Traditionally, weather has a starring role when it comes to electricity and gas demand, but as electricity production has been shifting to renewables, it has begun affecting supply as well.
Near the end of March, the “Beast from the East” and the “Mini Beast from the East” shook European energy markets. Gas demand reached six-year highs, and storage levels were depleted across the UK and the European continent. This is the time of the year when historically, we would start filling up our storages due to the lowered demand for heating, but the unexpected late winter pushed prices to levels not seen since Quarter 2 of 2015. As Jason Durden, Alfa Energy Group’s Head of Energy Markets and Risk Management, likes to say, “The price rises like a rocket and falls like a feather.” It will take quite a while for the prices to come down from these highs and the effects to wash off.
Weather plays an important role in price movement, but it is not the only factor. When I talk to my clients, a common reasoning they use to determine when to enter the market is “let’s wait till the summer, when the weather is warmer and the demand is low”. That sounds reasonable and logical, doesn’t it? However, markets these days are anything but predictable and reasonable. They are guided by a whole group of factors that go beyond the fundamentals of supply and demand. There is so much geopolitical risk currently, coupled with supply issues and general risk re-evaluation, that the market is ignoring the direction from the warmer weather the UK has been enjoying these past two weeks. The past two years (2016 and 2017) saw lower prices during Quarter 1 and Quarter 2 than they were during the summer, showing that, despite being an important factor, weather is part of a bigger set of influences that sometimes take precedence in driving the markets.
Since the UK is committed to shifting power generation towards low-carbon sources, weather is becoming more important in the supply side of things, namely wind and solar. Fifty percent of electricity generated in 2017 came from low-carbon sources, 15% of it from wind farms. Solar power is a major source of electricity during the summer months, with more electricity coming from the sun than from coal on 183 days last year. Saturday, April 21st 2017 was the first full day that saw 0% coal generation (source: electricinsights.co.uk). When wind and solar do not provide the expected levels of electricity generation, the UK must revert to other sources, such as imports or gas generation, which significantly influence the prices.
If we were to look into UK gas and power markets on a more detailed level, we would find multiple examples of how weather affects prices. On a macro level, it is important to know that the weather influences both the supply and the demand side and ultimately the p/kWh you see on your invoice.
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