Coal Market Review and Outlook
Market Watch Cathy McClay Head of Modelling and Analysis
Agenda • Overview of drivers on the UK power market • A review of prompt prices • Forward prices • • • • •
Oil Coal Carbon Gas Power
• Key drivers for the future
Power Market Drivers
4
Winter 2010 UK Power and Gas Spot Prices Day Ahead Winter Baseload Power Prices P ric e (£ /M W h )
100
Winter 09 Winter 10
75
Power
Gas
£44.35/MWh
49p/th
17%
40%
Day ahead range
£40-80/MWh
38-66p/th
DA average to date
£49.20/MWh
51p/th
Premium over 2009
36%
60%
25 0 01-Oct 31-Oct 30-Nov 30-Dec 29-Jan 28-Feb 30-Mar
80 P ric e (p /th )
Winter 2010
50
60
Day Ahead Winter Gas Prices Winter 09 Winter 10
40 20 0 01-Oct 31-Oct 30-Nov 30-Dec 29-Jan 28-Feb 30-Mar
Price at expiry Premium over 2009
UK Power Winter 2010 – Supply/Demand Balance UK Winter Power Demand D e m a n d (G W )
60
Peak demand
50
Day ahead power 40 30 28-Sep
Winter 2009 Winter 2010 28-Oct
28-Nov
28-Dec
Supply margin
2010
2009
59 GW
58.5 GW
£80/MWh
£43/MWh
2.1GW
6.9 GW
28-Jan
• System margin 4.8GW tighter than in 2009
M a rg in (G W )
18
• Outages • Only 10% of transmission system wind generated on coldest days • Reduced output from embedded wind also increased demand
UK Winter Power System Margin
12 6
2009 2010 Forecast
0 28-Sep 28-Oct 28-Nov 28-Dec 28-Jan 28-Feb 28-Mar
• Higher power prices in Winter 10 driven by underlying fuels and system margin
UK Gas Market Winter 2010 - Demand T e m p e ra tu re (° C )
UK Daily Demand Weighted Temperatures 20
Winter 2009 Winter 2010 Long Term Avg.
15 10 5 0
-5 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
D e m a n d (m c m )
NTS Daily Gas Demand 600
Day-Ahead 66p/th
400 200 Day-Ahead 49p/th
0 01-Oct
01-Nov
01-Dec
NTS Winter 2009
01-Jan NTS Winter 2010
• Winter 2009 coldest for thirty years • Mean daytime temperature for the UK Dec-Feb 1.5C, 2.2C below long-term average • Lowest average daytime temperature was -3.6C on 7th Jan • Record high gas demand of 465.5mcm on 8th Jan
• Start to Winter 2010 coldest on record • Mean daytime temperature for the UK 1.0C, 5.2C below the long-term average • Lowest average daytime temperature on 20th Dec at -4.0C • Gas demand on 20th Dec of 464.8mcm
UK Gas Supply • UK was self-sufficient in gas until 2005/06 • UKCS gas output peaked in 2001 and has since been declining • Annual decline rate 6-12% over last 5 years • UKCS contributed 174mcm on peak day in Winter 2010, 24mcm below Winter 2009 levels
• UK heavily reliant on imports at winter peak • Increases the number of drivers on UK gas supply, increasing price uncertainty • • • •
Norway LNG Storage Interconnectors
Meeting Peak Gas Demand Winters 2009 and 2010 Gas Supply Stack on Peak Demand Day 500
• 466mcm versus 465mcm 60
Supply (mcm)
400
300
60 45 34 70
200
100
• Peak demand values in Winter 2009 and 2010 were almost identical
58 92
Storage LNG IUK
36 35 70
BBL Langeled UKCS
198
174
7th January 2010
20th December 2010
0
• Supply stack was also broadly similar • Decline in UKCS offset by an increase in LNG deliveries
• Peak demand day in Winter 09 saw day-ahead price of 49p/th compared to 66p/th for Winter 10 • Why is the price difference so large when supply and demand in both years are comparable?
