Fuel for Thought – 15 Jul 2011

15 Jul, 2011

European debt crisis impact on energy markets: Renewed concerns over contagion from the European debt crisis have weighed on commodity markets this week. The impact on European energy markets is both through a fall in the price of oil, gas, coal and carbon as well as from a strengthening of the US dollar against the Euro and Sterling. Exchange rates and global asset correlations are becoming increasingly important drivers of European power and gas markets, a topic which we explore in an article to be posted on Monday.

UK electricity market reform: The electricity market reform policy measures announced by the UK government this week are a confused attempt to incentivise delivery of much needed new infrastructure. To commit capital, investors need transparency and a reasonable degree of certainty as to market structure over an investment horizon. Instead the UK government is walking a dangerous line; on one hand relying on market price signals to deliver investment but on the other hand introducing a range of amorphous support mechanisms which are likely to distort those signals. Particularly important is the way that price setting flexible thermal capacity will be treated, but an announcement on capacity payments has been delayed until December. As Centrica’s CEO Sam Laidlaw said in June.. ‘the clock is ticking’.

Gazprom eyeing a stake in RWE? A marriage between Gazprom and RWE presents an interesting cultural challenge. However it may increase the chances of gas fired power plants being built in Germany. German spark spreads are currently negative, hardly conducive for investment in new CCGT. However Gazprom may factor in a long run strategic benefit if it has RWE’s portfolio as a home for its gas. Gazprom are also more likely to be interested in ensuring supply continuity to markets which they have a significant investment interest in.

Japan to transition from nuclear? The future of nuclear power in Japan has become a defining political issue since the Fukushima accident. If Japan takes concrete steps to move away from nuclear power, gas fired power stations will play an important role in filling the gap. This will have a substantial impact on LNG demand from the world’s largest importer, a factor that is likely to increase competition between Asia and Europe for available LNG cargoes.

Picture of the week:

The soon to be commissioned solar farm at Rhosygilwen mansion in Pembrokshire. Despite the fact that Wales is not renound for its solar strength, the owner has ‘raided his pension fund’ and used the assistance of subsidies from the UK government to deliver the project.