There has been a slew of energy market news in the past couple of days, but none of it is good. Yesterday, Zog Energy became the 29th energy supplier to fail this year. The company had 11,700 domestic customers and has entered the Supplier of Last Resort (“SOLR”) process. Zog was one of the suppliers affected by the failure of gas shipper CNG. Zog’s founders have said that they always purchased gas forwards from CNG, but that shipper’s administrators had refused to allow these hedges to be transferred, leaving Zog un-hedged and having to replace those volumes at current higher prices, which it was unable to do.
Elexon credit assessment price set for largest rise yet
Adding further stress to suppliers is the news that Elexon plans yet another increase to its Credit Assessment Price (“CAP”), this time from £230 /MWh to £305 /MWh from 17 December. This is something like the 6th change in the CAP level since early September when the level was at £96/MWh. The current level is £240 /MWh, although it’s set to decline slightly to £230 /MWh tomorrow.
In determining the size of the latest increase, the Credit Committee gave greater weighting the latest forecast for December prices – on the date of the meeting, the average forecast market prices were at £224 /MWh for December with latest peak prices at £253 /MWh and latest base prices at £196 /MWh. The Committee also noted that average January price had increased to £255 /MWh. The most recent System Prices were also considered, and it was noted that prices in the Balancing Mechanism have been high in recent days. Given the chance of a colder weather along with high Balancing Mechanism prices, the Committee believes System Price spikes are likely.
While December prices had supported a slight reduction in the CAP level previously (due to be implemented tomorrow) the recent increase together with the higher prices for January are motivating this current proposed rise. However, the proposed increase is significantly above both current and forecast prices, so it is unclear why the proposal is for the new level to be at £305 /MWh which is a £50 /MWh premium to December prices, rather than something lower.
“Given the chance of colder weather and high prices in the Balancing Mechanism, the Credit Committee noted that there was likely to be system price spikes during the period when the proposed CAP would be live,” – Elexon
Last month Elexon began using an alternative credit review process allowing the CAP to be adjusted more quickly in response to rapidly changing market conditions, or where an unusually high increase is indicated. Under this alternative process, the consultation period for changes to the CAP is reduced from 5 to 2 working days and the notification period from 15 working days to 10. The Credit Committee is also reviewing the CAP every two weeks. The alternative process allows the Committee to use a wider range of data sources in setting the CAP, including the reference price, forward market prices and previous energy imbalance prices, as well as responses to previous price adjustment consultations.
While suppliers will not be pleased to see such a large increase in the CAP level, Elexon has demonstrated its willingness to reduce the CAP where it believes market conditions allow, and is using a new determination process to enable greater responsiveness to market conditions. It’s just a shame that Ofgem cannot demonstrate similar innovation and flexibility in setting the retail price cap.
UK ETS prices reach record highs
This week, the Cost Containment Mechanism (“CCM”) for the UK ETS was breached for the first time – monthly average UK ETS prices in September, October and November were all above the December trigger price of £52.88 /tCO2. Under current market rules, the Government must consider measures to reduce the cost of allowances if they consistently trade at more than double their average price of the previous two years – since we don’t yet have a two-year trading history for the UK scheme, the Government has set a thresholds based on EU ETS prices between May 2019 and December 2020.
Since the CCM has been triggered, the UK ETS Authority will meet to consider what intervention, if any, to make based on addressing sustained price movements that do not correspond to market fundamentals. If there is no agreement on what action to take, the final decision will be taken by HM Treasury. Potential interventions include:
redistributing allowances between the current year’s auctions;
bringing forward auctioned allowances from future years to the current year;
drawing allowances from the market stability mechanism account;
auctioning up to 25% of the remaining allowances in the New Entrants Reserve.
The Authority has announced that a decision will be communicated to the market no later than after trading hours on 14 December. Analysts have suggested that with only two auctions remaining for the year the Authority is likely to re-allocate auction volumes next year to bring forward allowances for sale in the beginning of the year.
Ongoing problems at Taishan indicate possible EPR design flaw
There has also been further bad news for EDF’s troubled EPR technology. Unit 1 of the Taishan nuclear power plant in China was shut down in July following a build-up of noble gases in the primary circuit, which was attributed to issues with the casing around some of the fuel rods, the first of three containment barriers at the reactor. An investigation into the cause of the problem is still underway, but a whistle-blower has reported that there may be a design flaw with the reactor pressure vessel, and that this ultimately damaged the containment.
The whistleblower, described as a French engineer who has access to detailed technical information about the Taishan reactor, has linked damage found on the fuel assemblies to “abnormal vibrations” which could be associated with a design flaw in the pressure vessel. In an email, dated 27 November, the Commission for Independent Research and Information on Radioactivity – a French association created in the aftermath of the Chernobyl disaster – asked the French nuclear regulator to investigate the whistle-blower’s claims, since any fault at Taishan could have implications for EPRs EDF is developing in France and elsewhere in Europe.
An industry source told The Times newspaper that the pressure vessel is “demonstrably safe” but that design changes may be needed.
“If the news we are hearing from the Taishan EPR is right then it’s beginning to look like there’s a potential generic fault with the key safety mechanism of the EPR reactor design itself,” – Paul Dorfman, nuclear expert at the University of Sussex
EDF has said that that investigations at Taishan are still ongoing and declined to comment on whether there would be any impact on Hinkley Point C, but four months on, there is still no information about the cause of the problem – which may not be surprising given lack of transparency in China – but the reactor is still offline, which is perhaps a better indication that safety concerns remain.
EDF is yet to complete any of its EPRs – neither the first scheme in Olkiluoto, Finland which was originally due to open in 2009, nor the flagship plant at Flamanville in France which should have opened in 2012 have been completed and both have seen costs escalate to multiples of the original estimates.
The UK Government has committed to approving another large-scale nuclear reactor by the end of this Parliament, and the expectation is that it will progress the EPR at Sizewell C. This would be unwise – until EDF demonstrates that it knows how to deliver an EPR in Europe the Government should not gamble security of supply on a failing technology. I remain convinced that the best option is the Advanced Boiling Water Reactor, and that attempts should be made to revive the Hitachi scheme at Wylfa Newydd.
As winter begins to bite, there is no sign of any end to the current chaos in energy markets.