A quick look at current energy prices adds some credence to the views of some doom mongers that the rising cost of energy could lead to potential financial problems of energy-dependent companies. Crude oil is back above $30/bl, coal is surging above $60/t and forward gas and electricity prices are rising as a result as well as being supported by emission compliance concerns ahead of implementing the EU Emission Trading Scheme (ETS) in 2005. In addition to this, analysts are warning that heating oil supplies in the US and Europe will be tight this winter, weather forecasters predict a cold winter on a par with last year and, in the UK, National Grid Transco is warning that supply margins will be tight although not sufficient to lead to any blackouts.
The energy scenario going into winter stems from a summer characterised by unusually high temperatures in Europe. As a result of these temperatures nuclear plant output in France was reduced as the rivers were too warm and gas-fired output increased to compensate the lower nuclear output reducing gas stocks ahead of winter and low water levels on the Rhine prevented coal barges reaching plant. In addition the delay in returning Iraq crude exports to pre-war levels and the subsequent output cut by Opec have rallied crude prices above $30/bl.
Within this rising price energy complex the most surprising developments were in the coal area. Although the low Rhine water levels reduced summer barge traffic, and this is still the case as there has been little rain post-summer, there is ample coal availability. But the current high coal price is probably placed in perspective when looking at the forward price of coal, which is around $40/t for calendar 2005. The concern expressed by some market observers is that coal prices largely controlled by a small group of producersupplier companies are being ramped up to take advantage of current power demand in the knowledge that post-2005 when the EU ETS takes effect the value of coal-fired plant will probably reduce.
This winter could prove an interesting test of the deregulated European electricity market. The latest edition of Cap Gemini Ernst & Young's European Energy Market's Deregulation Observatory says that European electricity markets are slowly beginning to work as they should, explaining that prices are now being dictated more by supply/demand fundamentals than by the dynamics of market competition, adding that merger and acquisition activity has reduced.
If the markets are starting to 'work as they should' then the rising price of electricity should encourage generators to return some mothballed plant to ease supply concerns. But equally, generators may seek to recoup lost margins following the low margins associated with competition. And with the EU ETS just over a year away, and with national allocation plans not due until the end of winter in March 2004, the opportunity to extract additional margins from rising energy prices this winter may prove too tempting for some energy utility companies. Whether this will lead to financial problems for energy-dependent companies is uncertain, but it does appear that the recent period of low energy prices may be at an end.
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