Posted on: 16/04/2020
As the impacts of Covid-19 continue to be felt across the globe, Head of Markets, Bozhidar Bozhkov takes a look at how power markets in the UK and across Europe are responding to the situation, as well as what this means for generators.
As we reach the 4th week of extraordinary measures designed to contain the spread of coronavirus, global commodity markets have been reacting to self-isolation, social distancing and the new demands of our changed societies.
The overall need for power remains of course, but depending on where you are in the world, this can vary quite widely. In the UK for example, demand is down 12% compared to the opening week in March, as increased domestic demand has balanced off against reduced need from the industrial and commercial sector. That said, demand in the UK is only down around 5% year-on-year for the same period. By way of comparison, worst-affected Italy has seen an overall reduction of around 26%!
Diving a little deeper, it’s also interesting to compare the consumption profiles of the two countries. Perhaps surprisingly, UK demand is not showing any particular shifts across settlement periods – remaining relatively steady across the day - in contrast to Italy and Spain where morning peak (around 08:00) is down 15%. Similarly, demand during working hours in the UK only really reflects the general drop in demand (around 4.6GW on average), whereas Italy is showing up to a 30% decrease between 9am-5pm.
All of these factors have of course led to a drop in power prices overall. This is evidenced by UK seasonal contracts now being in contango and the Summer-20 contract closing at its all-time low of £26.50/MWh at the end of March.
Of course, the decline in wholesale markets is even more obvious in spot prices. The average monthly UK APX spot price for example is down 33% year on year – less than £30/MWh.
So, what does this mean for generation projects which rely on the wholesale market as one of their key revenue streams? Well, that depends on the nature of the project.
Renewable projects supported by the Renewables Obligation are the most affected, due the fact they are reliant on capturing wholesale values alongside Renewables Obligation Certificate (ROC) payments and embedded benefits.
By contrast, Contracts for Difference (CFD) generators are protected against the drop in wholesale prices thanks to the fact that CfD generators are paid their agreed strike price for every MWh of power they produce – albeit this means the cost of covering difference payments has increased for end consumers as a result. Similarly, the revenues of generators supported by the Feed-in Tariff (FiT) are more robust due to their agreed price provided by their generation/export tariff.
In terms of generation type, solar is expected to be most affected by wholesale price drops (and potentially demand destruction further reducing prices) as most projects above 5MW are ROC-based projects and therefore more exposed to wholesale volatility. Onshore wind generation is in a similar position, although it is thought to be slightly better insulated from the shock.
By contrast, Combined Cycle Gas Turbines (CCGT) projects are less exposed, owing to Capacity Market contracts and their flexible nature making them perfect participants for the Balancing Mechanism, alongside other ancillary services.
Depending on the type of your generation project, and the nature of its revenue streams, Covid-19 will have varying effects. Whilst the impacts may affect some more negatively than others, the initial data ultimately shows us that the demand for power in the UK remains. With countries in Europe just beginning to ease some social restrictions, the hope is that it won’t be too long before the UK allows for the industrial and commercial sector to return to work, improving the landscape for generation projects.