Bad news for coal as wholesale power prices boost UK gas generation

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UK wholesale power prices dropped to a two-year low on Monday 5th January, representing good news for gas generators.

The ICIS Power Index (IPI) is now just £46.316/MWh, the cheapest since July 2012 and while that is good news for the gas sector, it’s not so good for coal power generation.

For generators, the falling power price is influenced by lower fuel prices – but gas prices have fallen more than power over the last year, so gas-fired power generation is more profitable.

“Forward power prices have been affected by warmer winter weather than usual, and more LNG continues to flow into the UK, which also helps to keep fuel costs for gas-fired generation lower,” Zoe Double, Head of Power at ICIS told Power Engineering International. “This continues the downward trend in power prices that we saw over 2014, and helps to bring down the wholesale portion of household energy bills.”

Gas prices have a strong influence on power because gas is the most flexible generation in the UK, and therefore price-sensitive. However, with gas prices falling, coal prices have fallen as well, so coal-fired generation has lost profitability. In addition, the carbon price support is still taking its toll, and has more influence on coal than gas.

During the summer of 2014, gas-fired generation was more profitable than coal, something that hasn’t been seen in recent years.

Warm weather last winter left plenty of gas in storage, and more supply of liquefied natural gas (LNG) has been routed to the UK, as demand from other regions such as Asia has fallen.

Long term, more renewable power generation has also been installed in the UK, according to Double, and energy efficiency measures have helped to reduce electricity demand.

“These measures have reduced wholesale electricity prices. However, the costs of funding these are paid for as a separate part of the retail bill, and expected to rise further over the coming years. “

The IPI is updated every working day and is freely available from the ICIS website, along with analysis of price trends and volumes.

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