Wholesale prices rise as energy demand increases
Published: 30 July 2020 - Rachael Morling
Research from Cornwall Insight shows that as energy demand has risen due to lockdown restrictions being eased, wholesale prices have also increased. In fact, the day-ahead power price (while typically remaining volatile) recently peaked at £33.10/MWh on 8 July; the highest price traded for the contract since pre-COVID lockdown.
In a similar vein, front-month power contracts are no longer in backwardation, while the annual October 20 contract is at its highest price since mid-January. The below graph compares the increase in electricity demand to the annual October 20 contract.
Sam Nicholls, Analyst at Cornwall Insight, said:“There is no doubt that the easing of lockdown measures has helped the market lift from substantial lows. With the slow re-opening of the economy, increased business activity has likely driven daytime demand higher. This increase in demand correlates with the steady price gains seen in June and July.
“While broader commodity drivers and weather has impacted the wholesale market, it is clear that the recovery in demand is bringing value back to the typical within-day price. Higher demand should also be able to absorb more of the solar and wind fleet when generating, limiting the cannibalisation trends the market has seen recently.
“A less obvious driver for the recent price gains has been the surge in EU ETS carbon prices, which rose on the easing of lockdown in European countries and has boosted thermal generation levels. Since the start of June, the cost of EUA’s has soared by nearly 50% to reach a 14-year high of €30.57/t.
“Although the GB power market is beginning to return to pre-COVID levels, there are concerns over the sustainability of growth in the coming months. Rising demand as we head towards winter will look to support prices in the short-term, but weak economic results could hinder future growth. What is clear is that even a small level of overall demand destruction from the COVID-19 crisis would have lasting impacts for wholesale prices.”