After what was an extremely tough year for businesses and the energy sector alike, the start of 2021 has provided us with an interesting opportunity to see how the rest of the year could unfold.
Here, we'll take a look at what 2021 has in store for the UK energy industry. We'll touch on everything from the ongoing pandemic and the rise of renewables to oil prices and LNG performance.
We hope the insights provided equip you with some useful information you can use to plan for the year ahead.
Demand for the Winter '20 period averaged around 277mcm, which was around 9mcm lower than the seasonal average and around 3mcm lower than Winter '19's average.
The reduced demand has caused issues for system operators, making forecasting a challenge. System operators now have to plan for numerous scenarios, working closely with both government and energy regulators to ensure energy remains affordable, supply stays secure, and that the generation mix is balanced.
It's suggested that the increased roll-out of the vaccine and a decrease in lockdown restrictions might be key to greater supply and demand. As a degree of normality resumes through non-essential businesses re-opening and more people receiving vaccinations, we could see demand increase once again.
Mark Doyle, Manager of Corporate Accounts at Gazprom Energy, noted that European gas storage levels rose steadily in the second half of 2020 due to a milder winter on the continent, which increased supply as a result. However, the colder weather that swept across Europe early on in 2021 saw levels decrease and demand increase accordingly.
After a lull earlier in the year, the start of Winter '20 saw increased LNG activity. As the season progressed, 90 cargoes were delivered to Great Britain, thanks largely to the efforts of the US, Russia and Qatar, all of which were the largest providers of LNG during the period. In fact, LNG imports from the US to Great Britain were around 6.8 million tonnes.
Of note, however, cargo that was previously bound for the UK and Europe were redirected to Asia in January, which reduced supply and drove up demand. As a result, shipping rates for LNG across the Atlantic grew higher, to an average of $300,000. Broadly, however, LNG wasn't badly affected during the pandemic, seeing only a 1.5% YoY decrease.
For a more in-depth comparison of LNG imports between the Winter '20 period compared to the Winter '19, see the tables below.
How will LNG be affected going forward? That may depend on how it recovers in terms of demand. As we enter summer ‘21, there could well be additional pressure on LNG supply. Slow returning demand is unlikely to result in an oversupplied market, but supply across the country could remain tight throughout the rest of the summer.
Even with the resulting increased demand from Asia, and Europe receiving temperatures in December and January that, seasonally, were below what we would expect, storage capacity saw plenty of usage over the course of 2020. In fact, gas storage levels last year were generally higher than the prior three years; even 2020's troughs largely remained higher than the troughs of '19, '18, and '17 for the most part.
Storage injection auctions – where users have the opportunity to purchase bundled annual products consisting of injection capacity, withdrawal capacity and working gas volume – were also held at the end of February, further adding to the increase in gas storage, in time for injection season, which typically begins around the end of March and beginning of April.
Oil prices took a nosedive during the pandemic, making future pricing tough due to weaker economies and plummeting demand. OPEC (Organization of the Petroleum Exporting Countries) announced the world's largest production cut measures as a result, slashing its output by around 10 million barrels per day.
This production cut schedule depends on the return of demand throughout 2021. After the above reduction, the number has been cut further, with the number for the period of January 2021 to April 2022 now set at 5.8 million barrels per day. Saudi Arabia, meanwhile, voluntarily promise cuts of around 1 million barrels a day, which began earlier this year in February.
It’s forecasted elsewhere that with the Pfizer vaccine making its way through the UK and US, world oil demand may increase to 6.6 million barrels per day year-on-year in 2021. The same source contends that oil demand in China has strengthened to levels higher than the same period of 2019 – will other countries soon follow suit?
As the vaccine rolls out, there's been some good news for the country as a whole. Compared to the Euro and USD, GBP grew in strength over the Winter '20 period. Furthermore, with more than 50 million COVID-19 vaccinations already rolled out (as of May ’21), the UK is one of the world’s most protected nations.
However, some larger European countries paused the AstraZeneca/Oxford University vaccine, which slowed the rollout in these areas and slightly hindered future demand.
In terms of Nord Stream 2, the new export gas pipeline running from Russia to Europe across the Baltic Sea, the winter saw further developments. Upon its proposed early 2021 completion, the project could see an increase of Russia's supply of gas into Europe by ~55bcm every year.
However, the Biden administration is considering imposing further sanctions which could block the nearly completed pipeline. Such sanctions aim to single out insurance companies that have provided support and materials on the project.
Due to cold weather, low supply and Saudi Arabia's aforementioned voluntary production cuts, day-ahead prices for power remained volatile throughout the year, with peak volatility occurring in January, where prices reached between £200 and £220 per MWh.
As for its generation mix, wind generation is up, after slowly creeping up YoY since 2017, while a 25% decrease in nuclear generation points to an increase in green approaches and renewables.
The sector is expected to remain strong despite the effects of the pandemic. Moving from seventh to sixth on the Renewable Energy Country Attractiveness Index, the UK's improved position is based on the decision to include onshore wind and solar projects in forthcoming Contracts for Difference auctions – the fourth round of which is set to open in 2021.
Even before the pandemic spread across the globe, 2020 was set to be a year of low demand for Carbon and EUA. However, high auction volumes coming to market across Great Britain actually resulted in quite the opposite.
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And as businesses seek cheaper gas prices, we've seen an increase in fuel switching, with dirtier, more expensive fuels like coal and lignite being passed over in favour of alternatives.
As for Carbon spot prices, the cost increased from €16/tonne to €42/tonne in the space of 12 months, despite occurring across a period beset by reduced economic activity and emissions.
What does 2021 mean for the Emissions Trading Scheme (ETS) in this country? It's thought a UK ETS linked to an EU ETS would be the most cost-effective way to achieve the country's 2050 net-zero emissions goals, according to the EFET.
Indeed, there are concerns that a standalone UK ETS would be faced with liquidity issues. Combined with an EU ETS, it would give us the requisite size to avoid such issues. Likewise, on its own, a UK ETS may well put UK installations at a competitive disadvantage to the EU ETS due to a lack of a level playing field.
Elsewhere, a standalone UK ETS could also result in lower power market liquidity, higher risk-management costs and higher power prices, while Market Participants would also miss out on opportunities to hedge their allowances.
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