LNG Flows and Stocks Cumulative Winter LNG Send-Out S e n d O u t (b c m )
10 8 6
Winter 09 Winter 10
4 2
0 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
LNG Stocks at Terminals S to c k s (m c m )
1000
S.Hook Dragon Isle of Grain
800 600 400 200 0 01-Oct
01-Nov
01-Dec
01-Jan
• LNG send-out 1.7bcm higher yr-on-yr • Averaging 63mcm/d versus 48mcm/d • Record send-out of 115mcm/d on 20th Jan 2011, 31% NTS demand • UK send-out capacity now 132mcm/d since Grain Phase III expansion
• Storage tanks at terminals provide another source of flexible supply • Storage capacity is now 1.4bcm • Can provide a maximum send-out of 132mcm for around 10 days
• Terminals all seem to use storage differently • Grain – increase flows when demand increases • South Hook – use storage to create baseload flows
Storage • Rough storage was not full by the start of Winter 2010 Volume of Gas in Rough Storage 4 2010
Store (BCM)
3 2
2009 2008
1
• Strong withdrawals through late Q410 as spot moved above balance of winter • Rough at lowest level for Q1 since 2005
• However it is not significantly below 2008 levels at this stage of the year
0 01-Oct
• Relatively tight Summer 10 market saw injections deferred until October • Facility managed to reach 95% full
01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
• Storage (or a perceived lack of it) hasn’t been the major driver on gas prices this winter
Pricing levels of Flexible UK Gas Supply UK Gas Price Convergence Points
Price (p/th)
80
Coal switching price • Gas price at which it is cheaper to run coal • Price lifted from 41p/th to 60p/th on the back of a coal price rally from $76/t to $135/t
60
40
20 01-Jan
Oil indexed price • LT contracts on Continent indexed to oil • Influences price of Norwegian and IUK gas • Lifted to 60-70p/th as oil prices rallied from $70/bbl to $90/bbl
01-Apr Spot CSP
01-Jul
01-Oct
Oil Indexed
01-Jan HH
Henry Hub • Alternative destination for LNG • Remained depressed as US is awash with gas due to unconventional sources
Pricing levels of Flexible UK Gas Supply UK Gas Price Convergence Points 80
Price (p/th)
Jan 2010 • Market over supplied with LNG • Record gas demand • Coal switching at 45p/th able to provide flexibility to balance gas market
60
40
20 01-Jan
01-Apr
Spot CSP
01-Jul Oil Indexed
01-Oct HH
01-Jan Spot NBP
Dec 2010 • Coldest start to winter on record • Strong depletion of storage • Tight power market lead to insufficient volume of coal switching • Prices move towards oil index level on increased imports across interconnector Jul 2010 • LNG market tighter plus issues with Qatari supplies • High levels of IUK exports • Coal switching at 50p/th able to provide flexibility to balance gas market
Oil Market Review and Outlook • Oil prices increased steadily towards $100/bbl on stronger fundamentals • 2010 global demand a record 87.4mbpd
Demand (mbpd)
P ric e ($ /b b l)
Front Month Brent Oil 110 100 90 80 70 60 50 Jan-10
60 50 40 30 20 10 0
• 1.2mbpd above pre-recession 2007 level • Non-OECD countries driving future demand • Increasing reliance on OPEC to meet demand growth Apr-10
Jul-10
Oct-10
• OPEC output for 2011estimated at 29.9mbpd
Jan-11
Outlook for oil market
Trends in Global Oil Demand 49.3
47.6 37.7
2007
45.4 38.6
2008
45.9 39.5
2009
41.5
2010
• Non-OECD demand to overtake OECD within the next few years • OPEC spare capacity slipping below 5mbpd • Non-OPEC supply 52.8mbpd 2010, 53.4mbpd forecast 2011 • Longer-term non-OPEC relies on higher cost, non-conventional, sources
45.7 43.1
2011
OECD Non OECD
14
Coal Market Review and Outlook • Coal prices ended 2010 on a strong footing
