Market Developments | News and Commentary

Headine:

Shadow cast over UK’s planned nuclear renaissance:
A terse statement from EDF has marked the end, for the time being at least, of a potential deal for British Energy. “After in depth discussions, EDF considers that the conditions for a major development in Great Britain are not met to date.” And British Energy noted that advanced discussions “have continued but without agreement to date.”

The breakdown in talks came in the eleventh hour and centred on the price that EDF was prepared to offer and its difference when compared with the price that British Energy’s major shareholders (excluding the government) were prepared to accept. EDF had been expected to announce an offer in the region of £12bn, but in the face of spiralling energy prices shareholders are understood to have wanted closer to 800p per share, considerably more that the 765p per share cash offer that EDF reportedly tabled.

Central to the talks collapsing were investment companies Invesco and M&G, which collectively control some 22% of British Energy. They are understood to have rejected the cash offer as being too low and found the alternative offer of a cash price 700p/share embedded with a contingent value rights component - a little known financial instrument in the UK that offers shareholders some future value in the company - too uncertain.

UK News:

Start of second round of prices increases:
Blaming record wholesale energy prices, two of the UK’s largest energy suppliers have announced massive hikes in tariffs for consumers, with both EDF Energy and British Gas parent company Centrica saying they had increased prices in response to pressures from the wholesale market. EDF Energy raised its electricity prices by 17% and gas by 22%, reasoning wholesale energy prices had increased by 70% for coal, 63% for gas and 47% for electricity since its last increase in January.

British Gas followed EDF’s lead a week later, with electricity prices increasing 9% and gas by a record 35%, adding that dual fuel customers will see a 25% price increase. As with EDF, British Gas laid blame on the wholesale market, explaining that winter gas prices have increased 89% on last winter, up from 48p/th to 90.8p/th, while electricity prices have increased 72% from £49.62/ MWh to £85.58 MWh. The company attributed rising wholesale prices to diminishing UK gas reserves, with gas prices strongly linked to record oil prices, and to increasing demand.

Committee says high energy prices are here to stay:
The era of cheap energy is surely over. This is the conclusion of the fi ve-month inquiry into energy prices by the BERR Select Committee, which said evidence heard during its inquiry can lead to only one conclusion; that whatever short-term fl uctuations occur, and whatever regulatory action is taken in the UK to improve the functioning of the energy markets, high prices are here to stay.

Ironically the inquiry was prompted by across the board retail price increases in January and as the report was published the second series of price increases commenced. But the report lacks any real potency and seems content to provide input into Ofgem’s on-going energy market investigation that will report its preliminary fi ndings at the end of September. However, the Committee did express concern that Ofgem’s terms of reference suggest it may pay relatively little attention to the wholesale markets, and, in particular, the wholesale gas market.

All supply companies cited rising input costs, particularly for gas, as the primary cause of their price increases. Wholesale gas prices have continued to rise throughout 2008 and suppliers told the Committee this is likely to lead to further retail price increases in the future. Some reports have suggested retail prices could rise by 40%, while industrial consumers have also been experiencing rapidly increasing energy costs over the past year due to a doubling in the wholesale gas price.

European News:

First report on EU regional transmission transparency:
The European Regulators Group for Electricity and Gas has released its first report on gas transmission transparency for the North West regional energy market, with the Gas Regional Initiative North-West (GRI NW) being the largest geographic market comprising nine countries. Stakeholder consensus is that the GRI NW priorities are transparency, capacity and investment, which are critical market attributes if gas is to be freely traded between member states on a nondiscriminatory basis. Lower priorities are balancing, quality and creating trading hubs and storage.

The lack of transmission capacity availability data is one of the market’s main shortcomings, and acts as a new entrant barrier.

Electricity:

Electricity curve reflected the bearish momentum of underlying drivers including gas, coal, oil and prompt prices. The supporting factors, however, included an upturn of carbon prices due to a surge in demand for sCERs and a renewed reality check on supply-demand fundamentals for the coming winter with Rugeley coal plant failing to opt in to the Large Combustion Plant Directive.

Gas:

Long-term gas forwards eased as prompt prices slackened leading to the anticipation of robust fundamentals during the winter. Downward momentum of oil prices also had a bearish role to play for most part of the week except for a brief period when an explosion on a large Turkish oil pipeline triggered upside pressure in the market.

Water:

SIndependent review of domestic water charging and metering
Water UK is pleased that Defra has now released details of its long-awaited review of household charging and metering which is to be independently chaired by Anna Walker, Chief Executive of the Healthcare Commission.

This review is a constituent of Future Water, the government's water strategy for England (announced in February) and with the Cave Review of water competition is welcome evidence that ministers are making progress with implementing the strategy.

The review has been given wide-ranging terms of reference covering, in addition to metering and charging, recovery of debt and protection of vulnerable customers. The industry supports its emphasis on fairness, water efficiency and sustainability. (http://www.water.org.uk/)

Quote of the week:

BERR Select Committee, said: “We believe that there are very real problems that need to be addressed. This can best be done through improving market design, taking specifi c regulatory steps, and by continuing to work for liberalisation of European markets. Such an approach is more likely to bring real and lasting benefi ts to consumers. It is also less likely to inhibit the investment the UK needs so urgently.”