Vayu half year report

Half Yearly Review and Outlook

2015

Table of Contents Executive Summary................................................................................................................................................................................................... 2 Outlook for the remainder of 2015.................................................................................................................................................................. 4 Gas................................................................................................................................................................................................................... 4 Power............................................................................................................................................................................................................. 5

Brent oil movements.............................................................................................................................................................................. 5

January to June 2015 Review............................................................................................................................................................................... 6 Gas................................................................................................................................................................................................................... 6 Power............................................................................................................................................................................................................. 7 Key Themes so far in 2015..................................................................................................................................................................................... 8

Liquefied Natural Gas............................................................................................................................................................................ 8

North Sea Gas Supply............................................................................................................................................................................ 8

UK sources of supply.............................................................................................................................................................................. 9

Storage.......................................................................................................................................................................................................... 9

Oil..................................................................................................................................................................................................................... 9 Historic Storage Levels ......................................................................................................................................................................................... 10 NBP Day-ahead comparison............................................................................................................................................................................... 10 NBP Winter-15 analysis ........................................................................................................................................................................................ 11 FX Chart ........................................................................................................................................................................................................................ 11 Vayu Contact Details.............................................................................................................................................................................................. 12

1

Executive Summary Gas Day ahead prices down 11% year on year.

Strong supply, low demand and overall bearish fundamentals have continued on from last year.

Storage levels are significantly lower year on year, however July is expected to see record amounts of storage injections take place.

A restriction on Dutch gas output has added some risk to curve prices as supply from this source will be limited during the second half of the year.

Overall, both prompt and curve contracts are likely to remain neutral over the coming weeks with potential for upward movement later in the summer. The onset of the third quarter is likely to bring some direction to the market.

2

Electricity Average wholesale electricity prices for the first half of 2015 are down 9% on the same period in 2014.

Total demand in Ireland for electricity is up 3.5% when comparing January through to June 2014 against the same period this year.

Power generated from wind so far this year has met 25% of demand, an increase of 5% on the same period last year.

Wholesale prices are likely to remain stable over the coming months due to a neutral gas market and low demand.

3

Outlook for the remainder of 2015 Gas In the face of numerous sources of potential risk, National Balancing Point (NBP) spot prices are likely to remain neutral in the short-term. However, considering how bearish the market has been of late, upside risk as opposed to further downside risk is more likely.

Record storage injections expected during July could provide demand support, while reductions to Dutch supply could also put pressure on the system to meet demand requirements. However, this risk is being somewhat mitigated by low demand elsewhere and the completion of the Norwegian maintenance season as of late June.

While it’s been widely discussed that Winter-15 may have reached its lowest price point already, it’s unlikely the contract will make significant gains before its expiry. Risk to the front winter contract comes in the form of storage injections and whether or not facilities will reach an acceptable level prior to October. Winter-15 is currently trading just above 48p. This is an attractive price when you consider that the lowest outturn price we have seen for a winter in the past 4 years was Winter-14 which out-turned at just above 50p.

Record storage injections expected during July could provide demand support, while reductions to Dutch supply could also put pressure on the system to meet demand requirements.

In terms of a potential Greek exit from the Eurozone and how this could impact energy markets in the UK, it is currently unclear. The key risk for Irish businesses would be FX exposure as gas procured from the NBP is paid for in sterling but invoiced in euro and Ireland imports almost all its gas requirements from the UK. An even weaker euro could make NBP gas more expensive to buy.

An even weaker euro could make NBP gas more expensive to buy.

4

Power Wholesale electricity prices on average have been lower year on year, largely due to a decrease in the price of gas as well as a large contribution of power generated from renewable sources. The average wholesale price for the period January to June 2014 was 5.88 c/kWh, while the average price for the same period this year was 5.35 c/kWh, a fall of 9%.

Wholesale electricity prices on average have been lower year on year.

The only potential risk to supply is that generators tend to shut down for maintenance over the summer period which could restrict flexible supply.

Should any increase in gas prices coincide with a drop in renewables as well as high demand, electricity prices are likely to increase as less efficient and more expensive generators may be called on to meet demand.

With gas prices and other fossil fuel markets likely to remain stable in the short-term, this should filter into the stability of electricity prices as well.

Demand over the summer months is likely to be the lowest expected during the year which should also keep a cap on prices and limit price volatility.

Brent Oil movements

Brent Oil movements 120

60

30

/6 /1 5 24

/1 5 /4 29

15 3/ 3/

15 1/ 6/

/1 4 11 7/

/1 4 /9 12

/1 /1 4 30

/1 4 /7 18

/1 4 /5 23

/3

/1 4

0

27

$/bbl

90

5

January to June 2015 in review Gas Market weakness evident at the end of 2014 continued into early 2015. The market was coping well with intermittent supply glitches from Norway with storage levels at 72% fullness and no shortage of LNG contributing to the supply mix. The Dayahead contract averaged 46.12p during January, down 29% on January 2014. Brent oil was trading comfortably below $50/bbl which created significant downward pressure on winter contracts also.

