Geopolitics trump fundamentals

The months ahead will be filled with uncertainty – and price volatility – as energy market participants assess the consequences of the escalating conflict in the Middle East and potential sabotage to the gas pipeline linking Finland with Estonia. Will these events override market fundamentals? Listen to a discussion of the key developments in UK and continental wholesale power and gas markets in the last quarter and the outlook for the coming months. 

Host: Snjólfur Richard Sverrisson, Editor-in-Chief, Montel

Guests: Jean-Paul Harreman, Director, Montel EnAppSys, 
                  Paul Buckworth, Principal Consultant, Montel EnAppSys.

Transcript

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly Podcast. Bring Your Energy Matters in an informal setting. In today's pod, we take a look back at the key developments in UK and continental energy markets over the last quarter, as well as discussing what the issues will be in the coming months. Will the downward trend in energy demand continue? What will happen to prices? And most crucially, does everything depend on the weather. I'm Richard Sverrisson, and joining me today are two experts from Montels EnAppSys., a warm welcome, Paul Buckworth and Jean-Paul Harreman. Before we take a deep dive into the report that you guys wrote about the last quarter and discuss the following months, I'd just like to, two recent events have highlighted or thrown a lot of uncertainty in, into markets, and I'd like to start off with the Baltic pipe. Incident. We dunno what's happened there. The gas pipe connecting Finland and Estonia suffered a massive loss of pressure. There's suspected sabotage. We dunno, but, I know we, we can't really speculate what happened here, but what are the implications for for the market here, the European gas and power markets. Paul, what's your initial reaction? Does this raise questions about the vulnerability of energy infrastructure?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 1:21

Indeed, yes. Yeah. I think it it does very much highlight that. I think the trends that we've seen in recent weeks and months have seen an easing. If you like of the perceived pressures in the market that came about following the buildup to, and the aftermath of the outbreak of the Ukraine war and the and some of those pressures of have eased debate, although we have seen jitteriness in the markets and spikes in market prices in response to, to, to short term events. But this latest development really does, I think, highlight that and bring into to. Clear view that potential vulnerability of supply to infrastructure exposure and risks such as that. And I think that will likely feed through into to market sentiment. And potentially we see prices spike e even. Without further impact on infrastructure, just the risk premium that, that, that will be there. It'll create its own pressures, I think.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:22

Jean-Paul what's your view here? We've seen incidents at both the Nord Stream and now the btic pipe, neither, which we know exactly what happened, but is it more the gas infrastructure that's vulnerable or is the sort of power infrastructure also problematic here?

Jean-Paul Harreman, Director, Montel EnAppSys: 2:37

Yes. We've seen some studies on, on, yeah on the offshore industry as well. So offshore winds of course. Yeah. Far away from any protection. So yeah, you would say that has similar vulnerabilities and it's just feeding into a little bit of the nervousness in of the markets. So we're seeing a very tight supply demand balance. You can see even. Even rumors or sentiments are affecting prices quite quickly.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 3:05

And what about the Arab Israeli conflict? Now, we've seen some horrendous incidents in the in, in Israel and in Palestine. Is there risk here that there could be contagion into global oil and gas markets here paul?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 3:19

Very much I would've said any escalation is will certainly feed through into market sentiment. I do wonder, it's not my area, but, any escalation that could draw other nations and produce a nations into any sanctions regimes would have. Likely have a major impact on energy, supplies, gas and oil and feed through into electricity prices. I think despite what I said earlier about the situation of having eased in recent weeks and months, there, there is still tightness there and the response to any events that we've seen is quite marked. This is just an order of magnitude more serious than any of those other events that we've seen over summer that have fed through into pricing and supplies.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:00

Jean Paul, what's your view?

Jean-Paul Harreman, Director, Montel EnAppSys: 4:01

I think, the direct exports from Israel to the European Union are quite limited. I think yeah, it's, but it's the political effect of it. So if indeed other nations get drawn into the conflict that may Yeah, a lot of the, a lot of the Arab world is, are major suppliers of of gas to the world. Yeah, a, it's a tight balance. And yeah, the re recent history has shown that conflicts can get out of hand quite quickly.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:30

It's a bit of a powder keg in a way, isn't it? Okay. Let's go onto the quarterly reports that both of you authored. For an in Q3, we saw what happened to prices Jean Paul on the, on in continental Europe. What were the trends here?

