Winter '15 spark trade surprises UK electricity market
Winter '15 Baseload on the UK power market traded through the spark spread for the first time in over a year, surprising the market, given uncertainty over plant capacity from 2015.
Broker Spectron confirmed the trade went through at about 17:00 for £15.70/MWh on the spark spread and £65.70/MWh on outright power, which one UK power source labelled a "maverick" trade.
"Someone has been an aggressive seller of far-curve sparks out the back," said another trader.
The last time the contract traded, according to ICIS Heren records, was 12 October 2010, when it dealt at £62.25/MWh.
But even on the more liquid UK gas market, the NBP, activity has been especially thin in recent months on the far curve, with the Winter '15 contract trading just six times in as many months. Tight credit has been reported as a factor, with traders reluctant to get involved in long-term positions.
"As risk departments begin to look warily again at potential counterparties, [curve] liquidity appears to be beginning to dry up," one market analyst said.
The price has surprised some traders, who view it as too low, given the potential for large swathes of the coal- and gas-fired plants to be mothballed over the next five years.
All plants that opted out of the EU's large combustion plant directive (LCPD) will be retired post 2015. "So the Q1 of that contract potentially has some supply issues," said one source. "If you believe the plants affected will actually be turned off then."
According to ICIS Heren data, 10.7GW capacity is due to come off line because of the LCPD directive, with 6.84GW from coal-fired plants. This excludes RWE-owned Tillbury, because it is planned to be converted to run on biomass.
The loss of free carbon credits could cause less-efficient gas plants to retire as early as in the first quarter of 2012 (see EDEM 17 October 2011).
Too high a price
Wednesday's deal gives Winter '15 Baseload a premium of £3.50/MWh to the ICIS Heren assessment of the Winter '14 Baseload close that day (see graph).
Traders had mixed views on whether the deal is fair value. "I think it is a bit low but to get a trade out there £0.10-0.15/MWh is probably what you need to give up," said one.
Others argued that the carbon price floor, to come into force from April 2013, will have little upward effect on prices in 2015 because of a lack of coal-fired stations in the generation mix by then.
"It doesn't look massively wrong either way," said one trader. "That being said: the mentality of this market makes me think not too many people will want to sell this at the moment." FOR/JT
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