Timera Energy’s 2011 review

12 Dec, 2011

A year in review

The season of long lunches, last minute shopping and visits from the in-laws is upon us again.  As a result this will be our last post in 2011.  We will be back with our first 2012 feature article on 2nd January. 

This week’s article reviews some of the key themes across European power and gas markets that we have explored in 2011.  We believe that many of these themes will continue to shape value and risk in power and gas markets moving into 2012.  But before the review we thought it was worth providing a quick update on the response we have had to the Blog so far.

The Timera Energy Blog in 2011

It has been about a year since we had a burst of enthusiasm by a fire in a London pub and decided to launch a Blog.  Somewhat naively we thought it wouldn’t be much work to convert the fireside banter into insightful published articles.  So we set to work, encouraged by a view that there was a limited supply of published analytical insight on European power and gas markets.

We have been publishing material on the Blog for seven months now.  And while we certainly underestimated the effort involved, the response we have had has been very positive.  We have had many thousands of visitors to the site over this period with a strong month on month growth in readership.  We have been particularly pleased with visitor loyalty, with around half of our readers returning regularly to the site after their first visit.  We have been regularly quoted in the press (e.g. Reuters, Montel) as well as publishing feature articles in Utility Week and the European Gas Hub newsletter.  So while there have been a few late nights to meet publication deadlines and some foul language as we learn how to use WordPress, it has been a rewarding experience that we look forward to building on next year.


Review of key themes in European power and gas market in 2011                     

The following is a summary of some of the key themes we have explored this year.

Market dynamics

Debt crisis impact: Through the year we have focused on importance of the impact of the debt crisis on European energy markets.   We believe the debt crisis will continue to be a defining factor in 2012, both through its impact on energy market pricing dynamics and through a tightening of access to investment capital.

European gas market dynamics: We have set out our view of the current drivers of European gas pricing dynamics and European gas hub liquidity, particularly recognising the increasing importance of global LNG pricing.  However we have been much more cautious than the market consensus in calling an end to conditions of global supply glut, given the risks around a global recession and a slowdown in Asian demand.

Asset investment, valuation & hedging

Value of flexible thermal power assets: We have presented our case for an increase in the value of existing generation flexibility in an environment of weak market spreads, capital constraints and increasing intermittent and must run generation capacity.  This story is particularly powerful in the UK where capacity margins are set to tighten sharply by the middle of this decade.  But the investment case for developing new CCGT in Europe is much more difficult.

Value of gas supply flexibility: We have focused on the increasing value of European gas supply flexibility as a result of increasing power station swing demand and the rise in LNG import dependence.  This has important implications for the evolution of interconnector and transmission capacity although the approach to monetising the value of this capacity is changing.

Valuing and monetising flexibility: We have explored the challenges facing investors and asset managers in the valuation and hedging of transportation capacity.  This included a specific look at managing the volume flexibility in gas swing contracts.

UK energy policy, investment and security of supply: We have been critical of the UK government’s approach to Electricity Market Reform and the associated threat to investors and security of supply as a result of a lack of policy clarity. This is particularly relevant for investment in the UK electricity market given a looming capacity crunch and for investment in gas storage given the risks around government intervention.

Analysing and managing value and risk

Robust analytical methodology: We have set out our thoughts on the principles behind the robust analysis of energy asset value and risk.  We have also explored the importance of investors and asset managers using stochastic modelling to analyse value and risk to capture conditions of uncertainty.

Management of exchange rate risk: We have explored the impact of exchange rate movements on European power and gas markets in the context of the current debt crisis.  We have also specifically looked at the risks companies face in bleeding value from residual foreign exchange risk.

Market value benchmarks: We described a number of sources of market data that can be used to benchmark power and gas asset value and set out our thoughts on the effective application of these benchmarks to the valuation of flexibility.

Hopefully these themes have included some interesting material that has challenged your thinking.  We certainly welcome any of your comments or feedback on the Blog and its contents.  We will be back in January to revisit some of these themes (e.g. European gas pricing dynamics and the debt crisis impact) as well as exploring new ones. In the meantime have a relaxing Christmas, as free as possible from thoughts of power and gas.