09 Nov 2022
Wendel Hortop

Power prices: why did prices crash in October 2022?

In October, power prices in Great Britain fell significantly. As a result, battery energy storage revenues were the lowest they’ve been since January 2021, as discussed in October’s Benchmark review.

Why did power prices crash in October 2022?

But what caused this fall in prices? And what might it tell us about this winter? In this article, we dig into the factors that contributed to this drop in power prices - and what it may mean for battery energy storage.

Spoiler Alert

  • Power prices fell 55% in October, and wholesale spreads fell 40%. As a result, battery energy storage revenues fell.
  • October saw the third-highest levels of wind generation on record. This kept power prices low, which meant there was no repeat of the sorts of price spikes seen in 2021.
  • Gas prices plummeted during the month, due to a combination of unseasonably warm weather and high levels of gas storage on the continent.
  • Forward contracts for delivery this winter have fallen, but still remain well above average. There is a higher-than-average probability of a cold, calm winter, and significant concern about gas supply through 2023.

Just how much did power prices fall?

Figure 1 (below) shows that day-ahead power prices fell to their lowest level since the summer of 2021.

Figure 1 - Monthly average day-ahead prices (N2EX) since October 2020.
  • Prices fell 55% from September, with within-day price spreads falling 40%.
  • Day-ahead prices for the month fell to £119/MWh, from £270/MWh in September. This is the lowest monthly average since August 2021.
  • Within-day price spreads fell to £126/MWh, from £210/MWh in September.

Figure 2 (below) shows that day-ahead power prices fell considerably within-month, as did the spread between the lowest and highest prices each day.

Figure 2 - Daily average day-ahead price (N2EX) and price spread in October 2022. Price spread is measured as the maximum price minus the minimum price in any given day.
  • The daily price spread fell by over 80% - from the peak on 2nd October, to the minimum on 29th October.
  • The price spread of £41/MWh on the 29th October was the lowest observed spread on the day-ahead market since summer 2021.

What caused this drop in power prices and spreads? And could it be a sign of things to come this winter?

What does a comparison to October 2021 tell us?

To explain this fall in electricity costs, we’ll compare it to the same time last year. There were extremely similar levels of electricity demand - an average of 28.6 GW. Gas prices in both months also started off at reasonably similar levels.

Figure 1, below, compares the hourly day-ahead prices for both October 2021 and 2022.

Figure 2 - Hourly day-ahead price (N2EX) for October 2021 and 2022
  • Both months saw prices start off at similar levels, with some variation day-to-day, before diverging significantly in the middle of the month.
  • On 15th October 2021, prices spiked to £1,200. There was no similar price spike in October 2022.
  • In the latter half of the month, October 2022 prices dropped significantly, averaging just £88/MWh across this period. This was almost half the level seen in 2021.
  • The average price for the month fell 34% year-on-year, while within-day price spreads fell 37%.

So, what caused prices to drop by over 30%? The warm, windy weather in GB throughout October 2022 was the main reason.

Record wind generation keeps power prices low

October 2022 was particularly windy. In fact, high wind speeds contributed to the UK breaking its record half-hourly wind generation figure (a record since beaten again, in November). October had the third-highest monthly levels of wind generation ever in GB.

Figure 3 - Monthly average wind generation within Great Britain over the past 10 years. (National Grid ESO generation mix data.)
  • Wind generation for the month delivered over 8,500 GWh of energy.
  • This resulted in an average generation of 11.8 GW, or 41% of monthly electricity demand.

This level of high, sustained wind generation kept more expensive thermal generation assets - like peaking plant - out of the generation stack, which reduced prices. When coinciding with low demand, it resuled in periods of very low prices.

Figure 4 (below) shows the correlation between wind generation and day-ahead power prices. Prices dropped to almost zero on October 6th and 7th.

Figure 4 - Day-ahead hourly power price (N2EX) and hourly wind generation (National Grid ESO). Highlighted in yellow are the two overnight periods with the lowest prices of the month.

More importantly, the high levels of wind generation coincided with the highest demand periods of the month. Wind generation in October 2022 averaged over 11 GW across peak periods during the month - or 30% of total demand.

In October 2021, the £1,200/MWh price spike was triggered by peak demand coinciding with a drop in wind generation. With wind consistently high across the month, October 2022 avoided a repeat of this.

Warm weather keeps gas storage full and crashes prices

Gas prices have been the story of 2022 (and even much of 2021). As discussed in the recent article on the UK’s Energy Prices Bill, gas prices have risen to record levels following the Russian invasion of Ukraine. To combat this, governments have launched unprecedented levels of policy intervention, alongside increases in interest rates globally to combat inflation.

In October, however, the spot price of gas collapsed midway through the month. This is shown in figure 5 (below). This collapse in the near-term gas price flowed through to the power markets - and was the primary driver of the very low prices seen across the last two weeks of the month.

Figure 5 - GB day-ahead gas prices (SAP) in October 2021 and 2022
  • Gas prices in GB fell from a high of £81/MWh (on 2nd October) to a low of just £8/MWh on 18th October. In just one week, prices dropped 87%.
  • Across the entire month, prices averaged £38/MWh. This was down 59% from the previous month, and down 46% from the same time last year.

This is largely due to two factors:

  1. In response to Russia’s invasion of Ukraine, Europe has sought and achieved high levels of gas storage.
  2. The unseasonably warm weather across Europe has led to reduced heating demand, whilst industrial demand has also reduced due to high costs.

This summer, Europe has been importing gas to meet the 80% storage-level target set by the EU. The target has been met - storage levels currently sit at close to 95% across Europe. There is still an ongoing inflow of LNG (Liquified Natural Gas), primarily from the US. This will be needed throughout winter - due to the shortage of Russian pipeline gas.

However, gas demand across Europe in October was down 25% year on year - there was less heating demand, due to warm weather, and less industrial demand, due to high prices. Meanwhile, Europe has continued to import gas, meaning storage has filled up to near capacity. Therefore, imports have had nowhere to go, causing spot prices to crash (even briefly turning negative on the hour-ahead market in Europe).

No need to worry about power prices this winter then?

Given what happened in October, is this a sign that concerns over energy prices this winter have been overblown? In short, no.

While some of the short-term risks in both gas and power markets have been reduced, the fundamental concerns highlighted in National Grid ESO’s Winter Outlook remain.

While October was very warm and windy, the latest three-month outlook from the Met Office shows a higher-than-average probability of a cold, calm winter. Cold weather will increase the heating demand for gas - and quickly deplete the current high levels of gas storage. This would quickly reverse the downward pressure on gas prices seen in October. Meanwhile, drops in wind generation will increase power prices and see capacity margins tighten, threatening the kinds of price spikes observed last year.

On top of this, EDF continues to see issues within the French nuclear fleet, and recently further downgraded its generation forecast for 2022. This means that capacity concerns will increase in France, reducing the likelihood of interconnector flows to GB. Imports from interconnectors have historically been vital for meeting peak demand points during winter (as explained here).

With the success in filling gas storage ahead of this winter, concerns are quickly turning toward 2023. In its recent publication on Europe’s gas balance for next year, the IEA stated that “Europe is to face an even sterner challenge next winter”. This concern will likely lead to high gas prices through winter - and any remaining storage may well be needed to meet gas requirements for next year.

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