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Significant Market Events Drive TEC to Close Forward Positions on Electricity

Forward electricity market prices, in particular for the remaining component months of Winter 2016 (November 2016 to March 2017) have risen sharply on a combination of unforseeable events. This has had a knock on effect for Summer 2017 prices and beyond, although less so further out into the future.

Firstly France has been forced to close a number of their nuclear power stations amid safety fears. This has caused an increase in demand from coal fired stations and a rise in coal prices. The UK can receive up to 2 GW of electricity from France via an interconnector and clearly this import source cannot be relied upon. This has been added to by some longer than expected outages at UK nuclear plant, including West Burton.

The increase in coal prices has put pressure on carbon prices, a component cost of generating using coal. In the meantime oil prices have also risen to above $53 per barrel on the back of proposals for a production freeze by some OPEC countries.

The final component to what would appear to be the “Perfect Storm” is a significant weakening in Sterling following the announcement of the proposed trigger for Brexit. As oil and coal are priced in US$ and carbon in Euros, this has further increased the costs of these commodities in Sterling terms.

This graph shows how traded prices for electricity for the Summer 17, Winter 17 and Winter 18 rose during periods last week. You will be pleased to know that we had already closed out our Winter 2016 requirements some weeks ago at a price averaging £41.70, while current prices for November baseload have reached £62 in recent days. There has been some impact on gas prices, but here too we are locked out for Winter 2016.

TEC have taken action to defend maximum target costs by locking out all required electricity volume for Summer 2017 and are well on the way to doing the same for Winter 2017.  When there is evidence of a willingness of seller to offer then we will of course increase cover for Summer 2018, although much can happen before then.

This table shows the new position and current market prices. This revised position has been achieved through purchases of almost 300 million kWh of TEC Member baseload electricity for a total value of over £150 million. To view full image

*Comparison includes market price of volume still to be purchased.

Our activity to date had made the most of the low prices available during the last 6 months at a difficult time when Members were committing to the new frameworks, whilst also responding last week to unprecedented market conditions to protect member budgets.

We can, should the market take a sharp downturn, unfix some of our volume and re-fix at lower prices, but would only do so if the benefits of doing so outweighed the risks of being open to further market volatility.

Please contact your Member Services Advisor if you have any queries and we will be more than happy to talk you through.

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