Fuel for Thought – Sep 9th

09 Sep, 2011

UK government embarrassed by EMR cost leak:  The leaking of a letter by the Prime Minister’s senior energy adviser puts the UK government in an uncomfortable position after the recent launch of its Electricity Market Reform policies. The letter warns the Prime Minister of a 30% increase in household bills as a result of support for low carbon technology and labels DECC analysis to the contrary as unconvincing. The political agenda behind the EMR policy announcement risks compromising public support for decarbonisation and threatens security of supply, as we explore here. The challenge presented by decarbonisation of the power sector deserves a more candid approach.

Centrica restarts idled gas plants: Centrica’s decision to revive two CCGTs illustrates the option value from owning older flexible thermal capacity. UK spark spreads have stabilised a little recently after suffering a substantial decline over the last year, but still represent low gas generation margins. However there is a relatively low fixed cost recovery hurdle on an older CCGT whose capital costs are paid down, particularly when assisted by additional payments from network operators. It will be interesting to see what further support is provided for older CCGTs when the government announces details of the EMR Capacity Mechanism in December.

First gas through Nordstream: The flow of first gas through the Nordstream pipeline represents a significant new source of physical gas supply into Europe but it unlikely to have much impact on market dynamics. Nordstream alleviates some of the security of supply issues resulting from brawls between Gazprom and transit states. But it does nothing to change the dominance of Gazprom as Europe’s largest gas supplier. If Europe faces a cold winter and supply issues this year it is the influence of Asian LNG pricing on Atlantic basin cargoes that will be a more prominent concern.

Beware of exchange rate risk: As financial markets end another week of heightened volatility, the Swiss National Bank (SNB) has issued a timely reminder of the dangers associated with exchange rate risk during a financial crisis. The SNB announced it would buy ‘foreign currency in unlimited amounts’ to stem the rise of the Franc as a result of safe haven buying. This caused a 10% depreciation of the Swiss Franc in the space of minutes, an ugly move indeed for any unwanted exposures. The SNB’s move will likely be one of an increasing number of shocks to the foreign exchange market from policy makers reacting in defense of their national interests.

Picture of the week:

A map of the route of the Nordstream pipeline from Russia to Germany.  The pipeline consists of two parallel sub-sea pipelines over a 1220km distance and will hold the record for the longest sub-sea pipeline in the world on completion. The project is estimated to cost €9 bn.