Spot prices in February reacted strongly to news of a cut in Dutch gas production. However prices settled down mid-month as it became apparent that an increase in Norwegian supply was more than off-setting the reduction in Dutch output.

Tensions between Russia and Ukraine, as well as an increase in Brent prices, put upward pressure on the curve.

Bearish fundamentals were just about outweighing some bullish risks during March. The spot market managed to fall 6% month on month, despite the start of the annual maintenance season in the North Sea. A tight supply scenario provided some upward pressure to spot contracts then in early April. Unexpected North Sea outages were the

main cause of the bullish sentiment, with the Dayahead contract breaching the 50p mark. Warmer temperatures in tandem with a healthy LNG outlook pushed the prompt back down, with Dayahead finishing the month below 45p. The positive LNG outlook also weighed on near curve contracts.

Spot movements during May were relatively flat, with Day-ahead trading in a tight range of between 42p and 46p. Unplanned outages and colder temperatures caused some modest volatility over the period but plentiful LNG was once again responsible for stabilising the market.

A sharp increase in gas demand from the power generation sector in early June put pressure on the UK system, resulting in spot prices climbing to just above 45p. This upward trend was short-lived however as demand sunk to its lowest levels since September 2014 on Thursday 11 June. Further unplanned outages throughout the month provided upward pressure at times, however the market remained relatively flat. The bearish prompt filtered into the curve over the month, with Winter-15 trading below 48p at times but finishing the month just below this level.

Spot prices in February reacted strongly to news of a cut in Dutch gas production.

6

Power Overall, the total average unit price of electricity in Ireland decreased by just over 8% in January when compared to December 2014. Comparing January 2015 to January 2014, the day unit price decreased by a significant 32%. The decrease in price was attributed to a number of different factors; gas prices decreased during January when compared to December, with an average decrease of 13.5% on the Day-ahead contract. Average daily wind penetration on the grid also increased in January with wind generation increasing by 17% month on month, hence reducing the amount of gas generating plants present in the fuel mix.

In February the total average unit price of electricity increased by just over 2% year on year.

This was driven by a strengthening of gas prices while wind penetration was also lower month on month. Wind generation meeting demand decreased by 10% from January due to low wind penetration during the first two weeks February.

This in turn increased the amount of gas generating plants present in the fuel mix.

The average day unit in March was 6.18 c/kWh, while the average night unit price was 3.9 c/kWh. Month on month prices decreased by almost 15%, driven by lower month on month gas prices and an increase in the amount of electricity generated from renewable sources.

In April, overall the price of electricity decreased by 1% on March. When comparing April 2015 to April 2014, the day unit decreased by over 3%. Conversely the average night unit price was up by 9.5%.

The average day unit price in May was 5.66 c/kWh, down a substantial 8% compared to April and down almost 4% on May 2014. The main driver of the fall was lower gas prices. Daily wind penetration on the grid also increased, up almost 10% on April’s levels. In June, average wholesale prices were down further, dropping by almost 3% month on month. A continuation of low demand and reduced gas prices exerted downward pressure on the wholesale market.

Gas

Power

Average Day-ahead price during H1 2014: 52.68p

Average Wholesale price during H1 2014: 5.88c/kWh

Average Day-ahead price during H1 2015: 46.67p

Average Wholesale price during H1 2015: 5.35c/kWh

7

Key Themes so far in 2015 Liquefied Natural Gas

North Sea Gas Supply

Liquefied Natural Gas (LNG) has been a key component in the UK supply mix so far this year.

Cargo deliveries have been consistent over the past number of months, which is largely due to the competitive prices offered by the NBP spot for LNG volumes over those offered by Asian markets.

Asian markets, notably Japan, historically offered far higher prices than European markets in order to attract LNG to its shores during periods of high demand. This has at times deprived the likes of the NBP from receiving regular cargoes and added to bullish price sentiment. Recent adequate supply and low demand in Asian markets has led to a drop in prices there.

Norwegian output has been reduced since the commencement of maintenance season in May. However this recently came to an end. Output from Norway increased in the first week in July as annual maintenance drew to a close with the Day-ahead contract immediately falling due to this fact.

The end of maintenance season means potential for stronger supply into the UK. This should foster increased volumes being injected into storage while also countering any loss of supply from Dutch output restrictions.

It’s unlikely that the current trend of consistent LNG arrivals into the UK will change dramatically in the coming weeks which is bearish for the supply outlook. Significant Qatari LNG volumes are en route to North West Europe over the coming two weeks, with the UK already assured of its first cargo for July. The cargo in question being a Q-Max vessel. Q-Max vessels have roughly 80% more capacity than conventional LNG carriers, so its arrival is expected to be bearish for the supply outlook.

Overall, the LNG supply outlook appears positive.

That said, there is always still a chance that cargo arrivals may not materialise, although this appears to be unlikely.

8

In a statement released in early June, the Dutch Economic Minister explained that a potential cap on the Groningen gas field, which is the biggest of its kind in the Netherlands and one of the biggest in the world, could reduce production significantly for the second half of 2015. The decision to cap production at 30 billion cubic meters was announced on 23 June.

