Energy Procurement 2023 Year in Review

By Trading and Risk Manager, Richard King.

In this concise overview, Richard navigates the highs and lows of the past year, offering valuable insights into the dynamic forces that shaped the industry.

January

European energy markets started the New Year with a continuation of the bearish momentum that was witnessed during late 2022, with further steep falls as very high renewable generation combined with mild temperatures kept the pressure on prices. Record high LNG imports, primarily from the USA, also helped to substitute much of the fall in Russian gas pipeline flows to Europe that were disrupted by the war in Ukraine with weak LNG demand from Asian markets due to Covid lockdowns also helping European gas markets to retain a global price premium for flexible LNG supplies. In order to manage soaring energy bills, the UK government confirmed plans to continue supporting businesses with their energy costs with the Energy Bills Discount Scheme that would run for 12 months from 1st April 2023 to 31st March 2024, replacing the Energy Bill Relief Scheme to aid all non-domestic consumers.

February

Markets continued the downward correction seen since New Year during February despite surging UK and European carbon markets as mild temperatures and strong renewable generation from wind turbines continuing to pressure contract values. The completion of outages at the Aasta Hansteen and Nyhamna facilities in the Norwegian sector of the North Sea also encouraged the bears, as did the news that the Freeport LNG terminal in Texas had resumed partial operations with the departure of its first laden vessel since July 2022 following a devastating fire. In order to accelerate the Net Zero transition a new Department for Energy Security and Net Zero (DESNZ) was created by Prime Minister, Rishi Sunak, focusing on the energy portfolio from the former Department for Business, Energy and Industrial Strategy (BEIS) as a means to secure long-term energy supply and encourage greater energy efficiency.

March

Despite a brief surge mid-month caused by a drop in French nuclear power production due to technical issues at several reactors, energy markets continued their downward trend in March. ASN, the French nuclear watchdog, announced the discovery of cracks on welds at several reactors and warned that all French nuclear plants could have similar issues. The news caused huge volatility in the European and UK electricity markets at a time when nuclear power production had already been disrupted by industrial action due to protests against the French government’s proposed pension reforms. However, EDF’s subsequent announcement that 2023 production targets would remain within a range of 300-330 TWh helped to calm market sentiment.

April

Longer dated power and gas contracts closed the month higher amidst concerns regarding delays to the summer maintenance schedule at EdF’s French nuclear fleet given the industrial action within the French energy sector. The delays lead to worries regarding winter energy supplies given the absence of Russian pipeline gas imports, meaning Europe would be highly dependent on LNG deliveries to supply their markets which raised the risks of competition with Asian economies for tanker deliveries. Oil markets saw losses through the month however, despite the surprise decision by OPEC to reduce its output quotas by 1.15mb/d to support the market after the International Monetary Fund (IMF) warned of headwinds to the global economy following the US Federal Reserve’s announcement that it could implement further interest rate rises to combat inflation. 

May

Electricity prices continued to shed value within the prompt market for the remaining summer months of 2023 during May as forecasts for benign weather conditions and increasing solar PV generation all combined to further de-risk energy contracts, with temperatures in the Goldilocks zone of being warm enough to end any demand for heating whilst not so hot to create additional demand for air conditioning. A slump in UK and EU carbon markets also helped the bearish momentum, as did further falls in both the oil and coal markets as Europe continued its energy efficiency drive and supply diversification efforts to reduce its dependency on imports of Russian energy, eradicating much of the geopolitical risk premiums within energy contracts that had driven markets to their record highs during 2022 following the Russian invasion of Ukraine.

June

UK energy prices broke their post New Year downwards trend in the middle of June following news that the maintenance outage at the Nyhamna gas facility in the Norwegian sector of the North Sea had been extended for three weeks from the 21st June to the 15th July. The outage extension meant that up to 80 mcm/d of gas supplies to the UK would be curtailed which, combined with further maintenance at the Hammerfest LNG plant in Norway and an outage at the Norn gas field in the North Sea, jolted markets out of their recent apathy and raised concerns over gas supplies given a lack of LNG tanker deliveries into European terminals. Weak renewable generation due to falling wind speeds across the UK and lower hydro generation across Europe given dry conditions also served to push power and gas prices higher, coming in the midst of higher overall demand due to additional air conditioning requirements as heatwave conditions took hold over much of Europe.

July

Cooler summer temperatures and a significant contribution from renewable generation helped to improve supply fundamentals, with the gradual return of Norwegian gas production following the completion of scheduled maintenance in the North Sea, helping to increase pipeline imports and make up for a lack of LNG tanker deliveries to UK terminals. With European markets trading at a premium the UK exported high volumes of power to Europe through the middle of the month via subsea interconnectors as the Continent grappled with additional air conditioning demand from heatwave conditions as well as risks surrounding hydroelectric and nuclear generation given the impact of extreme heat on European river levels. As part of efforts to meet climate targets and boost energy security the UK government opened a competition in mid-July to develop small modular nuclear reactors (SMRs) with a target operation date of the early 2030s as part of the revival of nuclear technology.