API2 Benchmark Coal Price
• Spot API2 up 50% since April 2010 to $125/t • Rally driven by tighter supply/demand balance
140
• Import demand growth driven by Asia Pacific
• China up 45% to 145mt, India up 30% to 80mt • GDP growth and new coal generation capacity • European imports declined 12% to 125mt
P ric e ($ /t)
120
• Exports constrained by weather and infrastructure • Flooding hit output in Indonesia and Australia • Mine safety and shortage of railcars in Russia
100
Front Month Calendar 12
80
60 Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Outlook for coal market • Asian demand to remain the major price driver
• China’s annual coal production of 3bnt and GDP growth are key, although GDP growth likely to moderate in 2011 • India set to increase its role as a major importer • Export constraints likely to remain in 2011
Carbon Market Review and Outlook • EUA Phase II very stable over the year
• Traded in a range of €13-16/t since April 10 • Few signals to inform trading
EUA Prices
• No successor to Kyoto at Cancun in December
20
• Provided a framework for Durban in Dec 2011 • Adoption of a Green Finance Fund to transfer finance/technology to developing nations • No legally binding targets due to lack of consensus
P ric e (€ /t)
15
• The introduction of a carbon price floor could send stronger signals in the UK
10 5
Outlook for EUA Market • Market trading sideways on lack of strong signals • Analyst consensus suggests €20-25 for 2011
EUA 2011 (Phase II) EUA 2013 (Phase III)
0 Jan-10
• Driven by need of coal generators to hedge
Apr-10
Jul-10
Oct-10
Jan-11
• A key driver is timely access to Phase 3 auction volumes (now 2012)
16
Gas Market Review and Outlook
P ric e (p /th )
• Gas prices recovered strongly in early 2010
UK NBP Forward Prices
80
• Gains of 20-50% (10-17p/th) • Tighter LNG market on strong global demand • In part driven by views on coal switching and oilindexed prices
60 40 Sum 11 Win 11
20 0 Jan 10
Apr 10
Jul 10
Oct 10
• Global rebound in demand key to higher prices
Sum 12 Win 12
• Global LNG market grew 56bcm (23%) in 2010 • Asian demand up 27bcm (18%) • European demand up 18bcm (30%)
Jan 11
Outlook for UK gas market • Drivers of higher demand likely to persist
D e m a n d (B c m /y r)
Annual Growth in LNG Demand 200 160
• Additional CCGT capacity across Europe • NBP remains 20p/th below oil-indexed levels • IMF forecast GDP growth in Asia
2009 2010
120 80
• Supply side appears more uncertain
40 0 Asia
Europe
S.Am & Mid East
• LNG production set to increase by around 25bcm compared to 2010 (Australia, Qatar) • First Nordstream pipeline due on-stream 2011
US
17
Power Market Review and Outlook
P ric e (£ /M W h )
60
Summer Forward Baseload Power Prices
55 50 45 40 35
Summer 11 Summer 12
30 Jan-10
P ric e (£ /M W h )
60
Apr-10
Jul-10
Oct-10
Jan-11
Winter Forward Baseload Power Prices
55 50 45 40
Winter 11 Winter 12
35 30 Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
• Forward power prices closely aligned with movements in carbon and fuel prices
• Weather-corrected demand is broadly in-line with 2009 • Generation availability adequate, despite extended outages, as 4GW of new gas plant came online
Outlook for UK Power Market • More renewable plant and another 1.3GW of gas plant add to supply in 2011 • Forward clean spreads over the next two years offer minimal returns • Deferrals of new CCGT plant • Expect more summer ‘colding’ and pressure to mothball in near-term
