is our electricity generated? Coal fired power plants Gas fired power plants Nuclear Renewable Percentage of generation can and does change dependent on generation fuel costs (Coal & Gas) primarily Forward supply issues Decrease in coal fired power plants due to EU carbon directives LCPD (More information at http://www.defra.gov.uk/environment/airquality/eu-int/eu-directives/lcpd/index.htm) Less capacity ( Non compliant power stations will have to close by 2015)

  7. Market fundamentals • Fundamentals drive supply and demand • Do not always dictate price • Prices can disconnect themselves from fundamentals • Speculation can play large part in market movements

  8. What Influences Price? Oil – Can Influence gas prices (Due to indexation) Coal –used for generation Supply & demand- positive & negative GDP EU carbon price- feeds into the cost of power generation Exchange rates- Crude oil/ Freight/ Coal Global tensions – political/economic etc Transportation cost of shipping LNG and coal Weather- can dictate demand on the NTS and the grid Maintenance- Gas field outages/power station maintenance

  9. Market volatility Spot prices are more volatile than forward prices Spot prices more closely reflect genuine supply and demand

  10. Gas - UK October Gas Year Price (Flat Cost) p/therm May 2006 – May 2010

  11. Electricity - Annual Forward Baseload Price £MW/h (Flat Cost) May 2006 - May 2010

  12. Source: Bloomberg, analysis Utilyx

  13. Current Situation Oil-Oil prices remain supported above $85/bbl on a bullish economic outlook, strong equities and growth in emerging market demand Supply remains healthy but demand from China is the most bullish fundamental driver Gas-If oil remains at $85 we could expect to see continued support to gas prices on longer dated contracts Further potential upside can come from an upturn in demand as we come out of recession, supported by increased continental demand Power-Prompt power prices have firmed in line with the upturn in gas prices last week Strong prices in underlying fuel markets have supported the curve, with corresponding contracts in both gas and coal having gained over the last week. This remains a risk to the upside in the near-term. ·Carbonprices have reached a 10 month high adding support to the curve, in particular the 2012 contracts and beyond · Bearish factors remain however - demand is significantly below pre-recessionary levels and a drop back down in oil and gas would feed through to have a bearish affect on the power curve · Supply side issues also represent a longer-term risk to the UK power market e.g. governmental policy with respect to nuclear build

  14. ENERGY PROCUREMENT-WHY USE A THIRD PARTY? Electricity-Complex price structures DUOS –Distribution Use of System Charges TUOS- Transmission Use of System Charges BSUOS- Balance System use of System Charges T-Losses Transmission Losses D-Losses Distribution Losses CCL- Climate Change Levy Renewable Obligation (supplier) Available Capacity Green/Renewable Premiums

  15. ENERGY PROCUREMENT-WHY USE A THIRD PARTY? Gas-Complex price structures LDZ – Local Distribution Charges NTS – National Transmission Charges Balancing (swing) – charges CCL – Climate Change Levy

  16. ENERGY PROCUREMENT-WHY USE A THIRD PARTY? Additional Services OJEU Compliance E-Procurement Market Intelligence Bureau Services – Bill validation EUETS/CRC – Guidance & advise Retrospective Cost Auditing Best Practice - Flexible Risk Managed contracts gas/power Dedicated Account Management

  17. ENERGY PROCUREMENT-WHY USE AN APPROVED PBO? Fixed or Flex?

  18. ENERGY PROCUREMENT-WHY USE AN APPROVED PBO? Fixed Fixed on a single day Advantages Fix and forget Known budget price Disadvantages 1 in 250 chance High risk premium Exposed budgets

  19. ENERGY PROCUREMENT-WHY USE AN APPROVED PBO? Flex Purchasing prior to and during contract Advantages Discount on forward price Access to market falls Protection from market highs Budget management & planning Disadvantages Reconciliations Skills required Size requirements

  20. Useful Linkswww.ogc.gov.uk/energy_gas_and_electricity.aspwww.energyconsortium.org.uk

  21. Thank you for listeningAny questions?

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