As Centrica and EdF announce that it is their intention to push prices up higher, for residential customers. It is at this stage that many large users feel that perhaps now might be the time to lock in a forward basis. The reason why Powerisk feels that this is unwise, is that the focus has and will continue to be on Winter 06. This has recently dropped and implied volatility is trading 10 -15% below the levels seen three months ago. In options terms this is the equivalent to a (circa) 50% drop in the value of an option you bought.

We have recently seen a pick up in market moves, and whilst this is smoothed out across a long term average on a VaR model, it is noted that for Winter the last couple of days have pointed to a defininitive buy signal. The uncertainity over prompt prices is bound to price premia into the far end seasons even though fundamentals suggest that the gas worries of 2005 will not materialise in 2006. There is no doubt that at the moment there is a lot of possible price premia built into next Summer due to the continental power market spiking and puilling the UK with it. There is no doubt that being short July day ahead was not a good trade, and the same is looking that way for August. This is pushing Summer 07 to remain at the high end of the range.