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Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come

This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

 

History tells us that the winter of 1946-1947 was one of the worst experienced by the UK in a century – and the coldest in three.

Coming so soon after the end of World War II, an already crippled economy felt the full impact of freezing weather that killed both livestock and crops while jamming roads and railways with snow.

It got so bad that at one point, Winston Churchill observed that he couldn’t even get his favorite cigars.

But the main concern was the provision of electricity. Not a single power-generating station in all of England had escaped wartime destruction, and a return to “normalcy” in the power sector was still years away.

Read More: The Next European Brexit Crisis Is in Energy

So during the cold winter of 1946-1947, the entire British population had to hunker down.

Now, the current situation is hardly as dire. But ever since the UK voted to separate from the EU (the so-called “Brexit” referendum) on June 23, I’ve been waiting for the initial signals that this divorce will have consequences in the energy sector.

Now we have one, with dire consequences for British consumers…

Brits Should Expect (Much) Higher Power Prices

natural gas

The signal shows a coming double whammy for Britishnatural gas users, as a result of the post-Brexit decline of the British pound sterling to more than 30-year lows against the dollar.

This decline has prompted two energy moves in very different directions. Unfortunately, neither is good for anyone living in the UK as winter approaches and temperatures decline…

First, the descent of the pound sterling has prompted UK retail natural gas distributors to forego discounts moving forward. This is, of course, based on the same reasoning that will certainly result in another round of appreciable electricity price hikes by the major national utilities later in the year.

Maintaining profit margins will be impossible at current levels, given the forex pressure on the bottom line. Most observers also believe that increased taxes are now inevitable, as the unexpected currency (effective) devaluation has made revenue an important factor.

Even before Brexit, this was shaping up to be a hard fall and winter in the UK, placing additional pressure yet again on an already strained power sector.

Now, the new government, headed by Prime Minister Theresa May, is still Conservative. And while she will delay substantive Brexit negotiations with the EU, the party’s policies of cutting subsidies will remain intact.

That means some difficult times lie ahead, both for end users and domestic power distributors, with problems – some Brexit-related, some not – hitting all British energy sources…

The UK Is Cutting Its Winter Gas Reserves – Just in Time for Winter

These include renewed concerns about the profitability of North Sea production, a decimation of renewable alternatives (for example, over a third of all jobs in UK solar have vanished), and rising indication that French EDF SA (OTCMKTS ADR: ECIFY) may be having second thoughts about moving forward with a major nuclear power plant at Hinkley Point.

This last one is no surprise, as the project is way over budget and certain to be hit hard by currency fluctuations moving forward.

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The British end user, however, is going to feel the pinch in an additional way…

You see, on July 15, utility giant Centrica Plc. (OTCMKTS ADR:CPYYY) announced it will not inject any additional gas into the offshore Rough field until spring of 2017. Rough accounts for about 70% of all British natural gas storage capacity.

Immediately, the news caused a spike of over 10% in winter-monthnatural gas futures prices, as everyone is now concerned that there might not be enough natural gas in storage to cover the increased demand for heating come winter.

But it gets worse…

Come Winter, Brits Will Have to Make Do with Just One-Third of Gas Reserves

Even the capacity issue at Rough doesn’t show how serious the situation is for British consumers. The field’s capacity is rated at 150 billion cubic feet of natural gas, but the present volume stored there is only 50 billion.

Unless Centrica Storage revises its plans – and there are no indications that’s likely to happen – that 50 billion cubic feet is now the maximum that will be available from Rough this winter.

And that’s creating a knock-on effect.

You see, in the summer, UK demand for natural gas comes primarily from gas being pumped into storage for winter heating. But Centrica has decided to shut Rough “for tests” at least into November.

And that has introduced the second major post-Brexit energy move…

British Gas Is Being Exported – Only to Be Reimported Again at a Premium

The dramatic change in cross-currency valuations has resulted in the UK exporting more natural gas to Belgium (and onward to the broader continental market) than at any point in more than two years.

The “spare fuel” being exported is actually coming primarily from volume that would have gone to Rough for storage…

Except that the weaker pound means that it’s now more profitable to instead send the gas along the east-west North Sea Interconnector pipeline to the terminal center at Zeebrugge on the Belgian coast.

Last week, Trevor Sikorski – the head of natural gas, coal, and carbon at Energy Aspects Ltd. in London – told Reuters as much. He thinks the spike in exports comprised gas “that would otherwise be going to Rough, now being incentivized to go and get injected into European storage.”

However, just about all analysts agree that the rising exports from Britain to Europe are more a result of the collapse in currency value than of any outage at Rough. A Brexit-induced “pounding of the pound” has provided some nice profits for European importers… and Centrica has obliged.

But for the average Brit back home, hoping to heat their house come winter, the short-term future may require a traditional British stiff upper lip. Given the decision to close injections of gas into Rough, Sikorski adds that he expects “higher UK imports of gas then to occur in the winter.”

Thanks to a much weaker currency, those imports will be far more expensive than drawing domestic gas from storage in Rough would’ve been (and has been in the past).

In other words, we’re looking at a nasty cycle: Today’s rising exports of British gas will go to European storage, with some of that returning as higher-priced imports when the weather gets colder.

Of course, this may attend to profit considerations along the Interconnector pipeline.

But it’s bad news for people living in Britain.

 

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The post Why Brexit Is Hiking UK Power Prices – and the Worst Is Yet to Come appeared first on Money Morning – We Make Investing Profitable.

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