Key Drivers for the Future • The UK electricity market needs to be considered in a global context • Key drivers for power market • Global commodity prices, particularly gas and coal • Plant availability – new build, reliability of current fleet and potential for coal mothballing
• Key drivers for gas market • Price of sources of flexible supply • LNG, coal switching, oil indexed contracts
• Increased volatility due to a reliance on external sources of gas which can be diverted elsewhere
• Complex market can be explained after the fact • Much more difficult to forecast what is going to happen
Agenda • Overview of drivers on the UK power market • A review of prompt prices • Forward prices • • • • •
Oil Coal Carbon Gas Power
• Key drivers for the future
Power Market Drivers
4
Winter 2010 UK Power and Gas Spot Prices Day Ahead Winter Baseload Power Prices P ric e (£ /M W h )
100
Winter 09 Winter 10
75
Power
Gas
£44.35/MWh
49p/th
17%
40%
Day ahead range
£40-80/MWh
38-66p/th
DA average to date
£49.20/MWh
51p/th
Premium over 2009
36%
60%
25 0 01-Oct 31-Oct 30-Nov 30-Dec 29-Jan 28-Feb 30-Mar
80 P ric e (p /th )
Winter 2010
50
60
Day Ahead Winter Gas Prices Winter 09 Winter 10
40 20 0 01-Oct 31-Oct 30-Nov 30-Dec 29-Jan 28-Feb 30-Mar
Price at expiry Premium over 2009
UK Power Winter 2010 – Supply/Demand Balance UK Winter Power Demand D e m a n d (G W )
60
Peak demand
50
Day ahead power 40 30 28-Sep
Winter 2009 Winter 2010 28-Oct
28-Nov
28-Dec
Supply margin
2010
2009
59 GW
58.5 GW
£80/MWh
£43/MWh
2.1GW
6.9 GW
28-Jan
• System margin 4.8GW tighter than in 2009
M a rg in (G W )
18
• Outages • Only 10% of transmission system wind generated on coldest days • Reduced output from embedded wind also increased demand
UK Winter Power System Margin
12 6
2009 2010 Forecast
0 28-Sep 28-Oct 28-Nov 28-Dec 28-Jan 28-Feb 28-Mar
• Higher power prices in Winter 10 driven by underlying fuels and system margin
UK Gas Market Winter 2010 - Demand T e m p e ra tu re (° C )
UK Daily Demand Weighted Temperatures 20
Winter 2009 Winter 2010 Long Term Avg.
15 10 5 0
-5 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
D e m a n d (m c m )
NTS Daily Gas Demand 600
Day-Ahead 66p/th
400 200 Day-Ahead 49p/th
0 01-Oct
01-Nov
01-Dec
NTS Winter 2009
01-Jan NTS Winter 2010
• Winter 2009 coldest for thirty years • Mean daytime temperature for the UK Dec-Feb 1.5C, 2.2C below long-term average • Lowest average daytime temperature was -3.6C on 7th Jan • Record high gas demand of 465.5mcm on 8th Jan
• Start to Winter 2010 coldest on record • Mean daytime temperature for the UK 1.0C, 5.2C below the long-term average • Lowest average daytime temperature on 20th Dec at -4.0C • Gas demand on 20th Dec of 464.8mcm
UK Gas Supply • UK was self-sufficient in gas until 2005/06 • UKCS gas output peaked in 2001 and has since been declining • Annual decline rate 6-12% over last 5 years • UKCS contributed 174mcm on peak day in Winter 2010, 24mcm below Winter 2009 levels
• UK heavily reliant on imports at winter peak • Increases the number of drivers on UK gas supply, increasing price uncertainty • • • •
Norway LNG Storage Interconnectors
Meeting Peak Gas Demand Winters 2009 and 2010 Gas Supply Stack on Peak Demand Day 500
• 466mcm versus 465mcm 60
Supply (mcm)
400
300
60 45 34 70
200
100
• Peak demand values in Winter 2009 and 2010 were almost identical
58 92
Storage LNG IUK
36 35 70
BBL Langeled UKCS
198
174
7th January 2010
20th December 2010
0
• Supply stack was also broadly similar • Decline in UKCS offset by an increase in LNG deliveries
• Peak demand day in Winter 09 saw day-ahead price of 49p/th compared to 66p/th for Winter 10 • Why is the price difference so large when supply and demand in both years are comparable?
