The last few weeks have seen further volatility in the wholesale market cost, electricity in particular. Prior to the recent uncertainty, the European electricity markets were already highly vulnerable. Several factors including the temporary closure of Switzerland’s largest nuclear plant until February and further nuclear shutdowns in France have had a damaging effect on what is already a fragile period for the markets. Meanwhile, on UK shores, the emergence of colder winter weather forecasts and increased coal prices are having a bullish effect on short-term electricity prices.
November and December UK power prices have both broken above £61/MWh, and Q1 2017 above £63.50/MWh ─ the highest Month-ahead and Quarter-ahead levels since the winter of 2009. While prices across the next two winters rose almost £1.5/MWh, Summer ’17 UK power gained less than £1/MWh.
On the back of huge short-term increases and little movement further out, the market has entered into a state of backwardation (a situation in which the spot or cash price of a commodity is higher than the forward price), which may make longer-term contracts look more competitive than shorter term contracts. We’re seeing a higher number 3-5 year contracts submitted since this shift in the market. However, counteracting this are third party charges. Although wholesale costs for 2018 onwards are generally more competitive than the next 6-12 months, this doesn’t necessarily mean your delivered price will reflect this way. The reason being is third party costs continue to be on an upward trend and are expected to ramp up even further from 2017/2018 onwards.
As of this year, third party costs are estimated to total £46.97/MWh of an average electricity price (51% of the delivered price). However, in 2019/20 this is likely to increase to £74.75/MWh (64% of the delivered price). It is therefore important to remember that increased wholesale costs are likely to have less impact than regulated costs in year to come. Below is a breakdown of how things are likely to change: