Wholesale Energy Prices Continue 2011 Rise as Centrica Announces Record Profit

Feb 24, 2011, 09:04 ET from ICIS Heren

LONDON, February 24, 2011 /PRNewswire/ -- British utility Centrica announced record profits on Thursday as news of soaring oil prices continued to put UK energy prices under upward pressure.

Centrica's pre-tax profit of GBP1.92bn in 2010 was an increase of 18% over the previous year. ICIS Heren data shows that the key Day-ahead UK price for wholesale gas rose by 38% in 2010 compared with 2009.

Year on year, the average price of wholesale gas for January 2011 was 59.031 pence/therm - an 88% increase over the price for January 2010, at 31.39 pence/therm. This index figure is a weighted average of all the deals for gas delivered over the next month reported to ICIS Heren. These deals took place the month before delivery.

And the Day-ahead price for gas delivered during working days is up by 44% so far this year, compared with the same period last year.

Going forward, the ongoing increase in the oil price is putting energy prices under significant upward pressure. The UK gas system has developed significantly since the last time oil prices were above $100/bbl, in 2008, and has significantly more import capability and flexibility. Currently, the gas market is well supplied, although the impact of higher oil prices is being felt across all European gas markets.

The oil price is still an important driver of prices on the forward curve, where companies including utilities buy gas as part of their hedging strategy. The price for gas delivery during the next winter of 2011/2012 has increased by 12% since last October.

"UK gas prices are now well below 2008 levels when oil last traded above $100/bbl. Spot gas prices are also cheaper than long-term European gas contracts which are linked to the oil price. But we should not underestimate the impact that oil prices could still have on the UK gas market if they continue to rise," said Edward Cox, gas editor at ICIS Heren.

Power generation profits falling

However, while gas prices have risen, the average price of wholesale power for January 2011 was GBP51.81/MWh - a 48% increase over the price for January 2010, at GBP35.06/MWh

This has caused the typical profit margin for gas-fired power plants to fall, as fuel costs have risen more than the power price that generators can achieve in the wholesale markets. In January '11, the typical profit margin was GBP6.28/MWh - a fall of 27% from the previous year. This 'clean spark spread' also takes into account the cost of emissions.

"New generation coming online in the last year in the UK has kept a lid on power prices," said Zoe Double, power editor at ICIS Heren. "Gas-fired generation margins for the front season - a benchmark for the UK power market - are close to record lows."

UK clean spark spreads for Summer '11 have averaged GBP4.65/MWh in February to date. Last year, the Summer '10 clean spark spread averaged GBP8.10/MWh over the same period.

ICIS Heren is an information service provider for gas, liquefied natural gas, power, carbon and coal market intelligence. We publish a suite of tailored reports providing news, analysis, benchmark price assessments and indices. Through our reports we aim to bring liquidity and transparency to power and gas hubs, helping you analyse the sector and make informed business decisions.

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    For further information please contact:

    Edward Cox
    Editor, European Spot Gas Markets
    ICIS Heren
    t: +49-211-5403-9689
    e: ed.cox@icisheren.com

    Zoe Double.
    Editor, European Daily Electricity Markets
    ICIS Heren
    t: +44-207-911-1875
    e: zoe.double@icisheren.com