LNG Flows and Stocks Cumulative Winter LNG Send-Out S e n d O u t (b c m )
10 8 6
Winter 09 Winter 10
4 2
0 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
LNG Stocks at Terminals S to c k s (m c m )
1000
S.Hook Dragon Isle of Grain
800 600 400 200 0 01-Oct
01-Nov
01-Dec
01-Jan
• LNG send-out 1.7bcm higher yr-on-yr • Averaging 63mcm/d versus 48mcm/d • Record send-out of 115mcm/d on 20th Jan 2011, 31% NTS demand • UK send-out capacity now 132mcm/d since Grain Phase III expansion
• Storage tanks at terminals provide another source of flexible supply • Storage capacity is now 1.4bcm • Can provide a maximum send-out of 132mcm for around 10 days
• Terminals all seem to use storage differently • Grain – increase flows when demand increases • South Hook – use storage to create baseload flows
Storage • Rough storage was not full by the start of Winter 2010 Volume of Gas in Rough Storage 4 2010
Store (BCM)
3 2
2009 2008
1
• Strong withdrawals through late Q410 as spot moved above balance of winter • Rough at lowest level for Q1 since 2005
• However it is not significantly below 2008 levels at this stage of the year
0 01-Oct
• Relatively tight Summer 10 market saw injections deferred until October • Facility managed to reach 95% full
01-Nov 01-Dec 01-Jan 01-Feb 01-Mar
• Storage (or a perceived lack of it) hasn’t been the major driver on gas prices this winter
Pricing levels of Flexible UK Gas Supply UK Gas Price Convergence Points
Price (p/th)
80
Coal switching price • Gas price at which it is cheaper to run coal • Price lifted from 41p/th to 60p/th on the back of a coal price rally from $76/t to $135/t
60
40
20 01-Jan
Oil indexed price • LT contracts on Continent indexed to oil • Influences price of Norwegian and IUK gas • Lifted to 60-70p/th as oil prices rallied from $70/bbl to $90/bbl
01-Apr Spot CSP
01-Jul
01-Oct
Oil Indexed
01-Jan HH
Henry Hub • Alternative destination for LNG • Remained depressed as US is awash with gas due to unconventional sources
Pricing levels of Flexible UK Gas Supply UK Gas Price Convergence Points 80
Price (p/th)
Jan 2010 • Market over supplied with LNG • Record gas demand • Coal switching at 45p/th able to provide flexibility to balance gas market
60
40
20 01-Jan
01-Apr
Spot CSP
01-Jul Oil Indexed
01-Oct HH
01-Jan Spot NBP
Dec 2010 • Coldest start to winter on record • Strong depletion of storage • Tight power market lead to insufficient volume of coal switching • Prices move towards oil index level on increased imports across interconnector Jul 2010 • LNG market tighter plus issues with Qatari supplies • High levels of IUK exports • Coal switching at 50p/th able to provide flexibility to balance gas market
Oil Market Review and Outlook • Oil prices increased steadily towards $100/bbl on stronger fundamentals • 2010 global demand a record 87.4mbpd
Demand (mbpd)
P ric e ($ /b b l)
Front Month Brent Oil 110 100 90 80 70 60 50 Jan-10
60 50 40 30 20 10 0
• 1.2mbpd above pre-recession 2007 level • Non-OECD countries driving future demand • Increasing reliance on OPEC to meet demand growth Apr-10
Jul-10
Oct-10
• OPEC output for 2011estimated at 29.9mbpd
Jan-11
Outlook for oil market
Trends in Global Oil Demand 49.3
47.6 37.7
2007
45.4 38.6
2008
45.9 39.5
2009
41.5
2010
• Non-OECD demand to overtake OECD within the next few years • OPEC spare capacity slipping below 5mbpd • Non-OPEC supply 52.8mbpd 2010, 53.4mbpd forecast 2011 • Longer-term non-OPEC relies on higher cost, non-conventional, sources
45.7 43.1
2011
OECD Non OECD
14
Coal Market Review and Outlook • Coal prices ended 2010 on a strong footing
API2 Benchmark Coal Price
• Spot API2 up 50% since April 2010 to $125/t • Rally driven by tighter supply/demand balance
140
• Import demand growth driven by Asia Pacific
