UK power flows swing to export as gas discount outweighs carbon premium

UK power flows have swung to exports due to the widening gap between UK and continental European gas prices, analysis by S&P Global Commodity Insights showed May 11.

Platts assessed NBP day-ahead gas at 38 p/th May 10, equivalent to Eur15.14/MWh versus Eur85.70/MWh for the Dutch TTF, S&P Global data show.

This more than offset higher carbon costs on UK power from the country's unilateral carbon price support (CPS) mechanism.

April was the first month of net exports for Great Britain since November 2017 with a record 4.3 GW net average on April 30, TSO data showed.

"We expect this strong export position to persist and deepen in May, supported by the combination of the NBP discount, a poor hydro outlook across much of Europe and low French nuclear," head of European power analysis at S&P Global Commodity Insights Glenn Rickson said.

Great Britain was forecast to continue to net export to France, Belgium and the Netherlands through to August, he added.

Further out, the NBP-TTF discount shrinks to around Eur20/MWh for Q3 and below Eur1/MWh for winter 2022.

Negative bids for within-day gas were reported during the Platts assessment process on May 10.

Nuclear premiums

French power meanwhile has become Europe's premium market as unprecedented reactor outages add a risk premium with record-low nuclear set to stretch into 2023.

UK power for Q3 was assessed at GBP198.15/MWh, a discount of around Eur13/MWh to France, S&P Global and exchange data show.

UK generators face a higher carbon burden with UK carbon allowances (UKAs) trading at a premium of Eur14.64/mt over EUAs in addition to the UK's Carbon Price Support (CPS) resulting in a premium of over Eur35/mt May 10.

For a 50% efficient gas unit this amounts to over Eur12/MWh premium for a UK-based plant, even higher for less efficient units.

This carbon premium however has been outweighed by the unprecedented discount for NBP gas.

Spare CCGT capacity

On average, Great Britain has 7.8 GW of spare gas generation capacity out of a total 30 GW that could turn up if needed for the balance of 2022, lower than historical levels but above the 2.5 GW spare capacity early May amid a lull in wind, according to SPGCI's base case.

Gas generation averaged 18.3 GW May 2-8, while average wind output plunged to 2.5 GW, UK grid data show.

"Interconnector availability, rather than gas plant availability, is likely to be the primary constraint on GB gas generation upside this summer," SPGCI's Rickson said.

The UK could export 5 GW to the Continent on links with France, Belgium, and the Netherlands until July when the new 1 GW ElecLink with France is scheduled to commission.

Half of the 2 GW IFA-1 interconnector is still offline, while the 1.4 GW link with Norway is set to reach full capacity mid-June.

Bearish prices already triggered rare northbound flows on the North Sea Link cable as power in Norway's southern bidding zone hit record highs.

UK power for May 11 was assessed at GBP86/MWh compared to Eur174.42/MWh for Norway's NO2, S&P Global data show.

Norway's position as net exporter should resume once snowmelt replenishes reservoirs.

At full capacity, GB interconnectors could transmit 70 TWh/year, but net values are lower as flows change frequently amid supply and demand swings.

Short-lived discount window

Based on a current carbon price differential of Eur35/mt and assuming 50% CCGT efficiency, SPGCI estimates that NBP gas needs to maintain a discount of over Eur6/MWh to Continental gas hubs for GB gas dispatch costs to cancel out the UK carbon premium.

On the French interconnectors, SPGCI does not anticipate GB to be a consistent net exporter to France next unlike forward markets, Rickson said.

French winter contracts currently trade above Eur500/MWh, while Platts assessed UK winter at Eur207.41/MWh equivalent May 10.

SPGCI forecasts a Eur7/MWh premium for GB over France for Winter 2022 and as it seen upside for NBP gas with LNG regasification capacity set to increase in Europe, according to its latest weekly report published May 4.

GB gas demand is also set to rebound and without storage to balance the spread risk between NBP and mainland Europe may move into 2023, SPGCI said adding that this view depends on Russian gas flows remaining undisrupted.

Additional LNG capacity with Germany alone aiming to have four FSRUs online next summer may reduce the risk of such a dislocation repeated.

"This summer's NBP gas price discount has transformed the traditional dynamic of GB power being Europe's premium market due to its structurally higher carbon price," Rickson said adding "this window is expected be short-lived with GB to revert to net power imports in Winter 2022."

The UK government has extended the CPS tax of GBP18/mt to 2023-24.