The restriction is a potential risk factor to UK supply for the coming months, particularly winter, as it could deflect other North Sea supply away from the NBP towards other European markets with high demand for storage injections and higher prices to offer.

Furthermore, the decision to reduce Dutch production decreases the number of supply options, which will bring indigenous supply as well as LNG supply into far greater focus. Add to this the potential for low storage volumes, and a more bullish winter period could emerge.

Storage

Oil

Storage injection season usually commences in April of each year. This year however, significant injections into storage facilities did not begin until June. As we have reported in the past, this is less of a reflection of high demand, and more a reflection on the belief that prices would fall later in the summer.

This belief has become a reality with the spot market hovering at or below the 44p mark for much of June. This has resulted in an up-tick in the volume of gas being injected into storage as this price point offers a discount to the current Winter-15 contract. The majority of gas in storage is expected to be withdrawn during the winter period so it is vital that storage participants inject gas at prices lower than the forward curve in order to ensure a profit is made.

Brent oil prices have remained within a tight range of between $62 — $65/bbl recently. Many traders in the market believe that when Brent breaks out of this range it’s likely to be on the upside. Current prices are just too low from a fundamental supply and demand point of view to be sustained.

Storage levels grew by an impressive 15% between 18 and 25 June, as the last days of maintenance on the Interconnector pipeline provided an opportunity for substantial injection. The Interconnector had been sending gas from the UK into Belgium until the pipeline went offline for maintenance, creating surplus gas in the UK system.

Since the Interconnector came back online, storage injections have continued, but at a slower pace.

Ongoing concerns over the Greek debt crisis have provided some downward pressure to the Brent market. The high degree of uncertainty over Greece and the Eurozone has pressured all major stock indices to settle in negative territory in the Asia-Pacific region, which also filtered into some European markets. However this has been countered by bullish sentiment arising from fears that Iran and six other world powers would miss a deadline on the nuclear power deal, leaving sanctions in place.

Storage stocks in the UK are currently at 38%, compared to 81% at the same point last year.

Record volumes of injections will be required in July in order to get volumes back on track and at an acceptable level before winter arrives in order to minimise supply risk. Total storage levels across Europe now stand at 39%, down almost 25% on the same point last year.

Brent oil is now half the price it was during June 2014. The impact of this decline in oil prices will be felt strongest in Q3- 15, as long-term oil indexed gas contracts are priced with a nine-month lag. This should result in a ramp-up in storage injections throughout Europe, bringing stocks up from historic lows. As demand is typically at its lowest during Q3, much of the excess gas will be used to replenish gas stocks.

Sources of British Supply: 27 June 2015 UKCS*.................................. 52.92% LNG...................................... 11.67% BBL......................................... 4.73% Norway*................................ 30.6% Storage.................................. 0.08% Interconnector....................... 0.00% *Based on ICIS calculations using both British and Norwegian flow data.

SOURCE: Natioanl Grid and Gassco

9

Historic Storage Levels

Historic Storage Levels

Million cubic meter (mcm)

5000

3750

2500

Day ahead 2014 Day ahead 2013 Day ahead 2012 Day ahead 2015

1250

De ce m

be r

be r No ve m

to be r Oc

Se pt

t gu s Au

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e Ju n

ay M

ril Ap

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em

ry Fe br

ua

ry ua Ja n

be r

0

Average NBP Day ahead prices over the first half of the year down 11% NBP Day ahead comparison on 2014.

110

Day ahead 2013 Day ahead 2014 Day ahead 2015

p/therm

82.5

55

27.5

10

be r

r De

ce

m

be m ve No

be r to Oc

m pt e Se

Au gu st

Ju ly

Ju ne

ay M

Ap ril

ch ar M

ar br u Fe

Ja

nu a

ry

y

be r

0

Euro/GBP

Euro/GBP

0.9

0.825

0.75

0.675

5 24

/6

/2

01

5 01 /2 16

6/

1/

2/

/4

20

15

4 12

/2

01

4 23

/9

/2

01

4 01 16

/7

/2

14 20 8/

28

5/

/2

/2

01

4

0.6

The graph below shows the significant fall in Winter-15 prices, however when FX is taken into consideration the drop is not as significant.

2.9

57.5

2.175

p/therm

70

45

1.45

32.5

0.725

c/kWh

Winter-15 comparison with FX

Winter-15 p/therm Winter-15 c/kWh 5 6/ 1 24 /

/1 5 8/ 5

5 3/ 1 24 /

/1 5 5/ 2

14 12 / 19 /

4/ 1

1/ 1

4

4 9/ 1 18 /

/1 4 4/ 8

4 6/ 1 18 /

/1 4 2/ 5

4 3/ 1 18 /

30 /

1/ 1

4

20

11

Contributor details For more information on any of the above please do not hesitate to contact, Joanne, Keith or Gillian who will be more than happy to take your call or email on 01 884 9400 or customercare@vayu.ie

Gillian Lawler Head of Customer Operations Gillian.lawler@vayu.ie

Joanne Daly Senior Analyst Joanne.daly@vayu.ie

Keith Deacon Senior Analyst Keith.deacon@vayu.ie

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12

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