• China up 45% to 145mt, India up 30% to 80mt • GDP growth and new coal generation capacity • European imports declined 12% to 125mt
P ric e ($ /t)
120
• Exports constrained by weather and infrastructure • Flooding hit output in Indonesia and Australia • Mine safety and shortage of railcars in Russia
100
Front Month Calendar 12
80
60 Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Outlook for coal market • Asian demand to remain the major price driver
• China’s annual coal production of 3bnt and GDP growth are key, although GDP growth likely to moderate in 2011 • India set to increase its role as a major importer • Export constraints likely to remain in 2011
Carbon Market Review and Outlook • EUA Phase II very stable over the year
• Traded in a range of €13-16/t since April 10 • Few signals to inform trading
EUA Prices
• No successor to Kyoto at Cancun in December
20
• Provided a framework for Durban in Dec 2011 • Adoption of a Green Finance Fund to transfer finance/technology to developing nations • No legally binding targets due to lack of consensus
P ric e (€ /t)
15
• The introduction of a carbon price floor could send stronger signals in the UK
10 5
Outlook for EUA Market • Market trading sideways on lack of strong signals • Analyst consensus suggests €20-25 for 2011
EUA 2011 (Phase II) EUA 2013 (Phase III)
0 Jan-10
• Driven by need of coal generators to hedge
Apr-10
Jul-10
Oct-10
Jan-11
• A key driver is timely access to Phase 3 auction volumes (now 2012)
16
Gas Market Review and Outlook
P ric e (p /th )
• Gas prices recovered strongly in early 2010
UK NBP Forward Prices
80
• Gains of 20-50% (10-17p/th) • Tighter LNG market on strong global demand • In part driven by views on coal switching and oilindexed prices
60 40 Sum 11 Win 11
20 0 Jan 10
Apr 10
Jul 10
Oct 10
• Global rebound in demand key to higher prices
Sum 12 Win 12
• Global LNG market grew 56bcm (23%) in 2010 • Asian demand up 27bcm (18%) • European demand up 18bcm (30%)
Jan 11
Outlook for UK gas market • Drivers of higher demand likely to persist
D e m a n d (B c m /y r)
Annual Growth in LNG Demand 200 160
• Additional CCGT capacity across Europe • NBP remains 20p/th below oil-indexed levels • IMF forecast GDP growth in Asia
2009 2010
120 80
• Supply side appears more uncertain
40 0 Asia
Europe
S.Am & Mid East
• LNG production set to increase by around 25bcm compared to 2010 (Australia, Qatar) • First Nordstream pipeline due on-stream 2011
US
17
Power Market Review and Outlook
P ric e (£ /M W h )
60
Summer Forward Baseload Power Prices
55 50 45 40 35
Summer 11 Summer 12
30 Jan-10
P ric e (£ /M W h )
60
Apr-10
Jul-10
Oct-10
Jan-11
Winter Forward Baseload Power Prices
55 50 45 40
Winter 11 Winter 12
35 30 Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
• Forward power prices closely aligned with movements in carbon and fuel prices
• Weather-corrected demand is broadly in-line with 2009 • Generation availability adequate, despite extended outages, as 4GW of new gas plant came online
Outlook for UK Power Market • More renewable plant and another 1.3GW of gas plant add to supply in 2011 • Forward clean spreads over the next two years offer minimal returns • Deferrals of new CCGT plant • Expect more summer ‘colding’ and pressure to mothball in near-term
Key Drivers for the Future • The UK electricity market needs to be considered in a global context • Key drivers for power market • Global commodity prices, particularly gas and coal • Plant availability – new build, reliability of current fleet and potential for coal mothballing
• Key drivers for gas market • Price of sources of flexible supply • LNG, coal switching, oil indexed contracts
• Increased volatility due to a reliance on external sources of gas which can be diverted elsewhere
• Complex market can be explained after the fact • Much more difficult to forecast what is going to happen