Jean-Paul Harreman, Director, Montel EnAppSys: 4:44

Yeah, we've seen quite, quite a relaxation on, on, on prices. So we've seen a drop. Yeah. Partially because of the drop in gas prices. Also the gas storages are quite full. The hydro situation is quite comfortable. So you're seeing a lot of, a lot lower prices, especially compared to last year, but also compared to the previous quarter and we're, yeah. It's also produced some extreme events in terms of negative prices. So the Netherlands is a clear example with a lot of negative prices due to the immense solar developments. But we've also seen negative prices in Scandinavia, which is quite interesting because that used to be in a region that was quite well safeguarded from negative prices. So Finland is the biggest example where the nuclear power plant basically Yeah. Increased the base load level and yeah, that sort of results in some surplus situations, but also the prices of GOs have. Have increased quite considerably, which means that even if you run at se at the price of zero, you can still make money on your guarantees of origin. So yeah. Interesting developments.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 5:57

And do you expect these sort of trends to continue in, in the coming months as well? I know you know, that we are entering the darker months as it were, so solar shouldn't have too much of an impact, but I'm sure it still have some some consequences.

Jean-Paul Harreman, Director, Montel EnAppSys: 6:09

Yeah. We're going to see higher prices than this quarter, of course, because. Yeah, it's winter and demand is higher, but yes the wind is coming back. So we're going to see surpluses that last a bit longer. And I think if looking at Scandinavia, so in, in the past we used to see flows from Scandinavia to the continent, basically nonstop. Over the summer we've seen. Reversal vi reversal of interconnectors quite complete. I think that's a trend we're definitely going to keep seeing.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:38

And in the UK Paul what were the major sort of trends in, in, in the last quarter?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 6:43

Very much downward trend on icing, similar to or John Paul has described, and continental Europe that's driven by the linkage between gas and electricity prices, albeit the, there's a general downward trend. Through the whole year really, but that's certainly continued through Q3, with the exception of some blips in July, which I think were related to prolonged or longer than expected outages in some of the gas fields. I think Hamer and Norway was the one I recall. And then. In late August, early September, there was prospect of an Australian LNG strike disrupting supplies, and that sent worldwide gas prices and LNG prices upwards for a period and that fed through into what we saw in electricity prices, perhaps lesser extent of negative pricing in gb. Less, less pronounced. We saw intervals in early July, which I think was a windy period, and then in, in early to mid-September where we saw another very windy period. So there's a high level of renewable output coupled with the low levels of demand that we see at this time of year. So it creating an excess of supply and that fed through into negative prices in the day ahead market. And those. Periods in the balancing mechanism, we probably see negative prices to a greater extent. But and those are localized and reflect transmission constraints. So don't filter through into the day ahead pricing and in quite the same way, albeit the customer ultimately. Here's the cost of those in their bills.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 8:30

Absolutely. What do you expect in the coming months Paul? As John Paul has said, there's more demand and the, it's, but potentially that could be counterbalanced by more wind.

Paul Buckworth, Principal Consultant, Montel EnAppSys: 8:39

Yes. Yeah, indeed. Demand will hiccup as we move into the winter so that seasonal pattern will reestablish. In Q3, one of, one of the. In fact, a lot of recent quarters we've seen very low levels demand against historical norms, and that, that reflects a number of things. I think there's price sensitivity to the high prices, probably being the main one, but also some growth in renewable, so embedded renewable generation and even behind the meter. Renewable generation so that reduces the apparent demand at transmission level. So that, that trend is still there. In terms of the growth of renewables, we saw high levels of renewable output in Q3, I think it was the highest Q3 we've we've seen and looking back at historical quarters the same quarter historically, and that reflects the underlying upward trend in, in installed capacity, yet going into the winter. Obviously solar will decline that has very seasonal output. Wind tends to be less seasonal, but there is, there, it is higher in winter, generally than summer, but the differential between summer and winter is obviously far less rather than for solar.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 9:55

But as you mentioned as well, Paul, the, with the Australian. Strike and how jittery the market was or how prices spiked, not just in the UK and Europe, but across the world. The market is still very nervous as what's was being reflected in the price of gas this week on the continent and in the UK given the situation in the btic pipe and the questions around infrastructure as well as the Arab Israeli conflict. So we can expect maybe more, more of the same kind of volatility going forward.

Paul Buckworth, Principal Consultant, Montel EnAppSys: 10:24

I think so, yeah, potentially accentuated because of the winter, increases in demand and the, there's less headroom, if you like, for, to accommodate any shocks in the supply demand balance. So I think through the summer there, there's certain jitteriness there, despite the fact that storage was being filled and at high levels and. Whatever short term disruptions there might have been. The longer term trend was that storage would be filled by the end of the summer, and despite that, there's still occasional jitteriness, I think going into the winter. Yeah. The, anything that impacts that balance and eats into any headroom that might be there will. Feed through into the market and we'll see quite sharp reactions to that to any such events I would imagine.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:16

Absolutely. John Paul, we talked a little bit about demand. Could, what did you, what are we seeing in, in Q3? And, there's a lot of talk about demand destruction, anything from on the industrial side, also households what happened in Q3 and what can we expect over the coming, months? Is any of that, that. The industrial demand gonna return?

