Timera Energy’s 2012 review

With Christmas upon us again, this will be our last blog post for 2012 before we return again in the New Year. This week’s article summarises our view of the current environment in European energy markets. We summarise the key macro drivers we see impacting markets and investment and draw together some of the themes we have explored during 2012. We will be back with our first feature article of 2013 on the 7th of January.

December 17, 2012

With Christmas upon us again, this will be our last blog post for 2012 before we return again in the New Year.  This week’s article summarises our view of the current environment in European energy markets and draws together some of the key themes we have explored in 2012.  But first a brief update on the development and readership of the Blog this year.

The Timera Energy Blog in 2012

It is now about 18 months since we started the Blog.  Our aim has been to present an independent view point on value and risk in European energy markets.  Our intention is to challenge investors, asset managers, traders and risk managers with analytical insights and opinions, rather than providing news coverage.

The Blog readership continues to grow.  We now have several thousand regular readers across most of Europe’s energy companies as well as many investment funds, banks and commodity traders.  This year we have published articles in Energy Risk and Commodities Now (the start of a series on LNG investment).  We have also regularly been quoted through Reuters and Montel, published articles via the European Gas Hub and started a Guest Post relationship with the Oxford Institute for Energy Studies. 

We thank you for your support this year, welcome any feedback and look forward to continuing to develop the Blog in 2013.  In the meantime here is a review of the key themes that we believe are currently shaping the European energy market.

 

A challenging environment

There can be no doubt that European energy markets are increasingly being influenced by global commodity and financial markets.  While the global debt crisis has ebbed and flowed through 2012, it remains a key backdrop.  The great monetary experiment continues, with the use of unprecedented central bank stimulus to fight the deflationary forces of a deleveraging global economy.  But this has done little to address the capital constraints and uncertainty that are impacting energy market supply and the lack of economic growth that is impacting demand.

The European energy policy environment also remains uncertain.  Decarbonisation and security of supply are the dominant policy objectives, but there is a lack of co-ordination and consistency across European governments in addressing these.  In many cases (e.g. German nuclear closures and UK Electricity Market Reform), poorly implemented policy is damaging investor confidence and acting to undermine these objectives.

European energy markets are however being shaped by strong structural changes.  An increase in gas import dependence and maturity of hub pricing is changing the way gas is sourced and priced.  The LNG market is entering an unprecedented phase of growth with its influence on European gas prices becoming more pronounced.  At the same time rapid investment continues in renewable generation capacity and the transmission/transport infrastructure required to support it. 

These factors are combining to drive a structural increase in the requirement for gas and power asset flexibility.  However market price signals for flexibility value are currently subdued.  We will be watching closely in 2013 to see how the drivers of flexibility value evolve.

In the section below we summarise how we have explored some of the specific issues behind these themes.

 

Asset investment, valuation & hedging

LNG investment: We explored the impact of US LNG export contracts on European portfolios, the importance of a portfolio analytical framework for LNG investors and provided some views on building LNG supply chain value.

Power plant investment: We looked at the impact of low spark and dark spreads on generation margins and the potential for this to cause a gas plant ‘bust’ across Europe.  We also addressed some of the policy responses that may impact investors in the future, particularly the implementation of a capacity market.

Gas flexibility investment:

We looked at the drivers of seasonal price spreads in Europe and the associated challenges of investing in gas storage.  We also explored the factors behind the current depressed levels of gas price volatility.

 

Analysing and managing value and risk

Portfolio management: We explored risk capital allocation to support European energy portfolios as well as exploring why portfolio value does not equal the sum of its parts.  As a case study in portfolio price risk management, we had a look at RWE’s gas contract portfolio.

Risk measurement: We ran a series on risk measurement challenges facing the centralised trading functions of European energy companies, looking at ‘mark to market’ tensions, the application and relevance of Value at Risk and the measurement of risk from structured contracts.

Major disruption and credit risk: Consistent with our view that many energy companies could be better prepared for a major market disruption, we looked at the risk implications of a Eurozone breakup and specifically explored credit risk

 

Market dynamics

Global gas market: The evolution of the global LNG market and its influence on the European gas market has been a key theme, as we have looked at the 5 key drivers of the LNG market, the impact of LNG flow into Europe, the impact of North American LNG exports on European pricing and China’s influence on LNG demand.

Impact of renewable growth: We have explored the potential range of renewable build in the UK and the impact of increasing intermittency on market dynamics.  We have also looked at the complications that renewable capacity growth is causing in the German power market.

UK energy policy implications: We have been particularly focused on the impact of UK Electricity Market Reform on thermal plant generation margins, exploring the government proposal for a Capacity Market and the potential impact on market prices and volatility.  In our view this is unlikely to avert a capacity crunch this decade and given capacity tightness it is likely that the UK will be the first European country to confront the issue of depressed thermal plant margins.

Commodity prices: We have looked at the macro drivers of global commodity prices (including coal), with a particular focus on the impact of central bank intervention.

Decarbonisation perspective: We provided our perspective on where the European decarbonisation agenda is going wrong as well as the contrasting views of Bill Clinton and Vaclav Klaus.

You can see a full summary of our articles in our Blog Archive.

Happy Christmas and see you in 2013.