Power Crunch

Some good news at last for UK households, with energy prices expected to fall by over 12% in April. From 1^st April 2024, the Energy Price Cap, which dictates what most households pay for energy, is set to drop by an average of £238 or 12%.

However, the UK could face a power crunch point by 2028, according to analysis undertaken by energy generator Drax. By 2028, the UK’s demand for power is set to exceed dispatchable and baseload capacity by 7.5 gigawatts (GW) at peak times such as winter evenings. Dispatchable capacity refers to power sources that can be turned up or on at peak times from storage options such as hydroelectric, batteries, or baseload sources such as nuclear that run all the time.

By 2028, there is expected to be a 5GW supply surplus, but this will be from intermittent sources of energy such as wind, solar, and interconnector cables with other countries such as France and Norway. The gap in supply is expected due to the ‘perfect storm’ of an increase in demand, the retirement of existing energy assets, and the delay in the opening of Hinkley Point C.

In November, the government set out a plan to reduce the time it takes to build new energy infrastructure from 14 to 7 years. Energy regulator Ofgem said there was a long queue of energy projects that could generate almost 400GW of electricity-well in excess of what is needed to power the entire British energy system. The new rules will allow stalled or speculative zombie projects to be forced out of the queue, meaning viable projects can be connected quicker.

PM Rishi Sunak is aware of the risk of winter power outages in the future as the UK shifts to renewables. Last week, he said the UK needs to build new gas-fired power stations as an ‘insurance policy.’ Not surprisingly, this was attacked by opposition parties, albeit Labour appeared to acknowledge retiring gas-fired power stations needed to be replaced.

Meanwhile, lower energy prices should feed into lower inflation, supporting the case for lower interest rates. In turn, cheaper financing costs should support even greater private sector investment in renewable energy. However, unless retiring energy-generating assets can be kept going for another few years, the UK runs the risk of winter power outages. Global warming and the El Nino weather event led to a mild, wet winter, but who can say with any certainty what will happen in the future?

What have we been watching?

Another important week for equity markets with the latest US inflation data ahead of the Federal Reserve (Fed) monetary policy meeting this week. Markets have adjusted to a later interest rate cut following the previous inflation numbers, but the latest figures were slightly ‘hot’ although this was partly countered by US jobs data suggesting the market was not as strong as previously thought. Market futures currently have a 52% chance of a US interest rate cut in June and a 76% chance of a European interest rate cut also in June, with the first cut from the Bank of England expected in August. The week ahead is another key one for central banks, with meetings by the Bank of Japan, Federal Reserve and Bank of England. The greater prospect of a European Central Bank (ECB) interest rate cut saw European equities climb to a fresh record high.

No surprises as Putin won the Russian election with almost 88% of the votes.

The US/China technology Cold War continues. The US House of Representatives has passed a landmark bill that could see Tik Tok banned in America. The bill now needs to secure approval in the Senate. The US has long held concerns about China’s influence over Tik Tok.

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In the UK, the shallow ‘technical recession’ looks to be over, with the economy returning to modest growth in January as GDP increased by 0.2%. The service sector was the main driver, which correlates with the recent PMI business activity indicator readings. Housebuilding and retail spending also picked up. Meanwhile, UK average weekly earnings continue to ease, with an increase of 5.6% in January, which was slightly less than expected.

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In Europe, a member of the ECB said that policymakers will eventually have to lower borrowing costs without being completely sure that inflation will return to the 2% target.

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In the US, headline inflation in February came in slightly ahead of expectations at 3.2%, while core inflation dipped to 3.8%, although this was also a bit higher than was hoped for. US producer prices increased by 1.6% in February, which was also higher than expected. US jobs data saw material revisions to prior months data,suggesting the jobs market has not been as strong as previously thought. Meanwhile, the battle for the US presidency between Biden and Trump is getting underway. Biden’s 2025 budget proposal would see US debt to GDP remain above 100%, with a rise in US corporation tax rates. Meanwhile, Donald Trump in considering the possible ban on Tik Tok, along with calling Meta’s Facebook the ‘enemy of the people.’

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Japanese media and economists expect the Bank of Japan to end its negative interest rate policy on Tuesday, given stronger than expected wage growth. 

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Chinese retail sales increased by 5.5% in the first two months of 2023, which was slightly better than expected, while industrial production also beat expectations rising by 7%. However, China’s property sector woes continue to overshadow the economy, with sales of newly built property slumping by 29%.

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Brent oil moved above $85 as the International Energy Agency raised its global oil demand forecast slightly. This reflects the strength of the US economy and ships using more fuel as they avoid the Red Sea, and must travel faster to counter longer distances. In addition, Ukraine has been carrying out drone attacks on Russian oil refining facilities.

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Finally, the Office of National Statistics (ONS) has updated the latest inflation basket, which comprises 700 products. Amongst the additions are air fryers, as households have sought to lower their energy bills and vinyl music sales, reflecting Taylor Swift’s best-selling vinyl album of the year. Amongst the items dropped from the basket are hand sanitiser and home bakeware, both reflecting the end of the Covid-19 pandemic. Besides being a measure of inflation, the basket provides an interesting insight into our changing fashions and spending habits.

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Read Last Week’s Alpha Bites – FOMO – Fear Of Missing Out

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.