Jean-Paul Harreman, Director, Montel EnAppSys: 11:36

I don't think any that's going to return on the short term. So we've seen demand destruction in the chemical industry and the steel industry, in the paper industry. Some of that is shifting production to the continents. So yeah, if prices drop down low enough that might come back, but there's also some permanent. The permanent closures that have happened. So I think with demand now being at similar levels then during COVID, yeah. We're not going to see this come back to the old level anytime soon. Of course, next to demand destruction, there's also demand creation slowly starting to pick up with power, two x technologies and people starting to develop. Yeah. Electrolyzers and hydrogen generation sites. But yeah, that's, it's a question mark how fast that's going to come and how big of an impact that's going to have. This's definitely not gonna have a major impact this winter.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 12:38

And maybe next year do you think? The, that the power to x being power to, to hydrogen generation, isn't it? Power to hydrogen production.

Jean-Paul Harreman, Director, Montel EnAppSys: 12:45

Power to hydrogen, power to ammonia. Yeah. That's, so it those assets don't take. Too long to build, but a permitting process can be quite lengthy. So it's a bit of a question mark how fast it's going to go.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 12:57

So maybe something for later this decade rather than the next coming years. Yeah, absolutely. Paul, what's the situation in the UK?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 13:04

I think that's very similar. We've seen, industrial demand decline in response to high prices and then, and possibly also domestic demand and. E even demand flexibility schemes introduced to, to manage demand at system peaks. Yeah. I don't expect that to to come back at any great rate really. I think that will be a slow recovery process.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:33

And demand creation that John will mention. Is any of that happening in a similar way in the UK?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 13:37

Yes. Yeah. There, there's various schemes for. Electrolysis and hydrogen production that, that we're aware of. And also electrification of heating is at a commercial and industrial level. We're seeing potential development of that and also the domestic level, the government is, has. Very much been pushing heat pumps as a solution. So that's definitely the direction of travel. The extent to which we see it in the immediate near term is probably limited. But it will start to, to happen.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:10

And there's been obviously some rollback. We've discussed this in a previous podcast rollback from the present government as well, and which maybe could hit demand in the coming year or two. Would you say that, would that be too. Too hard to make that judgment call there or?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 14:24

Yeah, I'm sure it will. I'm not sure what the latest position on heat pumps is, but certainly on e electric cars the mandate's been pushed back from 2030 to 35. I think there's probably a similar diff delay in, in, in the heat pump targets. And that will inevitably I would think, feed through into. The customer's appetite for these things. If there's that uncertainty there, Robert, it a lack of mandate for it then I think we'll see a slower take up.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:53

Absolutely. John Paul, turning to electricity generation what were the main trends you saw in the last quarter? I know the big story was solar in the Netherlands, wasn't it?

Jean-Paul Harreman, Director, Montel EnAppSys: 15:03

Yes. Yeah. Solar in the Netherlands produced a minus 500 price at sell point. We. We've seen many second round auctions in the day ahead market until the rules were changed. So surprisingly we didn't get to a situation where the minimum price on the day ahead, market changed. That was, there was a, there were a few near misses there, so that was definitely an interesting event on the market with such a small country having such a large effect on basically the whole country, the continent. So Germany is also seeing this huge solar development. We're seeing a Hungary starting to catch on. We're seeing Poland, but even the Scandinavian countries starting to develop quite a lot of solar. So yeah, that is a trend that is ongoing and will continue to go for a while.'cause yeah, it's just an easy thing to do if you're a household, put solar panels on your roof, that reduces your energy bill. At least it does. If you're not in the Netherlands and you don't have a market index based contracts on hourly level, because then sun Sunday mornings, it can get quite expensive. We've actually seen people asking on Twitter, if you live in the neighborhood, please come charge your car on Sunday morning because otherwise you have to pay. So yeah quite interesting developments. But yes, so increasing renewables is the main headline. We've seen some closures of capacity nuclear in Belgium and Germany, but despite those closures, we've seen lower gas and coal and ignite production across Europe. So yeah the ex, the extra renewables are offsetting the closures of the nukes, which is interesting. It also means that there's a lot of slack in the system. So if we get a harsh winter there's enough. Gas and coal capacity to run, fill the gaps. So there's definitely not, or at least not looking like it right now. Security of supply issue.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:08

Obviously the boost to the market was with increased availability of the French nuclear fleet as well?

