Thursday April 13, 2023

The winter has seen a huge shift in the outlook for the gas and power markets, with concerns about the security of supplied trumped by the very warm temperatures seen in Europe and very strong wind generation.

The UK has actually seen temperatures this winter that are similar to last year, with the average London temperatures only 0.1 degree different over the six months of winter. However, temperatures on the continent have been considerably higher than normal, with averages temperatures in Austria 1.2 degrees above the previous year and 1.8 above the normal. These higher temperatures have reduced consumption with an average drop across the EU of 19% below the ‘Save Gas for Winter’ target of a 15% reduction.

This has left Europe with a lot more gas in store at the start of the summer, reducing the need for injections this summer. However, this is a midterm boon but does little to replace the gas which has been lost to the system with only minimal Russian flows into Europe.


Peak, Average Peak and Average Demand

In the UK, the winter was characterised by generally warm and windy conditions with a few cold snaps that were also windless. The cold windless spell was the issue that was most likely to test the UK system, and the doomsday scenario that could lead to blackouts. The UK experienced these conditions for a week in December and having survived this test, the market has been falling ever since.

The winter has thrown up a few interesting observations. First looking at demand, the December cold snap produced the highest demand in three years. While this peak was an outlier, the trend is clear with a considerable drop in average demand and drop in peak demand.



The magnitude of the cold peaks is also decreasing with fewer peaks over 43GW than ever before, with just 11 peak demands over 43 GW compared to 32 in Winter 2021. The extreme prices are evidently going some way to reduce demand.


Average Hourly Generation

While demand reduction has been a major boost this winter, the supply make up has also seen some big changes with more wind generation than ever before, producing 32.4% of electricity this winter.



The large increase in wind generation is due to the increase in installed capacity, as average wind speeds were below last winter’s levels. There was a small decline in gas fired generation which reduced gas usage in power generation by 3% on the previous year. Interconnector flows were lower as in October and November saw net exports, until the UK gas price discount to the continent was erased, and the UK stopped producing power to send to the continent. Since December, Interconnector flows have been 20% higher than last winter.


Gas Supply and Demand Breakdown

On the gas side, the main reduction has come in gas demand. There has been a considerable reduction in Local gas demand, which as temperatures across the whole six month period are largely similar, must predominantly be driven by consumer behaviour.



This consume behaviour is also apparent in the halving of Industry demand in the last two years. The other factor seen in Gas demand is that two years ago, we took gas from the continent and this winter, we supplied 40mcm/d of gas a day on average into the continent.



The gas was available because the UK was getting much more gas from LNG, this has come due to the UKs plentiful import capacity due to its three terminals. This has enabled LNG supply to rise considerably and there be enough gas to send into the continent.


Energy Prices

The high prices seen at the end of the summer, coupled with milder weather and increased wind generation, saw significant demand reductions over the winter. As the season progressed, this lower demand and strong LNG arrivals across Europe saw prices, which had been moving lower since late August, fall significantly at the end of 2022 and continue into this year.



Gas storage in Europe remained significantly higher than the previous winter and French nuclear generation levels also increased. As we ended the winter season, European gas storage remained at over 55% of capacity, meaning that over 300TWh less gas will need to be injected into storage this summer compared to last year.

In recent weeks, the downward trajectory has slowed as buying interest has returned. News of further potential issues with French nuclear generation provided support in March and more recently colder weather forecasts for early April, and production cuts by OPEC have seen prices rise from this years lows seen in March.

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