August

UK power and gas prices saw strong moves upwards from the 9th August after the announcement that workers within the Australian offshore LNG sector were considering industrial action in an effort to improve pay and working conditions. Although the UK does not import significant LNG from Australia, the threat of strike action at the gas fields that would remove 10% of global LNG supplies saw European traders panic that Asian buyers of Australian LNG outbid European shippers for American and Qatari LNG and thus add upward demand pressure to prices. By contrast, oil prices continued to trade in a narrow band around $85/bbl with the announcement from Saudi Arabia that it would extend its unilateral cut of 1 million barrels per day countered by growing pessimism about the state of the Chinese economy, with economic data releases pointing to a significant slowing of the world’s second largest economy amidst turbulence within the property and construction sectors.

September

Power and gas contracts closed the month lower with volatility abating as LNG supply concerns eased while maintenance outages at Gassco’s gas facilities in the Norwegian sector of the North Sea came to an end. The industrial action at Chevron’s Gorgon and Wheatstone plants in Australia looked to have reached a conclusion after Chevron asked the labour regulator the Fair Work Commission (FWC) to make recommendations to help resolve the dispute. Prices were also depressed by evidence of lower industrial demand as well as European gas storage levels hitting 95% of capacity, leaving the Continent in a comfortable position heading into the winter season. The government’s aim to deliver 50 gigawatts (GW) of offshore wind by 2030 was dealt a blow after there were no bids for new offshore wind project contracts in the Contracts for Difference (CfD) auction as developers indicated the guaranteed power sales price was too low to make them economically viable.

October

Power and gas contracts witnessed another volatile month during October as comfortable supply fundamentals were balanced against rising geopolitical concerns that saw significant risk premiums placed onto energy contracts. Prices started the month following September’s downtrend with high gas inventories across Europe and forecasts for mild temperatures for the early autumn period. Events in Middle East then saw prices quickly jump higher following the conflict between Israel and Hamas that saw the closure of gas platforms in the eastern Mediterranean and concerns over the transit of oil and LNG tankers through the Suez Canal and Strait of Hormuz. Energy markets were also rattled by the threat of further industrial action from Australian offshore workers that would impact LNG supplies heading into the winter as well as damage to the Balticconnector pipeline linking Finland and Estonia that raised accusations of sabotage reminiscent of the intentional damage to the Nord Stream pipeline 12 months earlier.

November

Following on from last month’s heightened volatility, power and gas markets were relatively stable during early November with mild temperatures, strong wind generation and high levels of power imports helping to offset rising demand as the UK heads into the darkest period of the year. Fears that the conflict in the Middle East could escalate and threaten the transit of energy supplies through the Suez Canal and Strait of Hormuz also subsided, helping to reduce risk premiums that had been applied to energy contracts since the middle of October. Across Europe, high winds from Storm Ciaran helped drive bearish power spot markets at the start of the month, with curve prices tracking falling carbon prices as Dec-23 EUAs lost value given high gas storage levels, comfortable gas and nuclear supply and weak industrial energy demand. Chancellor Jeremy Hunt delivered his first Autumn Statement with plans to accelerate the time it takes for clean energy businesses to access the electricity network as well as the introduction of a new, six-year Climate Change Agreement scheme that will entitle participants that meet decarbonisation targets to reduced rates of Climate Change Levy from July 2027 to March 2033.

December

Energy markets closed out the year continuing the general downward trend of 2023 with strong renewable generation, mild temperatures and comfortable gas supplies all helping to push prices lower to levels not seen since early 2022. With gas inventories at European storage sites still well above 85%, risk premiums priced into contracts for the remainder of the winter steadily fell out of contract values, with lower industrial demand over the last week of the year due to the Christmas holidays also weighing on prices. Prices saw a brief rally just before Christmas following an escalation of the conflict in the Middle East, with heightened geopolitical risks regarding the potential closure of the Suez Canal as a transit route to oil and LNG deliveries to Europe with some Middle Eastern shippers announcing they would reroute tankers around the Cape of Good Hope in South Africa following attacks on ships by Iran-backed Houthi rebels. European markets quickly discounted the threat however given high storage levels and continuing deliveries of LNG from the USA. The successful go-live of the new Viking interconnector between the UK and Denmark on the 29th December also helped to put downward pressure on prices during Christmas week, with 800MW of capacity initially available on the 1.4GW link that on current pricing will be importing cheaper power into the UK.

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