Jean-Paul Harreman, Director, Montel EnAppSys: 17:13

Absolutely. Yeah. That was the thing I was, I almost forgot. So the French have gotten their act together and basically improved the availability of nuclear assets by about 35%. They're still not at. The historic average levels, but they're a lot better and said, yes, it are coming back slowly for the winter as well. So that's looking a lot less dim than last year.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 17:38

Perfect. And so the story would be really increased renewables production, less fossil fuel on the continent? Yes. Yeah. And what's in and in gb Paul?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 17:47

Very similar. Yes. Yeah. We saw very high levels of renewable output in Q3. Coupled with lower demand, and that's really squeezed the requirement for gas fire generation. So that the figures for CCGT output look, look really quite low by historical standards. I think 20 terawatt hours for the quarter, whereas, 25 terawatt hours for. Q3 is a, a typical figure for previous years

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 18:22

for gas fired plants. For gas fired, yeah.

Paul Buckworth, Principal Consultant, Montel EnAppSys: 18:24

Yeah. So that, that certainly reduced the requirement for gas fired plants, interconnector. So we've, in all quarters this year, GB has been a, an importer of electricity again after I think the three quarters where we were last year, where we. It's a combination of the French nuclear outages and the long drought last year that GB was in the unusual position of being an exporter of electricity. Actually, the other factor in that was that because of the LNG facilities in gb, we were able to import gas convert that into electricity and export the electricity to the European markets as a and displace the requirement for gas fire generation in Europe, which. Which was more affected by the Ukraine war and didn't have the same LNG capacity. Yeah. And I think we saw that a consequence of that last year was the, it's push up the price of CO2 allowances in the UK relative to the European scheme. And we now seem to be seeing the converse of that. So the differential's gone the other way now and in recent weeks and months that's now at a discount to the European scheme, albeit we do have the kinda unilaterally imposed CPS scheme that applies an additional carbon charge.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:50

What's that? An abbreviation for? For those who aren't in the notebook? Sorry.

Paul Buckworth, Principal Consultant, Montel EnAppSys: 19:53

That's the carbon price hort. It's the climate change levy carbon price support. Tariff. So it's a fixed tariff per megawatt hour of input fuel.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:02

On inputs from Norway up as well. Paul? In, in Q3?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 20:07

Yes. Yeah, there's been consistent imports from Norway, I think through for it was a whole year. Yeah. There've been a few occasions where it's gone the other way, but they're very isolated. That's a contrast to last year where we did see more. Along periods of exports from GB into Norway, which I think was a consequence of the drought that we saw through the summer months last year.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 20:33

Absolutely. And what are your expectations then, for the coming months in terms of generation in the UK? Is it gonna, or. Is gas gonna come back? What's, are you expecting potentially more wind but solar's not gonna have that much of a, an impact. So what are gonna be the main generating facilities going forward?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 20:52

Yeah. Solar decline, wind should be there. But the underlying seasonal increase in demand will push demand up and it will be gas that, would fill the gap.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 21:03

Excellent. Paul. And just to round off, I think you know, a lot depends, as I said in the intro, on, on temperatures going forward here what are you what's the winter looking like at the moment? Jean Paul? I know it's a bit hard to say and you're not a meteorologist, but what are your kind of expectations here?

Jean-Paul Harreman, Director, Montel EnAppSys: 21:21

All the building blocks were nicely in place for a very moderate winter in terms of energy prices. So the gas storages were nicely filled. The hydro situation is better than average. So that looked all pretty, pretty comfortable. Even a harsh winter would not really put us in any problems apart from sentiment maybe. But yes, we're seeing now. Quite a lot of political or geopolitical movements which just introduces additional uncertainty in the market, which means that even if the fundamentals are right, we may still see yeah, pressure on upward pressure on prices. So that risk, I think is considerable. I think we're definitely going to see volatility based on changing information. And I do think there, yeah, there are parties that have a benefit in having or creating uncertainty. So yeah there's all kinds of things happening at the same time. But fundamentally, it looks all very moderate for the winter. The supply situation would be very good if we, if there wouldn't be these geopolitical pressures.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 22:34

And Paul finally, do you, would you agree with John Paul here that geopolitics Trumps fundamentals going forward?

Paul Buckworth, Principal Consultant, Montel EnAppSys: 22:40

Yes, I think so. Yeah, the, whatever the fundamentals are and the fundamentals are robust, the geopolitics has the capability to, to change those fundamentally in a very short space of time and just fundamentally change it, everybody's assumptions as to what the, as to market stability and security. Yeah. And importantly the sentiment around that and the risk premiums that need to be factored into market trading activity.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 23:10

Absolutely. So we'll see what the next few weeks bring. It's certainly looking un very uncertain at the moment. But in the meantime, gentlemen, thank you very much for being guests on the Montel Weekly podcast.

Jean-Paul Harreman, Director, Montel EnAppSys: 23:21

You're welcome.

Paul Buckworth, Principal Consultant, Montel EnAppSys: 23:22

You're welcome. Thank you.