March 2018

As I write its v cold outside (by Irish standards) and in this edition of the newsletter, I want to look at the reason why and also the effect on Irish energy prices.

This has been a colder than normal winter and not just in Ireland. My brother lives in Boston and he has seen some huge snowfalls this winter. It even snowed in Tallahassee, Florida, for the first time in 28 years. A temperature of −26 °C took place in Omaha, Nebraska on Dec 30, 2017 that was lower than the previous record set in 1884. At the winter Olympics in Korea it has been the coldest winter in 40 years.

To help get a practical measure of how colder it has been this year, heating engineers tend to use a measure called – ‘Degree days’. In Ireland this is usually set at 15.5C and is the temperature below which buildings need to be heated. According to Met Eireann figures for Dublin airport, Dec 2017 had 317 degree days vs 272 in 2016 and 213 in Dec 2015.  The numbers for Jan 18 where 316 vs 304 (2017) and 303 (2016).  Feb numbers are not out yet but they should also show a big difference.

 

Why the colder weather?

Most winters super cold air is normally locked up in the Arctic in the polar vortex, which is a gigantic circular weather pattern around the North Pole. A strong polar vortex keeps that cold air hemmed in. But some years this vortex weakens like a dam burst effect and the cold air heads south like that indicated in the diagram below (referred to as Rossby waves by meteorologists).

Usually the jet stream marks the boundary between the cold polar air to the north and warmer air to south and sometimes you will hear reference in the media to the jet stream moving south.

How can it be so cold if global warming is underway?

Arctic air is still bitterly cold, so atmospheric changes that allow that air to drop south will continue to lead to such sharp temperature drops. And don’t confuse weather — which occurs over a few days or weeks at a regional level — with climate, which spans over decades with many complex inputs.

Historically, long cold spells are not unusual. If you look back at Irish history, there have been many periods of cold weather often with catastrophic effects. Before the Potato famine (1845-1852), there were many famine periods in Ireland caused by prolonged cold weather. The Irish Famine of 1740–1741 (Irish: Bliain an Áir, meaning the Year of Slaughter) was estimated to have killed at least 38% of the 1740 population of 2.4 million people, a proportionately greater loss than during the worst years of the Potato Famine. The cold and its effects extended across Europe, but mortality was higher in Ireland because both grain and potatoes failed.

 

Effect of the cold weather on short term Irish energy prices  

Last Friday we did see a spike of UK gas prices to 71 pence/therm which was the highest level in four years. However, prices started easing on Monday as gas supplies are still plentiful in Europe. Confidence in supply is still strong and once we get past this cold snap, we are expecting prices to ease.

We also saw a pick up in electricity prices near the end of the month in line with the gas price (to date data is only available to 22nd Feb).   On a positive note it has been a v windy start to the year and as a result, SMP prices are a little lower this year than over the same period last year  (Jan, Feb).

 

World energy outlook 

In an interesting geopolitical development, work has begun on the planned ‘Power of Siberia’ pipeline which will allow Russia to sell previously stranded gas reserves to China and also move them to an LNG plant on Russia’s east coast. The 3,968 km pipeline will be the largest fuel network in the world. Longer term the Russians will then be able to connect up the pipeline with Europe also and chose to sell their gas either to Europe or to the East.

Another massive pipeline – Nordstream 2 is also under construction between Europe and Russia. Currently, over almost 40 percent of the gas consumed in the EU originates from Russia, making Moscow the biggest supplier, followed closely by Norway and Algeria (though no Russian gas comes to Ireland). There are political critics of the project arguing that the deal will give Moscow unwanted influence.

Oil prices have been pulling back lately (by about 10% from Jan highs) as US oil output continues to expand.

 

Irish wholesale electricity prices 

The SMP price in Feb (to the 24th) was 5.7 c/kWh a decrease from the Jan price of 5.36 c/kWh due to the reasons given above.

I-SEM

There have been developments in this area since we last wrote about it mainly around capacity auction levels. Wind penetration continues to hurt thermal plant margins and I-SEM auction levels reflect this.  Its very technical stuff though and I suspect most readers of the newsletter are more interested in the bottom line – such the direct effect on electricity prices. Its too early to tell since I-SEM has not kicked off yet. As we get a clearer picture on what is likely happen to prices, I will update you.

I would encourage you to get expert advice before you make any decision about your contracts for the year going forward. (By expert I don’t mean the clueless call center people who call around offering to buy electricity & gas for people).